The Davy Digest - 10th February 2025

Trade policy developments were the focus of market attention over the past week. The threat of imposing a 25% tariff on Canada and Mexico raised the possibility of widespread economic disruption, given the interconnectedness of these economies in key sectors such as autos and energy. Over the weekend, Trump also announced that he would impose 25% tariffs on all steel and aluminium imports. On the macro side, US ISM Manufacturing PMI rose to 50.9 in January, up from December’s figure. The US created 143,000 new jobs in January, falling short of forecasts. Meanwhile, the unemployment rate declined from 4.1% to 4.0%, which supports the Federal Reserve’s case to proceed slowly with interest rate cuts. Elsewhere, Eurozone inflation (Harmonised Index of Consumer Prices) for January was up at 2.5% headline, compared to 2.4% in December, and 2.7% core, which was flat versus December. The Producer Price Index was unchanged year-on-year in December in the euro area. Retail sales slowed in December, decreasing by 0.2% month-on-month. In the UK, the Bank of England cut interest rates by 25 basis points to 4.5%. The Bank of England’s Bailey confirmed taking a “gradual and careful” approach to cuts, which saw sterling weaken in FX markets. In China, both Caixin Manufacturing and Services PMI figures fell in January. Both PMIs came in lower than December and below expectations.

Last week's highlights

	ISM Manufacturing PMI (03/02) – Climbed to 50.9 in January, above expectations and up from December’s 49.3. Nonfarm payrolls (07/02) – Created 143,000 jobs in January. Unemployment rate (07/02) – Came in at 4.0%, down from December’s 4.1%.
	Core Harmonised Index of Consumer Prices (03/02) – Rose to 2.7% year-on-year, the same as December’s figure. Eurozone Producer Price Index (05/02) – Unchanged (0%) year-on-year. Eurozone Retail Sales (06/02) – Down by 0.2% month-on-month in December.
	Bank of England meeting (06/02) - Cut interest rates by 25 basis points to 4.5%, its third cut since the easing cycle began in August last year.
	Caixin Manufacturing PMI (03/02) – Fell to 50.1 in January, below expectations and down from December’s 50.5. Caixin Services PMI (05/02) – Fell to 51 in January, below expectations and down from December’s 52.2.

Looking ahead to this week, investors will receive data on US inflation, a figure the US Federal Reserve will be watching closely ahead of its next meeting. The US will also see a Producer Price Index and Retail Sales figure. In the Eurozone, preliminary GDP for Q4 2024 will be released, along with German inflation. The UK will also see preliminary GDP for Q4, along with manufacturing production. Lastly, investors will see inflation data come from China.

What's on the radar

	US Inflation (CPI) (12/02) Producer Price Index (13/02) Retail Sales (14/02)
	Germany Core Harmonised Index of Consumer Prices (13/02) Eurozone Preliminary Q4 GDP (14/02)
	Preliminary Q4 GDP (13/02) Manufacturing Production (13/02)
	China Consumer Price Index (09/02)

Chart of the moment

Slow and steady wins the race

Source: DataStream as of 05/02/2025. Total return, local currency. Indices used: EuroStoxx Banks, NASDAQ 100

• European Banks returns have been exceptional over the last few years, allowing them to quietly outperform the NASDAQ 100 since January 2022.  
• Robust profitability, strong balance sheets, high dividends and share buybacks have made EU banks a popular choice for investors.  
• European Banks continue to trade at a valuation discount to their US counterparts, however, due to challenges including more stringent regulations and slower growth in Europe.