Week ending 7th February 2025.

As shown in the accompanying table, it was a mixed week for financial markets. U.S. stocks stumbled early on due to new tariffs and ongoing trade negotiations with Canada, Mexico, and China, which unsettled markets despite prior mentions by Trump. China responded with countermeasures against US imports, while tariffs on Mexico and Canada were suspended for a month to allow for negotiations, allowing equities to recover, ending the week with only modest declines. Trump’s comments on U.S. interests in the Gaza Strip, following previous remarks on Greenland and the Panama Canal, drew criticism but are unlikely to lead to real action, as Trump is known for off-the-cuff statements.

Earnings reports were a key driver of market sentiment, with 77% of S&P 500 companies exceeding fourth-quarter earnings expectations and 63% of companies surpassing sales projections, according to FactSet data.

In the UK, the Bank of England (BoE) cut interest rates by 0.25% to 4.5% during its February meeting, marking the third reduction since August. The decision, passed by a 7-2 vote, was widely expected, though two members called for a larger 0.5% cut. Governor Andrew Bailey indicated that further rate cuts are possible, stating, “we expect to be able to cut Bank Rate further as the disinflation process continues.” Markets responded positively, with the FTSE 100 rising as multinational companies benefitted from a weaker pound. However, the BoE’s updated economic forecasts presented a mixed outlook. The 2025 growth forecast was downgraded from 1.5% to 0.75%, a potential setback for Chancellor Rachel Reeves’ economic plans, but leaving room for further rate cuts this year, which could support equities. Inflation forecasts were also revised, with inflation now expected to peak at 3.7% later this year due to rising energy, water, and transport costs. The 2% target is now expected to be reached by the end of 2027, six months later than previously projected.

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In the U.S., the labour market remained a key focus. January job growth was weaker than expected, following strong gains in the prior two months. However, the unemployment rate dropped to 4.0%, its lowest since May 2024, surpassing expectations of 4.1%. This suggests the Federal Reserve is unlikely to rush into interest rate cuts in the short term. The number of unemployed people fell by 37,000, and the labour force participation rate rose to 62.6%. Job growth slowed, with nonfarm payrolls increasing by 143,000, well below December’s revised 307,000 gain. Despite the slowdown, strong wage growth supported consumer spending, reinforcing expectations that the Federal Reserve will keep rates steady until at least June. There are concerns that Trump’s immigration policies and tariffs could weaken the labour market and economy in the months ahead, and policymakers will continue to assess incoming data.

Elsewhere, the Reserve Bank of India (RBI) cut its key interest rate for the first time in nearly five years, lowering the repo rate by 25 basis points to 6.25%. This move, aimed at stimulating the economy, comes as inflation approaches the central bank’s 4% target.

Mainland Chinese stock markets climbed during the shortened trading week, as robust consumer spending during the Lunar New Year holiday helped counterbalance President Trump’s decision to impose a 10% tariff on Chinese imports. Increased travel and retail activity over the holiday, a critical consumption period in China, suggested stronger domestic demand.

Coming up next week, US inflation, retail sales and PPI. As well as UK and eurozone GDP.

Kate Mimnagh, Portfolio Economist