Week ending 14th February 2025.

As you can see from the accompanying table, it was broadly a positive week for financial markets.

US stocks closed the week on a positive note as investor sentiment steadied, fuelled by growing recognition that President Trump’s tough rhetoric on tariffs was likely a strategic negotiating tactic rather than a fundamental shift in US trade policy, as we had previously speculated.

Trump has already engaged in talks with key global leaders, including Japan’s Prime Minister Ishiba and India’s Prime Minister Narendra Modi, to explore potential trade agreements that could benefit the US. He is also planning upcoming discussions with the European Union and the United Kingdom in hopes of securing trade deals that align more closely with U.S. economic priorities. In line with his approach as a seasoned businessman, Trump’s tactic of setting high tariff proposals early in negotiations is seen as a strategy to create room for flexibility and bargaining, ultimately positioning the U.S. to secure more favourable agreements.

Markets reacted to January’s U.S. inflation data, which showed a faster-than-expected rise in prices, signalling that inflationary pressures remain persistent. The annual inflation rate increased to 3%, up from 2.9% in December. Shelter costs rose by 0.4%, accounting for nearly 30% of the total monthly increase. Core consumer price inflation, which excludes volatile food and energy prices, edged up to 3.3% in January, from 3.2% the previous month, surpassing market expectations of 3.1%. This data reinforced the view that the Federal Reserve will likely maintain its current stance on interest rates, with markets now anticipating a rate cut in November or December. While investors were somewhat disappointed, January’s report has not significantly changed the broader economic outlook. Policymakers are likely to stay the course, particularly given risks such as California wildfires and the potential impact of trade tariffs proposed by the Trump administration.

UK GDP data shows the economy narrowly avoided a recession in Q4 2024, with modest 0.1% growth, largely driven by government spending. December saw the strongest growth in nine months, at 0.4%, boosted by sectors like pubs, wholesale trade, and pharmaceuticals. However, construction continued to weigh on overall performance. The data suggests that the economy’s recovery is fragile and remains heavily reliant on public sector support, rather than a resurgence in private sector activity.

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Looking to 2025, the outlook is cautiously optimistic, with expectations for potential Bank of England rate cuts. Risks remain, including a cooling labour market and ongoing pessimism among consumers and businesses. The labour market may cool faster than expected, especially as companies could look to reduce headcount in response to rising employer national insurance contributions.

In Europe, sentiment was buoyed by hopes of an end to the Ukraine-Russia conflict and strong earnings reports. Investors responded positively to the prospects of peace talks between Ukraine and Russia, following a phone call last week between President Trump and Russian President Vladimir Putin. In a significant development, White House Middle East envoy Steve Witkoff confirmed he was traveling to Saudi Arabia on Sunday evening for the first in-person discussions between the US and Russia aimed at resolving the conflict. This marks a hopeful and constructive step forward in efforts to achieve peace.

In other news, mainland Chinese stock markets gained, fuelled by hopes that U.S. tariffs on Chinese imports may be less severe than initially expected, following the Trump administration’s decision to impose a 10% tariff on the country’s products in early February.

Coming up next week: UK inflation, unemployment, consumer confidence, retail sales, and Federal Reserve minutes from their January meeting. US and Eurozone consumer sentiment data are also due out.

Kate Mimnagh, Portfolio Economist