Week ending 17th January 2025.

Stocks climbed this week, fuelled by economic data that reinforced expectations for central banks to maintain supportive policies, as well as solid corporate earnings. Meanwhile, global government bond yields softened from recent peaks, aided by lower-than-expected inflation figures in both the US and the UK. Positive sentiment was also driven by anticipation of Donald Trump’s inauguration on Monday and the upcoming release of major corporate earnings reports later this month.

In the US, December’s inflation reports reassured investors. Headline inflation rose to 2.9%, partly due to low base effects from last year, particularly in energy, but core inflation—excluding food and energy—eased to 3.2%, slightly below expectations. A softer-than-expected rise in producer prices further reinforced expectations that inflationary pressures are cooling, keeping the Federal Reserve on track for potential rate cuts later this year.

Corporate earnings added to the optimism. Major banks, including JPMorgan Chase, Goldman Sachs, and Citigroup, reported stronger-than-expected Q4 results, demonstrating resilience despite the high-rate environment.

In the UK, the FTSE 100 advanced even as economic data sent mixed signals. GDP, the key measure for economic growth, grew by just 0.1% month-on-month in November, recovering from a 0.1% contraction in both October and September, but falling short of expectations for a 0.2% increase. December’s inflation unexpectedly cooled, strengthening expectations of a rate cut next month. Meanwhile, softer retail sales data on Friday further bolstered the case for monetary policy easing, powered by expectations of lower interest rates and a weaker pound, sending the FTSE 100 stock index to a record high. Shop sales in the UK unexpectedly fell in the run-up to Christmas, due to a “very poor month” for food sales in supermarkets. UK government bond yields eased from recent highs following the economic data, which supported expectations of further rate cuts this year, offering some relief to investors and borrowers.

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Asia-Pacific markets delivered a mixed performance on Friday, as investors digested encouraging economic data from China. China’s economy surprised to the upside, expanding by 5.4% in Q4—its fastest pace in 18 months. Retail sales and industrial production also beat forecasts, suggesting that consumer confidence is improving and that stimulus efforts are gaining traction. While regional sentiment remained mixed, China’s recovery provides a constructive backdrop for the year ahead.

In Europe, stocks closed the week on a high note, driven by a broad-based rally fuelled by declining government bond yields and encouraging economic data from China. Friday’s inflation data came in line with expectations, with the annual rate rising to 2.4% in December, up from 2.2% in November. The increase was largely attributed to strong base effects, as last year’s energy price declines no longer factored into the annual rates.

Looking ahead to next week: Monday 20th January marks Martin Luther King Jr. Day in the US and as such, markets will be closed. The second inauguration of Donald Trump will also take place on Monday. Data-wise, next week will include the UK unemployment rate and average earnings, Japan’s balance of trade, US initial jobless claims, and eurozone consumer confidence. Later in the week, we’ll see UK, eurozone, and US PMI data.

Kate Mimnagh, Portfolio Economist