Week ending 7th march 2025.

As shown in the accompanying table, financial markets broadly declined this week. Ongoing uncertainty—markets’ greatest foe—and shifting policies weighed on investor sentiment.

Over in Europe performance was mixed, the prospect of increased spending on defence and infrastructure by Germany and the European Union helped to moderate losses.

Germany’s DAX rose 2.03% this week with Friedrich Merz’s conservative alliance and the Social Democratic Party, who are in talks to form the next government, agreed to create an off-balance sheet €500 billion infrastructure fund, boost defence spending and loosen debt rules for states.

The European Central Bank (ECB) cut interest rates on Thursday, reducing the rate on bank deposits by 25 basis points to 2.5%, making monetary policy “less restrictive.” With the ECB’s inflation target nearing 2%, the key question is how much further the easing cycle will continue. This decision also comes amid rising global trade tensions and shifts in Germany’s fiscal policies and new plans to increase Europe’s military spending.

While the ECB’s actions have helped reduce borrowing costs, spurring loan growth, uncertainty remains about their long-term effects, especially with developments in Europe. With Germany and the EU commissions announcements just days before the policy meeting, policymakers have not yet had time to assess the full impact on growth and inflation. ECB President Christine Lagarde acknowledged the frustration over repetitive rhetoric but stressed that the rapidly changing economic landscape requires caution with risks from energy prices, trade policy, and shifting fiscal policies.

This week’s market activity serves as a timely reminder that while it’s easy to get swept up in the short-term noise, it’s crucial to avoid knee jerk reaction. A case in point: President Trump’s ever-changing stance on tariffs. On Tuesday, March 4th, the US administration announced sweeping 25% tariffs on imports from Mexico and Canada. However, by Thursday, the implementation was postponed for a month. This temporary delay applies to goods covered under the USMCA trade agreement, which was negotiated during Trump’s first term, giving both countries some breathing room for continued discussions. These shifting policy moves highlight the importance of maintaining a long-term economic perspective, rather than reacting hastily to the latest developments in trade and tariffs.

The latest US labour market report revealed job growth picked up in February with a gain of 151,000 jobs, slightly below expectations but an improvement from January’s 125,000. Job growth was strongest in healthcare, financial activities, and transportation, while federal employment declined. Federal government payrolls, excluding the post office, fell by 6,700, signalling a broader trend as Elon Musk’s Department of Government Efficiency (DOGE) has implemented significant layoffs as part of a major initiative to downsize the government and cut costs.

The unemployment rose to 4.1% in February 2025, up from 4.0% in January and slightly exceeding market expectations of 4.0%. Overall, the data suggests a cooling labour market, yet it remains resilient, which could support a more cautious approach by the Federal Reserve.

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On Friday, at an event at the University of Chicago, Federal Reserve Chair Jerome Powell reassured markets, noting that despite elevated uncertainty, “the US economy continues to be in a good place.” Regarding interest rates, he added, “We do not need to be in a hurry and are well-positioned to wait for greater clarity.”

Chinese stock markets advanced this week after Beijing set economic growth targets in line with forecasts and signalled further stimulus. At the National People’s Congress, China maintained its 5% growth target for 2025 but raised its fiscal deficit goal to 4% of GDP, the highest since 1994, amid ongoing trade tensions and a struggling property sector. While the government emphasised boosting consumption, specific measures remain unclear.

With global financial markets experiencing uneven performance, this underscores the importance of a diversified portfolio to manage risks across different regions and asset classes.

Coming up next week, US inflation data, PPI, initial jobless claims and University of Michigan consumer sentiment as well as UK retail sales and GDP growth.

Kate Mimnagh, Portfolio Economist