Market Commentary 10th February 2025 – from Charlie Hancock

The Bank of England (BoE) voted to cut interest rates by 0.25% following their policy meeting last week, taking the base rate down to 4.50%. Two members of the central bank’s monetary policy committee voted for a larger cut of 0.50%, citing concerns regarding a slowdown economic growth. The BoE’s governor, Andrew Bailey, hinted that further interest rate cuts would be implemented in the coming months.

Mortgage lender Halifax reported that the average UK house price rose by 3% year-on-year in January, with their house price index reaching a record high. Halifax reported strong demand for new mortgages, whilst predicting that mortgage interest rates would fluctuate between 4% and 5% this year.

Investors paid close attention to Eurozone inflation data. Consumer price inflation accelerated during January, with prices increasing by 2.5% year-on-year. The president of the European Central Bank (ECB), Christine Lagarde, stated that the rise in inflation was anticipated and cited base effects from lower energy prices in January 2024.

Germany released a mixed set of economic data. Factory orders increased by 6.9% in December, which was significantly better than the median economist estimate of a 2% increase. Meanwhile, industrial production declined by 2.4% during the same period, with notable weakness in the automotive sector.

US economic data was mixed last week. A manufacturing Purchasing Managers’ Index (PMI) showed that the sector expanded in January for the first time in 3 years, although firms cited concerns around the potential impact of tariffs under the new Trump administration.

Labour market data showed that the number of payrolled employees increased by 143,000 in January, which was weaker than expected and suggested that job growth slowed significantly during the month, given that the US economy reportedly added 307,000 new roles in December 2024.

The unemployment rate remained stable in January, declining by 0.1% to 4%. Weekly jobless claims came in slightly higher than expected at 219,000, while the number of continuing unemployment claims rose to 1.89 million.

Economic data relating to China’s New Year Holiday period pointed to an improvement in consumer sentiment, with spending on domestic trips rising by 7% in comparison to the holiday period in 2024. Other economic data released last week painted a weaker picture, with PMIs showing that growth in both the services and manufacturing sectors slowed in January. Following a rise in US tariffs on Chinese imports, which came into effect last week, President Trump was forced to reverse his ban on duty free imports for low value goods, after US postal services stopped accepting packages from China.

Economic data in Japan appeared to support calls for the Bank of Japan (BoJ) to maintain their hawkish policy stance and Japanese government borrowing costs rose as investors reacted to the week’s data. Wage increases accelerated in December 2024, whilst real wage growth (i.e. after inflation) remained positive. Consumer spending data for December came in stronger than expected.

Although the BoE suggested that further rate cuts were likely, the central bank also stated that it expects inflation to remain above their 2% target until the end of 2027. The BoE also cut their 2025 forecast for economic growth in half, with the bank now expecting the UK economy to expand by 0.75% this year.

Dovish sentiment from the ECB appeared to outweigh data showing an acceleration in Eurozone inflation. The release of a working paper from the ECB showed that the central bank estimates further rate cuts of between 0.50% to 1.00% will be required in order to reach a ‘neutral rate’.

US labour market data, which showed that job growth slowed significantly last month, appeared to add some downward pressure to US treasury yields.

GBP / EUR – Current 1.2010 Previous 1.1960

The Pound was stable against the US Dollar, gaining 0.06%. The Eurozone’s currency weakened against most major currencies last week and as a result, the Pound gained 0.42% versus the Euro.