Market Commentary 25th February 2025 – from Charlie Hancock

Inflation data for January showed that headline consumer prices in the UK rose by 3.0% year-on-year. With inflation accelerating from the 2.5% recorded for the previous month, the data prompted some debate around how many interest rate cuts the Bank of England (BoE) will implement this year. Services inflation, which the BoE have been closely watching, accelerated from 4.4% in December to 5.0% in January.

Annual wage growth accelerated during the final quarter of 2024, with average pay excluding bonuses rising by 5.9%. The unemployment rate remained stable at 4.4%. Retail sales data also showed that sale volumes increased by 1.7% in January, which was significantly above the median economist estimate.

An initial reading for a Eurozone Purchasing Managers’ Index (PMI) showed that the bloc’s economy continued to expand in February, with most countries experiencing growth. Germany saw business activity improve for the second consecutive month, while France saw a relatively sharp contraction in activity. According to the PMI data, inflation was an issue during February for firms in the Eurozone, with businesses citing increasing input costs as a key concern.

Headlines regarding the Russia-Ukraine conflict impacted sentiment on Europe throughout the week. US President Donald Trump continued to push for a deal which would see an end to the conflict. Trump also stated that Russian President Vladimir Putin was “going all out to end the war”.

President Donald Trump announced that he intends to implement additional tariffs on imports to the US of vehicles, pharmaceuticals and semiconductors. Trump added that tariffs on cars could come as soon as early April, in an effort to combat what he has described as the “unfair treatment” of US vehicle exports in foreign markets.

An initial reading of PMI data for February showed that growth in the US slowed this month. The manufacturing sector expanded, while the services sector slipped into contractionary territory. Firms cited concerns around government policy changes and rising input cost inflation. Meanwhile, consumer confidence fell sharply according to a closely watched index published by the University of Michigan.

Investors shrugged off concerns around US-China trade tensions, with Chinese equities moving higher across the week. Strong earnings results from Chinese e-commerce giant Alibaba contributed to an improvement in sentiment. China’s President Xi held a meeting with senior figures at Chinese tech companies, including Alibaba’s founder, Jack Ma, with reports suggesting that the government were looking to adopt a more supportive stance towards private companies.

Speculation around the Bank of Japan (BoJ) adopting more restrictive monetary policy continued to grow, fuelled by hotter than expected inflation data. Headline consumer prices rose by 3.2% year-on-year in January, with accelerating food and energy inflation contributing to the headline number. Data on Gross Domestic Product (GDP) showed that Japan’s economy expanded by a significantly better than expected 0.7% during the final quarter of 2024.

With data for January showing that inflationary pressures accelerated in the UK, government bond yields moved higher on the expectation of fewer rate cuts from the BoE in 2025.

The week’s PMI data, which showed businesses reported concerns around inflationary pressures, appeared to contribute to Eurozone government bond yields moving higher.

US treasury yields moved lower following the release of economic data. PMI data and a consumer confidence survey, which pointed to slowing economic growth, appeared to fuel expectations for the Federal Reserve to implement further interest rate cuts during 2025.

GBP / EUR – Current 1.2082 Previous 1.1996

The Pound gained 0.39% against the US Dollar last week and 0.72% against the Euro. The week’s UK inflation data resulted in investors scaling back their expectations for BoE rate cuts, which contributed to the Pound appreciating.