US equities rediscovered old form this week, rallying on the headlines that suited - the Trump administration delaying reciprocal tariffs - and looking past those that did not - the 25% across the board tariffs on steel and aluminium imports and a hotter-than-expected CPI report. But it is European equities that have continued to outperform where year to date gains have moved into double digits - helped this week by moves towards a Ukraine-Russia ceasefire. The overall upbeat tone in markets saw the US dollar offered, while market rates ended the week little changed.
An uptick in the CPI in January signals that inflation risks remain in the US, likely amplifying the Fed's caution over further rate cuts. After trending higher over recent months, headline CPI printed at 0.5%m/m - above expectations (0.3%) and its fastest rise since August 2023 - firming from 2.9% to 3.0%yr. The volatile components of energy (1.1%) and food (0.4%) were key drivers in January; however, a 0.4%m/m lift in core CPI - its strongest in 10 months - firming from 3.2% to 3.3%yr indicated broad-based price pressures were evident in early 2025.
That said, seasonal factors likely played a role here and when taking the producer price readings into consideration (0.4%m/m, 3.5%yr headline and 0.3%m/m, 3.6%yr core), early estimates from forecasters have the core PCE deflator - the gauge that the Fed sets policy to - coming in at a 0.3%m/m and 2.6%yr pace, down from 2.8% currently. While one CPI report likely won't have the alarm sounding at the Fed, inflation running a little on the sticky side into the risk of higher prices associated with tariffs is clearly leading to some caution around the committee table in Washington.
Not in any need of a reminder of the UK's growth struggles, the gilt market received it anyway this week as Q4 GDP came in at 0.1%q/q and 1.4%Y/Y - outcomes marginally better than expected but still subdued. Focus is on the upcoming Spring statement (March 26), with the UK government under pressure to deliver measures to revive growth while also formulating a path to balancing the budget in line with its fiscal rules. UK press continues to highlight that higher gilt yields and slow growth leave Chancellor Reeves with diminished fiscal headroom with which to manoeuvre. Indications coming out of last week's Bank of England meeting were that policy is set to be eased at a gradual pace through 2025.
Domestically, attention is focused firmly on next week's RBA meeting. Increased confidence in the inflation outlook - backed up by the Q4 CPI report from late January - and the Board toning down its resistance to easing policy back at the December meeting have a 25bps cut as a hot favourite for the outcome with markets. Watch out for my preview to be posted ahead of the meeting for more insights. Following the meeting, top-tier data on the labour market is on the calendar with the Q4 Wage Price Index (exp 0.8%q/q, 3.2%Y/Y) due on Wednesday and the January employment report (exp +20k, unemployment rate 4.1%) out on Thursday. This week saw the revamped housing finance series report a 1.4% lift in lending commitments in the final quarter of 2024 (reviewed here).
