Global Economic and Financial Outlook | Week 4, 2025

U.S. inflation remains well below the Federal Reserve's 2% target among the key economic data published. Internationally, China's achievement of its 5% economic growth target was perhaps the most significant news. The Chinese economy ended 2024 on a strong note, with Q4 GDP growing 5.4% year-over-year, supported by accelerated retail sales and industrial activity in December. However, 2025 growth faces challenges from U.S. tariffs and the need for large-scale fiscal stimulus to maintain momentum.

Next Week's Highlights:

·      U.S.: Leading Economic Index (Wed.), Existing Home Sales (Fri.)

·      Canada: Consumer Price Index (Tue.)

·      Japan: Bank of Japan Policy Rate Decision (Fri.)

·      Eurozone: Purchasing Managers’ Index (PMIs) (Fri.)

Earnings Report Overview

Last week, earnings season kicked off with strong performances from the banking sector, providing support to stock markets and maintaining a positive trend. Key earnings included reports from major financial institutions, showcasing resilient profitability despite challenging macroeconomic conditions. These reports will offer further insight into sector-specific trends and the broader economic outlook. Investors will be closely watching for guidance updates and the impact of economic headwinds on corporate performance.

Main Earnings for the Week Ahead:

·      Tuesday: Netflix (NFLX), Charles Schwab (SCHW), 3M (MMM)

·      Wednesday: P&G (PG), J&J (JNJ)

·      Thursday: Louis Vuitton ADR (LVMUY)

·      Friday: American Express (AXP), Verizon (VZ), NextEra Energy (NEE)

Trump's U.S. is Starting Over!

The U.S. Consumer Price Index (CPI) ended 2024 at 2.9% year-over-year, down slightly from 3.1% in January but still far from the Federal Reserve's 2% target. We anticipate two 25-basis-point rate cuts in late 2025, with the Federal Open Market Committee (FOMC) maintaining a target range of 3.75%-4.00% through 2026. The Beige Book highlighted modest economic growth across all regions, resilient employment, and rising prices, though tariffs remain a concern.

In the week ahead, Trump’s inauguration marks a pivotal moment for financial markets, as investors closely monitor his policy signals. Promises of tax cuts, deregulation, and infrastructure spending could boost sectors like industrials and financials. However, trade protectionism or healthcare reforms may create uncertainty for technology and healthcare. Trump’s first day in office is expected to feature a flurry of executive orders, with a particular focus on potential tariff-related actions. Markets are paying close attention to any immediate trade measures, which could significantly impact global supply chains and export-driven economies. These first-day actions will set the tone for Trump’s trade agenda, influencing market sentiment and shaping the outlook for economic growth and global commerce.

As markets respond, the U.S. dollar and bond yields may fluctuate based on growth expectations. Global markets, particularly in emerging economies, could experience heightened volatility due to trade policies. While short-term optimism may drive gains, market stability will hinge on the administration's ability to implement its agenda effectively, especially in relation to the stock and cryptocurrency markets, where optimism is higher regarding the new administration’s decisions and policies.

On the economic data front, this week does not feature many significant market-moving releases. The Leading Index and Existing Home Sales are the main data points to watch. The December Leading Index, set to be released on Wednesday, follows a 0.3% rise in November driven by gains in building permits, stock prices, average workweek hours, and fewer jobless claims. Although the index has mostly been in negative territory since 2022, December is expected to show only a small decline of -0.1%. This movement toward positive territory could still be interpreted as a hopeful signal.

In the housing market, mortgage rates have climbed back nearly 7% in January, reducing hopes for rate cuts in 2025 and likely keeping housing activity subdued in the years ahead. For December, we can expect pressures on sales but modest improvement after a 4.8% rise in November, which was supported by easing mortgage rates in late 2024.

From a market reaction perspective, the inauguration is expected to bring positive energy across the markets, supporting the U.S. Dollar Index (DXY) and stock markets in maintaining their gains and encouraging further optimism. Technically, the DXY remains bullish, with strong support around 107.80. However, with the RSI below 60, the bulls lack sufficient momentum to push prices significantly higher.