Weekly Economic & Financial Outlook | Week #3, 2025

Outside the U.S., China’s inflation data provided an encouraging signal to start the new year. In Europe, both the services and production sectors showe...

author: Ahura Chalaki

published:Jan 12, 2025 0:35

Reading Time:

10 minutes

category:weekly

Outside the U.S., China’s inflation data provided an encouraging signal to start the new year. In Europe, both the services and production sectors showed resilience, while Eurozone inflation rose slightly, contrasted by easing price pressures in Switzerland. Meanwhile, Canada garnered attention with Prime Minister Justin Trudeau stepping down as leader of the Liberal Party. In Latin America, inflation reports from Mexico and Brazil painted a mixed picture.

Notably, the gap between the Federal Reserve's rate cuts and Treasury yields draws interest. Since the FOMC began easing rates last year, cutting the federal funds rate by 100 basis points, the 10-year Treasury yield has paradoxically risen by about 100 basis points, now sitting at 4.76%. Understanding this divergence remains a focal point for market participants.

Key Events on the Economic Calendar

Monday:

- China: Trade data for December

- U.K.: Manufacturing output for November

Tuesday:

- Japan: Current account balance for November

- U.S.: December Producer Price Index (PPI)

Wednesday:

- Japan: Tankan indexes for January

- U.K. & Sweden: December CPI rates

- U.S.: December CPI rates, NY Fed manufacturing index for January

- Canada: Manufacturing sales for November

Thursday:

- Japan: Corporate goods prices for December

- Australia: Employment data for December

- U.K.: GDP rate for November

- Canada: December housing starts

- U.S.: Weekly initial jobless claims, January’s Philly Fed Business Index, and December Retail Sales

Friday:

- China: December industrial output and Q4 GDP

- U.K.: Retail sales for December

- Eurozone: Final HICP rate for December

- U.S.: December Industrial Production

This comprehensive lineup of global economic data will shape market movements throughout the week.

Earnings Season Kicks Off!

This week marks the kickoff of the Q4 2024 earnings season, starting Wednesday with reports from major players in the banking sector. As usual, these results will set a tone for the broader market, providing key insights into the financial industry's performance, economic trends, and expectations for the year ahead. Keep an eye on earnings updates for potential market movers! The most important names to watch JPMorgan (JPM), Wells Fargo&Co (WFC), Goldman Sachs (GS), Citigroup (C), Bank of NY Mellon (BK), Taiwan Semiconductor (TSM), UnitedHealth (UNH), Bank of America (BAC), and Morgan Stanley (MS).

USA

Last week, the US labor market report was the main market mover. December employment data highlighted a resilient U.S. labor market, with nonfarm payrolls rising by 256K, significantly exceeding expectations. Over the past three months, payroll growth has averaged 170K, maintaining a steady hiring pace. The unemployment rate dipped to 4.1%, aligning with the Fed's ideal labor market balance. And lower than the market 4.2% estimates. Wage growth of 3.9% also supports the Fed’s long-term 2% inflation target, as it eased from previous 4% growth.

The Federal Reserve has emphasized that further progress toward 2% inflation is necessary before additional rate cuts occur, provided the labor market remains stable. This solid employment data strengthens the Fed's confidence but suggests it will adopt a patient approach to rate adjustments. With strong labor data and Fed speakers' comments during the week, rate cuts by the Fed at the January or March meetings are increasingly unlikely.

In the week ahead, the US inflation numbers on Wednesday will be the main market mover. The December CPI report is expected to show that the underlying trend in inflation is not accelerating again. However, it is unlikely to ease the FOMC's growing concerns about inflation remaining stubbornly above its target. Headline CPI is projected to rise by 0.4%, following a 0.3% growth in November, driven by a strong increase in energy prices, which can push the annual rate to a five-month high of 2.9%. On the other hand, excluding food and energy, price growth is expected to be more moderate, with the core index likely increasing 0.2%, following four consecutive months of 0.3% gains. If realized, this would keep the year-over-year core inflation rate at 3.3% for the fourth consecutive month. While we do not anticipate a reversal in progress against inflation, we expect progress to stall in the coming year. Earlier disinflationary pressures from supply chain improvements and lower commodity prices have diminished, and new inflationary challenges from trade policies are likely to emerge.

Apart from inflation data, we have the housing market and retail sales as well to watch. Retail Sales numbers are supposed to be published on Thursday, and Housing data on Friday.

Retail Sales (Thursday):

Retail sales exceeded expectations for six consecutive months, with December growth expected to moderate to a solid 0.5%. This would bring annual retail sales growth to approximately 3.4%. High-frequency data suggest a potential upside, as non-store retailers and restaurants saw significant gains in December. The report will provide a complete view of the holiday shopping season, with holiday sales (November–December, excluding auto, gas, and restaurant sales) projected to grow by 3.3% annually, and 0.4% monthly in December.

Housing Starts (Friday):

Residential construction remains mixed. While single-family housing starts were up 7.2% year-to-date in November, multifamily starts were down 27%, impacted by an oversupply of new apartments. Future activity in multifamily construction looks weak, with declining permit filings. In contrast, the single-family market shows resilience, supported by price cuts and incentives despite rising mortgage rates. December housing starts are expected to rise by 2.3% to an annual pace of 1,310K units.

Based on the data, we anticipate a continued downside movement on Wall Street in the coming week, with the US500 targeting 5,700. If this level is reached, the next support levels are expected to be 5,500 and 5,400.