Macroeconomic Events and Risks
In the U.S., December saw nonfarm payrolls rising by 256,000, significantly exceeding forecasts, while the unemployment rate dropped to 4.1%. Inflation data showed mixed signals: headline CPI inflation rose to 2.9%, while core inflation eased to 3.2% annually. Markets reacted strongly, with Treasury yields fluctuating and expectations for interest rate cuts adjusting. The Federal Reserve is widely expected to maintain rates at its January meeting, though futures pricing reflects optimism for cuts later in 2025.
In Europe, annual inflation in the euro area is expected to have increased slightly to 2.4%, driven by higher services prices. Individual countries saw varied trends, with German inflation reaching 2.8% and Greece’s falling to 2.9%. The European Central Bank is projected to continue easing rates, balancing efforts to control inflation without inducing recession.
Oil prices surged due to falling U.S. crude inventories and sanctions on Russian oil, with Brent crude now at $82, up 11% since the previous report. Global demand for oil is expected to grow steadily in the coming years.
Geopolitical Events and Risks
Israel and Hamas have agreed to halt hostilities and exchange prisoners, signaling potential resolution to the protracted Gaza conflict. In the U.S., Donald Trump’s inauguration as the 47th president looms, with expectations for clarity on potential tariffs targeting imports from Canada, Mexico, and China. Any tariff action could significantly impact U.S. inflation and the Fed’s monetary policy trajectory.
Market Trends and Risks
U.S. equities have shown resilience, with the S&P 500 gaining 1.2% in January so far, bolstered by easing inflation and strong earnings from major banks. However, concerns linger over potential trade policy volatility under the Trump administration. European equities also advanced, supported by a weaker euro and dovish ECB policies. Emerging markets faced headwinds, with Hong Kong’s Hang Seng Index down 2.9% over the past month.
Bond yields rose broadly, reflecting recalibrated expectations for monetary policy. In the U.S., the 10-year Treasury yield climbed to 4.66%, while the 2-year yield dipped slightly. European bond yields mirrored this trend, with notable increases across German, French, and Italian benchmarks.
Gold prices climbed 2.5% last month, nearing all-time highs, as investors sought safe havens amid market uncertainties. Conversely, Bitcoin saw a slight 0.8% decline but remains historically strong amid pro-crypto sentiment from the new administration.
Currency Trends
The U.S. dollar strengthened against most major currencies, driven by a relatively hawkish Federal Reserve. The euro weakened 0.5% against the dollar, while sterling fell 2.6%. The Japanese yen depreciated 1.1% against the dollar, while the Canadian dollar gained slightly. The dollar index rose 1.0%, reflecting broad confidence in U.S. economic stability.