Week of JANUARY 20

Markets witnessed a lively week of trading, with cooling US inflation and data in the UK pointing to economic fragility, while Chinese GDP beat expectations.

Week in Review

Last week's news generally supported a positive outlook for equities, even if some of it fell into the "bad news is good news" category, suggesting more easing from central banks.

Midweek, markets welcomed the US headline inflation rate coming in as expected at 2.9%, but the core rate unexpectedly ticked down to 3.2% from the forecasted 3.3%. The subsequent increase in hopes that the Fed would take an easier path this year helped undo some of the gains in yields seen after the strong jobs data the week before. Following the data, voting FOMC member Christopher Waller suggested that rate cuts could come sooner than anticipated.

UK inflation came in lower than expected at 2.5% instead of increasing to 2.7% from 2.6%, confirmed by the drop to 3.2% from 3.5% in the core rate. While that helped support a narrative of a less hawkish BOE, the next day's GDP numbers showed the British economy grew by 0.1% in November, suggesting stagnation. Then, retail sales contracted on Friday instead of expanding, exacerbating worries that the final quarter GDP might be in the red.

The minutes of the last ECB meeting showed that members were increasingly confident that inflation would return to target.

China's GDP figure accelerated by 1.6% in Q4 from the upwardly revised 1.3% of the third quarter, pushing the annual figure above the 5% target to 5.4%. This came after reports that China's trade balance expanded as its export growth was much stronger than anticipated, with imports also returning to positive territory.

In geopolitical news, Israel and Hamas agreed to a ceasefire, hostage exchange, and release deal; French Prime Minister Francois Bayrou survived his first no-confidence vote, as expected; and Scott Bessent, the nominee for US Secretary of the Treasury, gave testimony before Congress, making the case for extending the Trump tax cuts and supporting tariffs.​

Biggest Market Movers

• The Aussie bounced from five-year lows against the greenback as US yields retreated throughout the week.
• USD/JPY slid over 1% after verbal intervention from Finance Minister Katsunobu Kato, which coincided with falling US yields post-CPI data.
• Small caps outperformed as the Russell 2000 added about 5% from a rotation towards growth stocks amid declining yields.

Top Events in the Week Ahead

Markets are off to an irregular start, with US markets closed for the holiday and the Fed entering its pre-meeting blackout period. Donald Trump's second-term inauguration looms large, and expected executive orders could impact markets through tariffs and energy production measures. Gold could be the week's hotspot, eyeing record highs unless it falls back towards the $2,500 per ounce handle.

BOJ Expected to Hike

The BOJ takes centre stage with its rate decision, expected to deliver a 25-basis-point hike as Japanese inflation forecasts point to 3% from 2.9%. EURJPY could confirm the break below 160.00 unless end-of-week data boosts the euro. Friday brings January Flash PMIs, with a focus on recovery signals and energy cost impacts.

Rate Meeting Signs

UK employment data arrives on Tuesday, with unemployment projected to remain steady at 4.3%. Slower wage growth could signal easing labour conditions for the BOE, increasing recent dovishness and adding to record-breaking gains seen in the Footsie.

The BOC outlook remains dovish ahead of Tuesday's inflation report, forecast at 1.8% versus 1.9% prior, though the trimmed mean measure is expected to steady at 2.7%. In a consolidation, the release could set the stage for the next move, with a focus on 145.00 and 142.00.

Other Events, Earnings

The calendar features the Eurogroup meeting and WEF Davos gathering on Monday, German ZEW sentiment on Tuesday, Japanese trade balance on Thursday, UK Gfk confidence, and Michigan consumer sentiment on Friday.

Earnings season accelerates with updates from Netflix, 3M, Procter & Gamble, Burberry, Abbott Laboratories, Kier, Intuitive, GE Aerospace, American Express, Verizon and NetEra.