KUWAIT: This week, US markets saw significant volatility following President Trump’s policy announcements after his inauguration. At the World Economic Forum in Davos, President Trump’s speech solidified his protectionist stance on trade, and reiterated calls for tariffs on imports, lower interest rates, and reduced oil prices.
This came as US unemployment claims rose only marginally, amidst mixed PMI data ahead of next week’s FOMC meeting. In Canada, inflation eased to 1.8 percent y/y, and monthly retail sales remained flat, increasing expectations of a rate cut by the Bank of Canada this month. In Europe, this week’s surge of data triggered fluctuations in the euro currency.
Eurozone PMI showed modest improvement, with Germany’s composite PMI returning to expansion, whilst France continued its contraction due to weak demand and political uncertainty. Meanwhile, the UK saw a rise in unemployment to 4.4 percent, despite strong wage growth. In Asia, the Bank of Japan raised its policy rate to 0.50 percent, the highest in 17 years, due to accelerating inflation. In contrast, the People’s Bank of China kept its lending rates unchanged as the yuan weakened, signaling a cautious monetary stance. Overall, global markets remain volatile, driven by the flurry of political developments, economic data, and central bank stances.
Trump inauguration
Donald Trump’s inauguration as the 47th US President was marked by sweeping executive orders and market volatility. Key policy changes included the withdrawal from the Paris Climate Accord and the World Health Organization, reversals of nearly 80 Biden-era directives, and the suspension of birthright citizenship. Immigration reforms, declaring a ‘national energy emergency’, diversity program eliminations, and hiring freezes underscored a shift toward protectionist policies, setting the stage for significant domestic and global challenges.
Trump also ordered investigations into trade imbalances, without imposing immediate tariffs, though he suggested potential levies of 25 percent on Canada and Mexico, and 10 percent on China. On Friday, DXY fell to a one-month low after Trump said he would “rather not” use tariffs on China, dampening inflation expectations. DXY was last seen at 107.44.
Ahead of the Federal Reserve’s meeting next week, President Trump ramped up pressure for interest rate cuts, criticizing Fed Chair Jay Powell’s cautious stance. The central bank is expected to hold rates at 4.25 percent -4.5 percent after three consecutive cuts totaling 100bps since September 2024. Economists have expressed concerns that Trump’s policies—especially tariffs, tax cuts, and immigration reforms—could undermine inflation control, which remains above the 2 percent target. Meanwhile, President Trump threatened to double tax rates for foreign nationals and corporations. This measure targets perceived discriminatory international tax policies, particularly against US multinationals. The administration also withdrew support for the OECD global tax pact, which was expected to generate $192 billion annually in tax revenues.
US unemployment claims
Initial unemployment claims in the US rose by 6K to a seasonally adjusted 223K for the week ending January 18, 2025, higher than the expected 219K. Continuing claims, a proxy for long-term unemployment, reached 1.9 million, the highest since November 2021, suggesting greater challenges for job seekers. Despite these figures, initial claims remain near pre-pandemic averages, indicating a resilient labor market. Nonfarm payrolls had grown by 256K in December, contributing to a 2.2 million job increase in 2024. Economists note potential distortions from seasonal factors, extreme weather, and the Trump administration’s pro-business policies, including federal employment cuts, which could shape the labor market in the coming months.
In January, the US private sector showed mixed signals of economic activity. The S&P Global Composite PMI fell to 52.4 from 55.4 in December, marking a nine-month low. The Manufacturing PMI improved to 50.1, up from a revised 49.4, reaching a seven-month high and indicating a slight return to expansion. Meanwhile, the Services PMI declined significantly to 52.8 from 56.8, also a nine-month low. Business optimism remains strong, bolstered by expectations of growth-friendly policies under the new administration. However, inflationary pressures have resurfaced, driven by supplier price hikes and wage increases, with broad-based cost growth across goods and services posing potential challenges for monetary policy adjustments.
Canada’s inflation rate eases
Canada’s Consumer Price Index (CPI) eased to 1.8 percent y/y in December 2024, down from 1.9 percent in November, reflecting the impact of a sales tax break that began mid-month. On a monthly basis, CPI contracted 0.4 percent in December, driven by lower prices for alcohol (-1.3 percent), restaurant food (-1.6 percent), and children’s clothing. The tax relief affected approximately 10 percent of the CPI basket and is expected to have a more pronounced effect in January. Core inflation metrics, CPI-median and CPI-trim, edged down to 2.4 percent and 2.5 percent respectively, approaching the midpoint to the Bank of Canada’s target range of 1 to 3 percent. Markets now anticipate an 93 percent likelihood of a 25-basis-point rate cut on January 29. USD/CAD was last seen at 1.4341.
Canada’s retail sales were unchanged in November at CAD 67.57 billion ($467B), as declines in six of nine subsectors, including food and beverage (-1.6 percent) and general merchandise (-1.0 percent), offset a 2 percent rise in motor vehicle and parts sales, according to Statistics Canada. Excluding automotive sales, retail sales fell 0.7 percent. Economists attribute the muted figures to delayed Black Friday effects and mid-December tax holidays. Retail sales, a key GDP indicator, contribute nearly 40 percent to consumer spending, which underpinned Q3 economic growth. Preliminary data suggest a 1.6 percent rise in December.
Eurozone PMI
Eurozone PMI data for January highlighted cautious economic improvement, with the PMI Composite rising to 50.2 from 49.6, indicating marginal growth after five months of contraction. Manufacturing PMI climbed to 46.1, its highest in eight months, though still contracting, while services PMI dipped slightly to 51.4 but remained expansionary. Germany’s PMI Composite rose from 48.0 to 50.1, marking a return to growth, while France continued to contract with a PMI Composite of 48.3. Inflationary pressures persisted, as input prices in manufacturing rose for the first time in four months, driven by a weaker euro and higher CO2 taxes, with markets assigning a 97 percent probability of a 25bps cut by the ECB next week. EUR/USD was last seen at 1.0495.
European Central Bank President Christine Lagarde has warned Europe to prepare for potential US trade policy shifts under President Donald Trump, who has hinted at selective tariffs targeting EU goods. Speaking at the World Economic Forum in Davos, Lagarde noted that Europe’s trade surplus with the US, almost 1 percent of GDP in 2023, underscores its reliance on key sectors such as chemicals and pharmaceuticals. Lagarde questioned the feasibility of US domestic manufacturing substituting EU imports, citing the US economy’s full capacity and historically low unemployment. She emphasized Europe’s need to remove internal trade barriers, enhance competitiveness, and implement urgent reforms to strengthen its position in global trade negotiations.
UK unemployment
The UK’s unemployment rate edged higher to 4.4 percent in the three months to November 2024, exceeding the forecasted 4.3 percent, according to the Office for National Statistics. Employment growth slowed significantly, with a net increase of 35K jobs, compared to October’s 173K. Claimant count data also reflected weaker labor market momentum, with a modest rise of 0.7K in December 2024, following a revised decline of 25.1K in November. Wage growth remained robust, as average earnings, both with and without bonuses, rose 5.6 percent y/y in the same period, consistent with market expectations. These figures underscore the UK labor market’s softening amidst broader economic headwinds, impacting employment prospects and wage dynamics. GBP/USD was last seen at 1.2483.
The UK S&P Composite PMI increased to 50.9 in January, up from 50.4 in December, marking a three-month high and narrowly indicating growth. The Services PMI edged higher to 51.2 from 51.1, while Manufacturing PMI improved to 48.2 from 47.0 but remained in contraction. Despite these gains, employment fell at its fastest rate since 2009 (excluding the pandemic), as businesses cited higher social security costs following payroll tax hikes in October 2024. Inflationary pressures intensified, with input and output prices at their highest levels since mid-2023. Business optimism hit its lowest point since late 2022, underscoring challenges for the Bank of England ahead of its February 6 rate decision.
Asia-Pacific
The Bank of Japan (BoJ) raised its key policy rate by 25bps to 0.5 percent, the highest level in 17 years, citing stronger-than-expected inflation and stable global financial conditions. The BoJ’s latest outlook report revised up its inflation projections to 2 percent or higher for the first time, with Japan’s core consumer prices (excluding fresh food) rising 3 percent in December 2024. The yen strengthened by 0.8 percent against the US dollar, reaching a high of 154.85, while 10-year Japanese government bond yields rose 2bps to 1.225 percent. This marks the third-rate hike under Governor Kazuo Ueda, reflecting the BoJ’s gradual tightening strategy as wage growth and currency stability remain pivotal to future policy adjustments. USD/JPY was last seen at 155.99.
China lending rates
China’s central bank kept its benchmark lending rates unchanged for the third consecutive month in January 2025, with the one-year loan prime rate (LPR) at 3.1 percent and the five-year LPR at 3.6 percent. This decision aligns with expectations and reflects the challenges posed by a weakening yuan, which has constrained the scope for further monetary easing. While the economy met the government’s 5 percent growth target in 2024, reducing the urgency for immediate stimulus, the depreciation of the yuan and banks’ narrowing interest rate margins limit the effectiveness of further rate cuts. Market expectations for imminent rate reductions have diminished, with a more cautious monetary stance anticipated considering the currency pressures.
Kuwait
USD/KWD closed last week at 0.30825.