Highlights
U.S. equity markets ended the week relatively lower as the earnings season began. Smaller-cap and value-oriented stocks continued to outperform, extending their year-to-date advantage over large-cap and growth stocks. Value stocks beat growth shares for the third consecutive week. For the week, the S&P 500 fell 0.38%, the Nasdaq dropped 0.92%, and the Dow finished down 0.28%. Markets digested several political and trade developments, including President Donald Trump’s proposal to cap credit card interest rates at 10% and impose a 25% tariff on imports from countries trading with Iran. Separately, reports that the Department of Justice was reviewing Federal Reserve Chair Jerome Powell’s congressional testimony regarding renovations to the Fed’s headquarters revived concerns about the central bank’s independence. On the economic data front, the Bureau of Labor Statistics reported that core consumer inflation slowed further in December, rising at its weakest annual pace since March 2021. Core CPI increased 0.2% from the prior month and 2.6% year over year, undershooting expectations. Headline inflation rose 0.3% on the month and 2.7% from a year earlier. Meanwhile, retail sales data pointed to resilient consumer demand. Spending rose 0.6% in November, beating forecasts, although growth in the control group of sales—which feeds into GDP—slowed from the prior month. Housing market data exceeded expectations, supported by easing mortgage rates and slower home price growth. Existing home sales jumped 5.1% in December, surpassing estimates, with gains recorded across all regions. According to the National Association of Realtors, improved affordability stemming from lower mortgage rates and moderating prices helped boost activity. Across the Atlantic, European equities as gauged by the pan-European Euro STOXX 600 added 0.49% for the week driven by solid economic data and earnings, though performance varied by country. Germany emerged from a two-year recession in 2025, posting modest GDP growth as consumer and government spending increased. At the same time, the UK economy returned to growth in November, exceeding expectations, helped by strength in services and manufacturing. Across the euro area, industrial output rose for a third straight month, and investor confidence improved to its highest level since mid-2025. In trade news, the European Union provisionally approved a landmark free trade agreement with South America’s Mercosur bloc, which will eliminate tariffs on most bilateral trade over time. In Asia, Japanese stocks rallied strongly, with both the Nikkei 225 and TOPIX posting gains of more than 3%. Markets hovered near record highs amid reports that Prime Minister Sanae Takaichi is preparing to call an early general election. Investors expect that a victory for the ruling party would pave the way for expanded fiscal stimulus, reviving enthusiasm for sectors tied to artificial intelligence, defence, and nuclear energy. Speculation also increased that the Bank of Japan could bring forward its next interest rate hike, possibly earlier than midyear, as policymakers monitor persistent yen weakness and wage trends. Finally, Chinese mainland equities declined after regulators tightened margin trading requirements, raising the amount of capital investors must provide when purchasing shares on credit. Officials appeared concerned about rapid recent market gains fuelled by AI-related optimism and heavy use of leverage.
Data Highlights
US Inflation Rate YoY (Dec) stayed steady at the 2.7% mark, in line with consensus. US Core Inflation Rate YoY (Dec) also stayed steady at the 2.6% mark, against the expected increase of 10bp (2.7%). The UK GDP YoY (Nov) rose to 1.4% from 1.1%, the market had expected it to stay at 1.1%. Germany Full Year GDP Growth (2025) rose to 0.2% from -0.5%, in line with expectations.
Week Ahead
China GDP Growth Rate YoY (Q4) & GDP Growth Rate YoY (Q4), EUR CPI (Dec), CAD Inflation Rate YoY (Dec), CAD Core Inflation Rate YoY (Dec) & CAD CPI Median YoY (Dec) – Monday | GBP Unemployment Rate (Nov), EUR PPI YoY (Dec) – Tuesday | GBP Inflation Rate YoY (Dec) – Wednesday | AUD Unemployment Rate (Dec), USD PCE Price Index YoY (Oct/Nov) – Thursday | JPY BoJ Interest Rate Decision, JPY Inflation Rate YoY (Dec), NZD Inflation Rate QoQ (Q4) – Friday.
