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Markets and macro insights with Bernard Swords, Chief Investment Officer
Were there changes to policy rates last week?
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The Governing Council of the European Central Bank (ECB) cut the policy rate by 25 bps as expected. President Christine Lagarde acknowledged the downside risks to the growth outlook but said that the “conditions for a recovery remain in place” and that there are “good reasons” to assume household consumption would improve. Lagarde reiterated the expectation that inflation will return to the 2% target in 2025. It is clear that the Governing Council still views the policy rates as restrictive. Further rate cuts this year remain likely.
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The US showed a different story as the Federal Open Market Committee (FOMC), the interest rate policy committee of the US Federal Reserve, left policy rates unchanged. Chair Jerome Powell was in no hurry to adjust rates, saying that the interest rate policy was “in a really good place.” He qualified this view by saying that interest rates are still meaningfully above neutral. This suggests that the Federal Reserve would like to reduce interest rates further but cannot until inflation drops lower. High uncertainty around the Trump policy agenda prevents a policy response at this stage. It would seem that a cut from the Federal Reserve is on hold for now.
What were the Gross Domestic Products (GDP) statistics from the US and euro area?
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In line with data from recent months, GDP statistics from the euro area were gloomy. In the fourth quarter of 2024, the euro area economy saw no growth, leaving the growth rate at 0.7%. Three of the euro area’s largest economies, Germany, France, and Italy, contracted during the quarter. It is difficult to find evidence to justify the ECB’s confidence in growth outlook.
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The US delivered a stronger story. Fourth quarter GDP grew at an annualised rate of 2.3%, which was 0.5% higher than forecast, and now looks likely to lead to a growth rate of 3% for the year. Consumption was the big driver of the economy, growing 4.2% during the quarter. On the other hand, business investment has declined, and the drawdown of inventory took 1% off the growth rate. Still, there is strong momentum for the economy going into 2025. Consumption is unlikely to maintain growth at its current level, but there should be some impetus from rebuilding inventories.
What happened in world equity markets?
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It was a flat week for world equities in local currency terms, but the IT sector got a lot of headlines. The semiconductor industry came under pressure following an announcement from the Chinese company, DeepSeek. The company claims to have produced an artificial intelligence (AI) model that requires a fraction of the running costs compared to the standard models currently in use and can be offered at a much lower price.
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Sales of established AI models have not yet been dented. For the wider market, faster innovation would extend usage of new technologies even further. This would produce the welcome outcome of deflation and enhanced efficiency.
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The DeepSeek announcement should be approached with a sceptical but open mind. Claims for the new AI model have yet to be proven. History has shown it is hard to dislodge established technology leaders.
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In the background there is tariff uncertainty and with it market volatility. It will continue to affect sentiment but the levels being discussed are unlikely to have a material impact on economic momentum across the globe.
The week ahead: what to watch out for
The US non-farm payrolls report and the major business surveys, the Institute for Supply Management Manufacturing Index (ISM) will be of huge interest this week. From the euro area, the Consumer Price Index (CPI) and the Producer Price Index (PPI) will give us more information on the direction of inflation. Retail sales for the region will also be worth watching for signs of recovery.
