Global markets surged last week, driven by strong corporate earnings, optimism around U.S. trade policy, and an AI-fueled rally in China. However, hotter-than-expected U.S. inflation data led to volatility in bond yields, forcing investors to reassess expectations for Federal Reserve rate cuts. European equities extended their 2025 outperformance, Japan saw a weaker yen supporting stocks, and China’s markets soared on AI-related optimism.
U.S. Markets: Tech Stocks Shine, Inflation Surprises
The S&P 500 climbed 1.47%, closing just four points shy of its all-time high, while the Nasdaq Composite gained 2.58%, breaking above the 20,000 level for the first time. Growth stocks continued to outpace value stocks, with small caps underperforming as rate concerns weighed on the Russell 2000.
Key drivers:
Inflation Data: Headline inflation rose 0.5% month-over-month and 3.0% year-over-year, surpassing expectations. Core CPI climbed 0.4% month-over-month, doubling December’s pace. The Producer Price Index (PPI) also came in hotter than expected at 0.4% month-over-month, raising concerns about inflation persistence.
Federal Reserve Response: Fed Chair Jerome Powell reiterated that inflation is “not quite there yet” for rate cuts, leading futures markets to push back expectations for the first rate cut from September to December.
Treasury Yields: The 10-year U.S. Treasury yield spiked to 4.66% midweek before settling at 4.47% as investors reassessed the Fed’s policy outlook.
Europe: Equities Rally, Economic Growth Surprises
European stocks continued their 2025 rally, with hopes of de-escalation in the Russia-Ukraine conflict further boosting sentiment. The STOXX Europe 600 Index gained 1.78%, reaching a new record high.
Key themes:
Economic Growth: UK GDP grew 0.1% in Q4, beating expectations of a contraction. Full-year growth reached 0.9% in 2024, up from 0.3% in 2023.
Industrial Production: Eurozone industrial production fell 1.1% month-over-month in December, worse than the expected 0.5% decline, as capital goods output slumped.
Stock Market Performance: Germany’s DAX led with a 3.33% gain, followed by France’s CAC 40 (+2.58%) and Italy’s FTSE MIB (+2.49%). The UK’s FTSE 100 underperformed, rising only 0.37%.
Japan: Stocks Gain, Yen Weakens
Japanese equities climbed, supported by a weakening yen and optimism that U.S. trade policy would remain stable. The Nikkei 225 rose 0.93%.
Key themes:
Interest Rate Speculation: The 10-year Japanese Government Bond (JGB) yield hit 1.35%, a 15-year high, as markets speculated on a faster rate hike cycle.
Inflation Data: The Corporate Goods Price Index (CGPI) rose 4.2% year-over-year, exceeding expectations and reinforcing the case for tighter monetary policy.
Government Intervention: Tokyo released rice reserves to combat soaring food prices, an unusual move signaling growing concerns over inflation.
China: AI Boom Fuels Market Rebound
China’s stock markets roared higher, with the Shanghai Composite gaining 1.30% and Hong Kong’s Hang Seng Index soaring 7.04%—its best weekly performance in over a year. Investors piled into Chinese AI stocks, mirroring the enthusiasm seen in the U.S. tech sector.
Key themes:
Inflation Data: CPI rose 0.5% year-over-year, marking its first acceleration since August, driven by Lunar New Year spending.
Deflation Risks: PPI remained in deflationary territory at -2.3% year-over-year, its 28th consecutive monthly decline.
Real Estate Troubles: Moody’s downgraded China Vanke’s credit rating deeper into junk status due to deteriorating financials, raising concerns about another major default. However, reports indicated that the Chinese government is working on a $6.8 billion liquidity plan to help stabilize the company, though a full bailout is unlikely.
What to Watch This Week
United States
FOMC Meeting Minutes: Investors will analyze the Federal Reserve’s January discussions for clues on inflation, interest rates, and economic conditions.
Housing Data: January’s Housing Starts and Existing Home Sales will provide insight into the strength of the U.S. real estate market amid high mortgage rates.
Eurozone & UK
Eurogroup Meeting: Eurozone finance ministers will discuss economic policies, inflation control, and fiscal stability, potentially influencing ECB decisions.
Germany ZEW Economic Sentiment Index: A key forward-looking measure of business confidence, offering insight into Europe’s largest economy.
UK CPI: The latest inflation report will be crucial in determining the Bank of England’s next policy moves.
Japan
Trade Balance: January trade data will reveal whether the weaker yen is supporting exports amid global economic uncertainty.
Consumer Price Index: Investors will closely monitor Japan’s CPI report to assess whether the Bank of Japan is moving closer to ending ultra-loose monetary policy.
China
Private Sector Developments: President Xi Jinping will meet with major private-sector leaders, including Alibaba’s Jack Ma, in an effort to restore business confidence and stimulate investment.
Conclusion
Markets continue to climb, with AI-fueled enthusiasm boosting tech stocks and China’s markets staging a sharp recovery. However, persistent inflation and shifting central bank expectations could lead to more volatility ahead. Investors will closely monitor key economic data releases, central bank statements, and trade policy developments in the coming weeks. Stay tuned for next week’s Market Roundup.
FAQs
Why did U.S. markets rally despite inflation concerns?
Strong corporate earnings, particularly in the tech sector, helped offset concerns about hotter-than-expected inflation data.What drove the rally in European stocks?
Positive economic growth surprises, easing geopolitical tensions, and continued investor optimism fueled the gains in European equities.Why is Japan's bond market experiencing volatility?
Rising inflation expectations and speculation about Bank of Japan rate hikes have driven JGB yields to their highest levels in 15 years.What is causing the AI stock surge in China?
Investor enthusiasm for AI technology, combined with policy support and market optimism, has driven strong gains in Chinese tech stocks.What are the key economic reports to watch this week?
The FOMC meeting minutes, U.S. housing data, UK CPI, and China’s private sector developments will be closely monitored for market impact.
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