U.S. Markets:
The U.S. stock market ended the week with strong gains, nearing record highs despite mixed economic signals. The Nasdaq Composite led with a 2.58% gain, and the S&P 500 followed, closing within 1% of its all-time high. Investor optimism was driven by President Trump’s decision to delay new global tariffs in favor of a “reciprocal tariff” framework to be determined country by country.

The inflation report caused a temporary selloff midweek, but equities rebounded as investors digested Federal Reserve Chair Jerome Powell’s comments that policymakers were still assessing inflation’s trajectory. Growth stocks continued to outperform value stocks, while small-cap stocks lagged.

Global Markets:

• Europe: The STOXX Europe 600 climbed to a record level (+1.78%), supported by positive corporate earnings and speculation about a Ukraine ceasefire deal with Russian concessions. Germany’s DAX (+3.33%) and France’s CAC 40 (+2.58%) led gains.
• Japan: The Nikkei 225 gained 0.89%, supported by yen weakness and Trump’s decision not to impose new tariffs on Japan.
• China: The CSI 300 rose 1.19%, while Hong Kong’s Hang Seng Index surged 7.04%, driven by investor interest in tech stocks and AI firms. However, China’s property market remains a major drag, with a double-digit decline in home sales and falling prices.

Economics

U.S. Inflation Data:
January’s Consumer Price Index (CPI) exceeded expectations, rising 0.5% month-over-month and 3.0% year-over-year (previously 2.9%). The core CPI (excluding food and energy) climbed 0.4% MoM, doubling December’s pace. The main driver was shelter costs, which rose 0.4% and contributed to nearly 30% of the inflation increase.

The Producer Price Index (PPI) also came in hot at 0.4% MoM, slightly above consensus. However, healthcare and airfare prices showed signs of cooling, suggesting potential disinflationary forces.

Monetary Policy & Federal Reserve:
In response to inflation concerns, Powell reaffirmed that the Fed is not yet ready to cut rates, shifting expectations for the first rate cut from September to December. Chicago Fed President Austan Goolsbee called the inflation report “sobering,” warning that multiple months of high CPI could delay monetary easing further.

International Economic Trends:

• Europe: Trade tensions with the U.S. over the reciprocal tariff policy could weigh on euro area growth, though it is unlikely to shift the trade surplus.
• UK: The British economy grew 0.1% in Q4 2024, surprising analysts. Bank of England officials are debating cautious rate cuts as inflation pressures persist.
• China: A higher-than-expected 0.5% CPI rise suggests inflation is reappearing, but factory deflation remains entrenched (-2.3% PPI YoY).
• Emerging Markets: Hungary’s inflation surprised to the upside (+1.5% MoM), lowering chances of imminent rate cuts. India faces higher U.S. tariffs, increasing global trade uncertainty.
  
  Week Ahead

• U.S. Markets: Investors will closely watch upcoming data releases, including:
  • Empire State Manufacturing Index (Tuesday)
  • Housing Starts & Building Permits (Wednesday)
  • Philadelphia Fed Index & Jobless Claims (Thursday)
  • Existing Home Sales & University of Michigan Consumer Sentiment (Friday)
• Global Markets & Central Banks:
  • China PMIs (Monday) will provide insights into early-year industrial activity.
  • Bank of Canada policy rate decision (Wednesday) is expected to deliver a 25 bps rate cut.
  • European Central Bank (Thursday) is likely to lower its deposit rate by 25 bps as inflation stabilizes around 2.4% YoY.
• Market Sentiment:
  • The S&P 500 may test new highs if bond yields remain stable, but inflation concerns could increase volatility.
  • Traders will focus on Nvidia’s earnings (Feb 26) and the upcoming PCE inflation report (Feb 28), the Fed’s preferred inflation gauge.

Conclusion:

Despite hotter-than-expected U.S. inflation data, equity markets showed resilience as investors weighed trade policy uncertainty, monetary policy outlook, and corporate earnings strength. The delay in new tariffs provided short-term relief to markets, but trade fragmentation remains a long-term risk. Next week’s housing and labor data will be key to assessing U.S. economic momentum heading into Q2 2025.