What Happened Last Week
- Lower Rates: Downside inflation surprises in the U.S. and U.K. and dovish Fed comments fueled a move lower in Treasury yields.
- Equity Gains: Lower rates lifted stocks, led by small caps and cyclicals, with banks benefitting from strong earnings.
- Trade Policy: Trump avoided immediate tariffs on day one, opting to evaluate trade policies; a comment on potential tariffs on Canada and Mexico highlighted headline risk for Trump’s trade agenda.
What We’re Watching This Week
- Trump’s Policies: Markets await policy developments across trade, regulation, immigration, and, potentially, taxes.
- Bank of Japan Hike: The BOJ is expected to hike rates for the first time since July.
- Earnings Focus: Key reports this week from Netflix, healthcare, airlines, and other consumer-focused companies.
Investment Management Team’s Views
Last week, we highlighted the growing challenges posed by rising interest rates for equity markets, and since then, the newsflow on this key area of focus has improved markedly. A cooler-than-expected U.S. CPI report and dovish comments from Fed Governor Waller on CNBC drove yields down by 10-15 basis points across the curve. Notably, this decline in yields occurred despite an upside surprise in retail sales, indicating that inflation data is currently more important for markets than growth figures. Bonds received an additional boost from a downside inflation surprise in the U.K., a country under significant market scrutiny due to concerns over its fiscal management. On the back of improved rate sentiment, stocks rose across the board last week in pro-cyclical and smaller-cap-led price action. Financials also got a strong boost from solid earnings from the mega-cap banks.
Over the holiday weekend, mixed news emerged on tariff policy, another key market focus area. While broad tariff announcements seem unlikely in the coming weeks, Trump did signal the potential for 25% tariffs on Canada and Mexico by February 1, creating ongoing uncertainty for markets regarding business sentiment, rate policy, and growth. However, markets seem to anticipate a pragmatic approach, as seen in a weaker U.S. dollar and rising global equities. The highly dynamic trade policy landscape will continue to warrant close monitoring in the weeks and months ahead.
Turning to the week ahead and the expected deluge of policy announcements, the relative focus between trade and deregulation will be key to near-term equity market performance. Outside the U.S., the BOJ is set to deliver its first interest rate hike since last July on Friday. Lastly, earnings season continues to roll on, with reports from Netflix, key healthcare companies, and key reports from the airlines, consumer-oriented financials, and luxury goods.
