Monthly Market Review — February 2025

Equities

Global equities (-0.8%) fell in February, ending the period with a 2.5% year-to-date gain. The US government’s foreign policy sent shock waves through global markets, as uncertainty about the timing and scope of tariffs unsettled markets. US tariffs on Chinese imports took effect in February, prompting China to retaliate with levies on US exports. Additionally, the US initiated tariffs on steel and aluminum imports, while threatening to reinstate levies on imports from the European Union (EU), Canada, and Mexico. The US Federal Reserve (Fed) signaled a patient approach to additional rate cuts, while European equities accelerated amid the European Central Bank’s (ECB’s) dovish policy stance and signs of an improving economic backdrop, including easing credit conditions, stabilizing purchasing managers’ indices (PMIs), and plans to reduce regulatory burdens. In Germany, the center-right Christian Democratic Union (CDU) and the Christian Social Union (CSU) won the federal election, fueling optimism that the new government will invigorate the economy. European markets were initially encouraged by hopes for a resolution to the conflict in Ukraine. However, optimism waned when the US paused military aid, causing negotiations to deteriorate. Chinese stocks jolted higher following last month’s DeepSeek announcement and President Xi Jinping’s public endorsement of Chinese technology companies. Australia’s central bank cut rates for the first time in four years, signaling caution about the prospect of further reductions. Japan’s inflation accelerated in January as the yen strengthened, and the Bank of Japan (BOJ) remained on track to raise interest rates again.

US

US equities (-1.3%) ended lower as anxiety about tariffs weighed on consumer and business sentiment and clouded the outlook for economic growth, inflation, and interest rates. Against this backdrop, value and large-cap stocks outperformed their growth and small-cap counterparts. Markets grappled with considerable uncertainty about the implications of the administration’s policies on trade, fiscal spending, immigration, and deregulation, while weaker measures of consumer spending and confidence in January elevated concerns about the resilience of the economy. The path of inflation in the months ahead appears increasingly murky, although the core Personal Consumption Price Index rose at a steady 0.3% monthly pace in January and eased to 2.6% annually, the smallest annual increase since early 2021. Corporate earnings in the fourth quarter were particularly robust. According to FactSet, of the 97% of companies in the S&P 500 Index that had reported earnings, the blended year-over-year earnings growth rate for the index was 18.2%, well above the 10-year average earnings growth rate of 8.5%.

Economic data released during the month suggested that the US economy lost some momentum at the beginning of the year. In January, nonfarm payroll growth moderated to 143,000 but was relatively in line with the average monthly gain of 166,000 in 2024. Notably, job growth in the prior two months was revised significantly higher, by 100,000, signaling that labor-market momentum accelerated after the presidential election. The unemployment rate dipped to 4.0%, and layoffs remained relatively subdued. Average hourly earnings increased at a robust 0.5% monthly pace and by 4.1% from a year ago, which, combined with labor supply constraints from immigration restrictions, could exacerbate inflation. After a strong holiday season, headline retail sales slid 0.9% in January, and consumer spending fell 0.2% — the first decline in nearly two years. Concerns about the economic outlook and inflation drove the Conference Board’s Consumer Confidence Index down by seven points in February, to 98.3, marking the largest monthly decline since August 2021. Housing market activity in January was negatively impacted by a combination of severe winter weather, deteriorating consumer sentiment, and elevated mortgage rates.

The manufacturing sector remained in expansionary territory but moderated slightly in February, with the Institute of Supply Management (ISM) Manufacturing Index easing to 50.3. Concerningly, price gauges continued to rise amid fears that sharp increases in import tariffs could undercut production. In January, the services sector expanded at a slower-than-anticipated pace as the ISM Services Index slipped to 52.8, from 54.0, amid extreme winter weather and US trade policy uncertainty. The NFIB Small Business Optimism Index cooled in January from its highest level in more than six years. A gauge of business owners’ uncertainty soared by a record amount and a measure of capital spending plans fell sharply.

Within the S&P 500 Index (-1.3%), five of the 11 sectors posted negative results for the month. Consumer discretionary (-9.4%) was the worst-performing sector, pulled lower by automobiles (-25.6%) and broadline retail (-10.6%). Communication services (-6.3%) also underperformed. Consumer staples (+5.7%) was the best-performing sector. Real estate (+4.3%) and energy (+4.0%) also outperformed.

Europe

European equities (+3.1%) advanced. The HCOB Flash Eurozone Composite PMI revealed that eurozone business activity grew at a tepid pace in February, reinforcing views of economic stagnation. Notably, Germany recorded its strongest output in nine months, offsetting the steepest decline in French business activity in 18 months. Eurozone employment fell for the seventh consecutive month and at the fastest pace since December 2020; job cuts remained exclusive to manufacturing, while services businesses continued to bolster headcounts. Against a backdrop of lackluster economic growth and an increasingly uncertain economic outlook, the Bank of England (BOE) cut interest rates to 4.5%, and the European Central Bank (ECB) signaled another rate reduction in March. However, ECB policymakers were at odds about further cuts beyond that amid disagreements about the “neutral rate,” tariff uncertainty, and a potential increase in defense spending. Annual eurozone headline inflation declined for the first time in four months, to 2.4% in February, and core inflation dropped to 2.6%. US President Trump threatened to impose 25% duties on EU imports, provoking EU leaders to warn of swift countermeasures. Trump and Russian President Vladimir Putin shocked European leaders by announcing immediate negotiations to end the Russia/Ukraine war, but contentious negotiations between the US and Ukraine left no progress on a peace plan. Fourth-quarter earnings for companies in the STOXX 600 Index are projected to increase 7.0% from a year earlier, according to LSEG.

Europe’s manufacturing downturn continued to ease; in February, the HCOB Eurozone Manufacturing PMI rose to a two-year high of 47.6, as factory production nearly stabilized, and demand fell at the slowest pace in almost three years. Input cost inflation quickened to a six-month high, but output prices fell marginally. Business confidence improved as expectations for production growth rose to the highest level since the beginning of 2022. The HCOB Flash Eurozone Composite PMI revealed that services sector activity in February increased for the third straight month, but only modestly. Concerningly, input costs and output prices increased at an accelerated pace, partly due to higher wages. The European Commission’s Economic Sentiment Indicator increased to 96.3 in February; both industry confidence and consumer confidence improved.

Germany’s (+4.0%) center-right Christian Democratic Union/Christian Social Union bloc won the federal election, and Christian Democrats party leader Friedrich Merz is seeking to form a two-party government with outgoing Chancellor Olaf Scholz’s Social Democratic Party. The ZEW Indicator of Economic Sentiment surged much more than expected in February amid greater optimism that the economy will improve under a new government. In France (+2.1%), Prime Minister François Bayrou survived a no-confidence vote in the National Assembly, and Parliament approved a 2025 budget aimed at taming the country’s deficits. The UK’s (+2.2%) economy unexpectedly grew 0.1% in the fourth quarter, thanks to a larger-than-expected 0.4% economic expansion in December, driven by the services sector. The S&P Global Flash UK PMI Composite Output Index showed that business activity increased marginally in February, but employment fell at the sharpest rate since November 2020 due to higher payroll costs and weak demand.

Pacific Basin

Pacific Basin equities (-3.1%) fell over the month. In Australia (-3.9%), the Reserve Bank of Australia (RBA) cut interest rates for the first time in four years, to 4.1%, as inflation cooled. However, the RBA was cautious about easing policy too quickly, noting the upside risks to inflation due to the strong labor market. Headline inflation remained steady at 2.5% in January, while core (trimmed mean) inflation ticked slightly higher to 2.8%. Wage growth slowed to 3.2% annually in the fourth quarter of 2024 — the smallest increase in more than two years — supporting the RBA’s rate-cut decision. However, a prolonged trend of surprisingly strong job growth supports the view that policy easing will be gradual. Business confidence rose in January and was close to its long-term average, but the recent recovery in consumer sentiment showed signs of stalling amid ongoing cost-of-living pressures. The RBA released a report highlighting the potential impacts of US tariffs on China, with each of the potential scenarios forecast to have a minimal impact on Australian GDP.

In Japan (-4.0%), stronger inflation, wage growth, and economic data kept the BOJ on track for additional interest-rate hikes. In January, core inflation excluding fresh food accelerated to a 19-month high of 3.2% year over year, the highest since June 2023. Nominal wages in December rose at the fastest annual pace in nearly three decades, sending yields on Japanese government bonds higher and further supporting the policy-tightening cycle. Nominal cash earnings for workers climbed 4.8% from a year earlier, sharply higher than an upwardly revised gain of 3.9% in November and largely driven by a jump in bonuses. Fourth-quarter GDP accelerated at a 2.8% annualized pace, well above growth of 1.7% in the third quarter and the consensus forecast of 1.1%. This result, combined with upward revisions to quarterly GDP in 2024, likely gives the BOJ greater confidence that it can continue to remove stimulus from the economy.

Singapore’s (+2.4%) core inflation cooled to 0.8% year over year in January, the smallest rise in more than three years. Fourth-quarter GDP was revised higher to 5.0% from the Ministry of Trade’s initial estimate of 4.3%, putting the government in a stronger position to cope with the negative impacts on trade from US tariffs. Hong Kong’s (+6.7%) economy grew at a moderate 2.5% pace in 2024, with flat consumption and a lackluster property sector weighing on economic activity. Officials delivered a fiscally conservative annual budget focused on addressing slower economic growth and the longest string of fiscal deficits in two decades, which are limiting the government’s ability to introduce new stimulus.

Emerging Markets

Emerging markets (EM) equities (+0.8%) rose in February. Asia led the gains, followed by Europe, the Middle East, and Africa (EMEA), while Latin America declined.

In Asia (+1.0%), China (+11.6%) continued to surge higher after the release of DeepSeek’s AI model boosted investor sentiment, particularly for Chinese technology companies. The government imposed tariffs of 10% – 15% on US crude oil, liquefied natural gas, farm machinery, and select other products after the US levied an additional 10% tariff on all Chinese goods. The authorities announced plans to inject at least 400 billion yuan (US$55.13 billion) into the country’s biggest banks as part of a broader stimulus package to spur economic growth. Factory growth was below expectations as the Caixin/S&P Global Manufacturing PMI registered 50.1 in January, lower than the previous three months. Taiwan (-4.1%) revised its 2025 GDP outlook down to 3.14%, as potential US tariffs and budget cuts threatened economic growth. Parliament approved deep cuts to the national budget, including defense spending, sparking concerns about potential disruptions to government operations. India’s (-7.1%) stock market continued to drop from an all-time high in September amid slowing economic growth, rising inflation, and lackluster consumption. The government announced tax cuts worth 1 trillion rupees (US$11.4 billion), and the central bank lowered its key interest rate for the first time in five years to spur economic growth and spending.

In EMEA (+0.5%), OPEC+ agreed to maintain its current oil production but gradually raise output beginning in April. Saudi Arabia’s (-1.5%) non-oil business sector registered a robust expansion, with the Riyad Bank Saudi Arabia PMI rising to its highest level since 2014. The United Arab Emirates’ (+1.2%) minister of economy forecast economic growth of 5% – 6% in 2025. Poland’s (+6.6%) government announced investment plans of more than 650 billion zlotys (US$160 billion) in 2025, which includes tax cuts, deregulation, and investments in sectors such as defense, green energy, information technology, and transport infrastructure.

In Latin America (-1.9%), Brazil’s (-4.3%) IPCA-15 consumer price index rose by 1.23% in February, the largest monthly increase in nearly three years, driven in part by rising education and housing costs. The government reduced its 2025 economic growth forecast to 2.3% and lifted its inflation outlook to 4.8%, from 3.6% in November. Mexico’s (+2.7%) central bank lowered its 2025 GDP growth estimate to 0.6%, from 1.2%, amid US trade policy uncertainty and an unexpected contraction in fourth-quarter GDP. After four consecutive 25 basis point (bps) interest-rate cuts, the Bank of Mexico reduced rates by 50 bps, to 9.5%, as annual headline inflation fell to a four-year low of 3.59% in January, down from 4.21% the previous month. Chile’s (+1.3%) government enacted a state of emergency after a power outage led to a widespread blackout, forcing the world’s largest copper producer to halt operations.

Fixed Income

Tariff tensions and fears of lower economic growth weighed on sentiment and drove government bond yields lower. Credit spreads widened, leading most spread sectors to underperform government bonds on an excess-return basis.

US economic data was mixed. Jobless claims trended higher and nonfarm payrolls grew less than expected in January, suggesting some softening in the labor market. The Conference Board’s consumer confidence gauge tumbled. Personal income gains outpaced forecasts, yet spending contracted, signaling cautious consumer behavior. Durable goods orders rebounded on strength in transportation equipment, while greater output of aircraft and parts lifted industrial production. Manufacturing expanded as the ISM Manufacturing Index and regional Fed surveys improved, although companies remained cautious. Home prices increased while housing starts and home sales declined. In Europe, the HCOB Eurozone Manufacturing PMI remained in contraction but showed a slight improvement, while retail sales declined modestly. Germany’s IFO Business Climate Index held steady, reflecting cautious sentiment, while the ZEW Survey Expectations signaled better investor morale. The UK’s manufacturing activity hit a 14-month low, but the services PMI improved. Housing prices were resilient despite ongoing affordability issues. China’s Caixin Composite PMI declined slightly, indicating slowing activity. In Japan, industrial output fell for a third straight month, core machine orders dropped, and the Producer Price Index rose more than expected. Household spending grew at the fastest pace in over two years. Canada’s economic growth beat expectations in the fourth quarter, boosted by strong household spending. Residential building permits surged, while the unemployment rate dropped on stricter immigration regulations.

The Fed held interest rates steady, while the BOE, the RBA, and the Reserve Bank of New Zealand cut rates. All other major central banks left their policy rates unchanged.

Most global sovereign bond yields declined due to concerns over economic growth, stagflation risks, and uncertainty surrounding President Trump’s trade policy. US Treasury yields fell as softening economic data and tariff concerns fueled recession fears. Non-US developed market bond yields declined by a lesser extent. Canadian government bond yields dropped as markets anticipated that the Bank of Canada will continue to lower interest rates to support the economy amid fears of a trade war. In Europe, German bund yields edged lower due to geopolitical uncertainties and economic concerns, although expectations for higher defense spending limited the decline on the long end of the curve. UK gilt yields also fell, in line with the broader market trend. In Asia, Australian yields rallied after interest rates were cut for the first time in four years. Conversely, Japanese government bond yields continued to rise steadily as hawkish signals from the BOJ and persistent inflation fueled expectations of further rate hikes. In EM, sovereign yields broadly declined, led by Mexico, as increasing downside risks from tariffs strengthened the case for further rate cuts by Banxico. Chinese yields rose as the central bank took measures to stabilize the yuan amid heightened trade tensions with the US. The Bloomberg TIPS Index delivered a total return of 2.18%, and the 10-year breakeven inflation rate decreased by 6 bps to 2.37% during the month.

Global credit underperformed duration-equivalent government bonds as spreads widened. Within the securitized sectors, agency mortgage-backed securities outperformed, while commercial mortgage-backed and asset-backed securities underperformed duration-equivalent government bonds. Within EM, local markets debt (+0.66%) underperformed external debt (+1.57%), in US-dollar terms. Spread widening detracted from external debt performance, while a decrease in US Treasury yields had a positive impact. Depreciation in EM currencies negatively affected local markets debt performance, while EM rates had a positive impact.

Currencies

The US dollar depreciated against most developed market currencies, driven by global tariff tensions and increased risk aversion. Among the G10, pro-risk currencies like the Australian and New Zealand dollars weakened, while the Japanese yen, Swedish krona, and British pound gained. The yen was supported by persistently higher inflation and hawkish signals from the BOJ, while the pound was bolstered by optimism about a Ukraine peace plan, greater-than-expected economic growth in the fourth quarter, and a larger-than-anticipated increase in consumer price inflation. In EM, performance was mixed. EM Asian currencies fell against the US dollar due to tariff threats and monetary easing, while Latin American currencies broadly recovered, driven by higher commodity prices.

Commodities

Commodities (-1.3%) slipped in February, with agriculture & livestock and energy detracting from returns and industrial metals and precious metals contributing positively.

Energy prices (-1.1%) fell. Crude oil (-3.1%), gas oil (-2.6%), gasoline (-2.0%), and heating oil (-0.7%) ended lower as President Trump’s escalating tariff threats on Canada and Mexico pressured US refiners who were already struggling with declining refining margins. Oil prices were also weighed down by fears of lower energy demand amid weaker economic data from the US and Germany, Nigeria’s plan to boost oil production, and Iraq’s deal with BP to redevelop the Kirkuk oilfields. Natural gas (+26.2%) soared, driven by larger drawdowns from higher US demand due to colder weather and elevated liquefied natural gas exports from the US. Additionally, the US Energy Information Administration reported that natural gas inventories were about 12% below their five-year average.

Industrial metals (+2.4%) were lifted by gains in copper (+4.0%), lead (+2.5%), zinc (+2.0%), nickel (+1.5%), and aluminum (+0.7%). The market began to price in the impact of President Trump’s 25% tariffs on steel and aluminum, which could increase costs for the transportation, construction, and packaging industries in the short term.

Precious metals (+0.5%) advanced. Gold (+0.8%) increased amid escalating global trade tensions and the Fed’s patient approach to interest-rate cuts due to concerns about inflation. Silver (-3.0%) ended lower on reduced investor demand, increased supply, and a strong US dollar.

Agriculture & livestock (-3.7%) ended lower. Sugar (+3.8%) was bolstered by tightening global supplies. India, the world’s second-largest sugar producer, reduced exports because of low production caused by adverse weather, while a stronger Brazilian real curbed exports from Brazil’s sugar producers. Coffee (+1.5%) continued to rise amid a worsening supply shortage due to adverse weather in previous months. Additionally, potential US tariffs threatened to drive coffee prices higher at a time when coffee demand remained strong. Feeder cattle (-0.7%) slipped as cattle imports from Mexico resumed months after the discovery of the New World screwworm. Corn (-4.9%) declined sharply after weak consumption in China led to a dramatic drop in the country’s corn imports. Falling oil and ethanol prices also weighed on corn prices. Additionally, US tariffs could reduce shipments of grains and livestock to Mexico, which is a top importer of US corn and lean hogs (-7.1%). Slowing demand drove cocoa (-17.8%) sharply lower, as chocolate makers responded to elevated prices by replacing cocoa with other ingredients.