Equities
Global equities (+3.3%) rose in January. The transition of power in the US brought meaningful changes to outlooks for foreign policy, trade dynamics, and economic growth. The Trump administration’s protectionist policies and territorial ambitions created a complex economic and political landscape that strengthened the US dollar and increased economic uncertainty, raising concerns about potential trade-related inflation. Against this backdrop, the US Federal Reserve (Fed) held interest rates unchanged, while the European Central Bank (ECB) and Bank of Canada (BOC) lowered policy rates. Japan’s central bank raised rates for the third time since March 2024 following a prolonged pause. The US announced plans for a multi-hundred-billion-dollar investment in the AI project “Stargate” with the aim to invest heavily in AI infrastructure. However, the release of two competitive large language models (LLMs) by Chinese start-up DeepSeek has led investors to question the long-term monetization structure of the foundational LLMs developed by US technology companies. Europe’s economy slowed in the fourth quarter, with the eurozone’s GDP rising just 0.7% in 2024. In contrast, US GDP grew by 2.8%, and China’s economy expanded by 5%, meeting the government’s official target. Canadian Prime Minister Justin Trudeau resigned as leader of the ruling Liberal Party and as prime minister. The Israel/Hamas ceasefire went into force, with Hamas releasing three hostages in exchange for 90 Palestinian prisoners.
US
US equities (+2.8%) were broadly higher, with value stocks delivering strong returns relative to other equity segments. Equities continued to benefit from optimism about President Donald Trump’s proposed policy initiatives for tax cuts and deregulation, although markets were unnerved by uncertainty surrounding the scope of tariffs and their potential implications for economic growth and inflation. After three consecutive interest-rate cuts, the Fed left policy unchanged in January, with Fed Chair Jerome Powell indicating that the central bank was in no hurry to lower rates further amid a solid expansion in economic activity and a healthy labor market. Inflation in December remained modestly higher than the Fed’s target, with the core Personal Consumption Price Index rising 2.8% annually for the third straight month. Robust consumer spending continued to underpin the economy’s strength, with GDP rising at a sturdy 2.3% annual pace in the fourth quarter and 2.8% for 2024. According to FactSet, of the 77% of companies in the S&P 500 Index that had reported fourth-quarter earnings, the blended year-over-year earnings growth for the index was 13.2%, well above the 5.8% earnings growth in the third quarter.
Economic data released during the month was predominantly positive. The labor market improved in December; nonfarm payrolls registered their biggest monthly gain since March, growing by 256,000 and surpassing expectations. The unemployment rate eased to 4.1%, and jobless claims ended the month at a historically low level. The Employment Cost Index — the broadest measure of labor costs — showed that wages grew at a stout 3.6% pace year over year in the fourth quarter, signaling that wage growth is potentially stabilizing at elevated levels. Sustained consumer spending in December capped a solid holiday shopping season. Retail sales advanced 0.4% after a robust 0.8% gain in November, while a 0.7% surge in personal spending drove up spending on goods and services by 4.2% in the fourth quarter, the biggest gain in almost two years. Weaker views of the labor market and the broader economic outlook dragged the Conference Board’s Consumer Confidence Index down to 104.1 in January, from 109.5 in December, as consumers assessed how President Trump’s policies will affect the economy. In housing, new- and existing-home sales rose in December despite a surge in mortgage rates over the past couple of months.
In January, manufacturing expanded for the first time in more than two years as the Institute of Supply Management (ISM) Manufacturing Index rose to 50.9 amid a sharp increase in new orders along with gains in production, employment, and import and export orders. However, economists fretted that the recovery could be undermined by higher tariffs, which threaten to lift raw materials’ prices and upend supply chains. In December, the ISM Services Index rose further into expansionary territory, to 54.1, with a measure of prices paid for materials and services significantly accelerating as some businesses reported higher demand ahead of anticipated tariffs. The NFIB Small Business Optimism Index continued to surge in December, reaching its highest level since October 2018 on expectations for favorable business policies under President Trump.
Within the S&P 500 Index (+2.8%), 10 of the 11 sectors posted positive results for the month. Communication services (+9.1%) was the best-performing sector, led by interactive media & services (+6.8%). Health care (+6.8%) and financials (+6.6%) also outperformed. Information technology (-2.9%) was the worst-performing sector, pulled lower by semiconductors & semiconductor equipment (-6.1%) and technology hardware storage & peripherals (-5.5%).
Europe
European equities (+6.9%) surged. The eurozone economy expanded 0.7% in 2024; however, it unexpectedly stagnated in the fourth quarter, dragged down by two straight years of economic contraction in Germany along with political turbulence in the country. In January, the region’s business activity returned to expansionary territory for the first time since August 2024, as the HCOB Flash Eurozone Composite Purchasing Managers’ Index (PMI) increased to 50.2, from 49.6 in December. Eurozone employment declined for the sixth consecutive month, but only marginally. The fastest pace of services sector job growth in six months almost offset a reduction in manufacturing employment. Against a backdrop of lackluster economic growth and an increasingly uncertain outlook, the ECB delivered its fourth consecutive 25 basis points (bps) rate cut, signaling another reduction in March. ECB President Christine Lagarde emphasized that financing conditions are still tight and monetary policy remains restrictive, while also highlighting uncertainty about economic and inflation dynamics. Annual eurozone headline inflation unexpectedly rose to 2.5% in January, primarily driven by energy prices, and core inflation remained unchanged at 2.7%. Fourth-quarter earnings for companies in the STOXX 600 Index are projected to increase 1.5% from a year earlier, according to LSEG.
Europe’s manufacturing downturn eased in January; the HCOB Eurozone Manufacturing PMI rose to an eight-month high of 46.6, as contractions in output, new orders, inventories, and purchasing activity slowed. Input costs increased for the first time since August 2024, but output prices were unchanged. Business confidence improved modestly as expectations for production growth rose by the most since February 2022. The HCOB Flash Eurozone Composite PMI revealed that services sector activity in January increased for the second straight month. Concerningly, input costs and output prices rose at an accelerated rate, likely due to higher wages. The European Commission’s Economic Sentiment Indicator increased to 95.3 in January from a four-year low in December; industry confidence improved, while consumer confidence remained unchanged.
Germany’s (+8.9%) economy shrank 0.2% in the fourth quarter compared with the previous quarter, and in 2024, it contracted for the second consecutive year due to increasing competition from abroad, high energy costs, elevated interest rates, and uncertain economic prospects. The ZEW Indicator of Economic Sentiment fell much more than expected in January, as weak consumer spending and construction demand restrained the economy. France’s (+7.7%) economy declined 0.1% in the fourth quarter despite firm consumer spending after the Olympics boost faded. GDP grew 1.1% in 2024, thanks to public consumption and public investment, but political uncertainty darkened the country’s economic outlook. The UK’s (+6.0%) economy grew by a smaller-than-anticipated 0.1% in November, which was the first expansion since August. The S&P Global Flash UK PMI Composite Output Index showed that business activity increased marginally in January, yet employment slipped for the fourth month due to rising cost pressures. Spain’s (+7.6%) economy registered a robust 3.2% expansion in 2024, driven by booming tourism, hearty agricultural output, and higher exports.
Pacific Basin
Pacific Basin equities (+1.0%) rose over the month. In Australia (+4.3%), cooling inflation and lower-than-expected consumer spending set the stage for a potential interest-rate cut in February. Annual core inflation eased to 3.2% in the fourth quarter, from 3.6% in the prior quarter, and was below expectations of 3.3%, pushing the Australian dollar lower. Lackluster retail sales and household spending were below estimates, underscoring cautious consumption and heightened concerns that slowing immigration could further constrain demand. November retail sales advanced 0.8% versus a forecast 1% gain, and results for October were downwardly revised. Household spending rose only 0.4% after a 0.9% gain a month earlier. These results fueled expectations that the Reserve Bank of Australia (RBA) will cut interest rates in February for the first time in four years. However, a persistently tight labor market, marked by surprisingly robust job growth and a low 4.0% unemployment rate in December, cast doubt on an imminent rate cut.
Japan’s (+0.1%) central bank raised its key policy rate to the highest level since 2008, as expected, following higher inflation and wage growth and relatively calm markets after Donald Trump began his second term as US president. The Bank of Japan (BOJ) lifted its overnight call rate by 25 bps to 0.5%, reflecting greater confidence that wages will continue to grow and keep inflation sustainably around the bank’s 2% target. The BOJ revised its inflation forecast higher, fueling expectations for more rate hikes ahead and supporting the yen. For the first time in 18 months, a key measure of core consumer prices accelerated 3% annually in December, up from 2.7% in November, largely driven by higher energy costs. In November, Japanese workers’ base salaries grew the most in 32 years, rising 2.7% from a year ago and offering further evidence of a strengthening economic cycle. However, real cash earnings dropped 0.3% compared to a year earlier, partly because inflation outpaced wage growth. A global bond sell-off and expectations of higher Japanese interest rates drove Japan’s 40-year government bond yield to its highest level since its debut in 2007.
In Singapore (+4.0%), the Monetary Authority of Singapore (MAS) reduced interest rates for the first time in nearly five years after core inflation in December rose at the slowest pace — 1.8% year over year — in more three years, and the S&P Global Singapore PMI markedly cooled in December. The MAS lowered its core inflation forecast for 2025 to 1% – 2%, down from its October projection of 1.5% – 2.5%. Singapore’s fourth-quarter GDP exceeded estimates but slowed to 4.3% year over year, compared to growth of 5.4% in the third quarter.
Emerging Markets
Emerging markets (EM) equities (+1.6%) rose in January. Latin America led the gains, followed by Europe, the Middle East, and Africa (EMEA) and Asia.
In Latin America (+5.9%), Brazil’s (+7.1%) economic activity in November was better than expected, as the IBC-Br Economic Activity Index (a leading indicator of GDP) rose 0.1% in seasonally adjusted terms from October despite the largest drop in services sector activity — the main engine of the economy — since April 2023. The central bank raised interest rates by 100 bps for the second straight time, signaling another hike of the same size in March. The bank also lifted its inflation forecast for 2025 from 4.5% to 5.2%. In Mexico (+3.0%), inflation slowed to 3.69% in the first two weeks of January, down from 3.99% the previous month. The central bank signaled the possibility of bigger rate cuts ahead but expressed concerns about the inflationary impact of potential US tariffs. Chile’s (+7.4%) economic activity in November grew for the second straight month, helped by strong industry performance after three straight declines. The central bank paused interest-rate cuts as economic uncertainty and greater inflation risks warranted caution.
In EMEA (+4.1%), OPEC+ will discuss its options in response to Trump’s calls for lower oil prices. In Saudi Arabia (+2.4%), fourth-quarter GDP grew 4.4% compared to the same period a year earlier, representing the fastest quarterly growth rate since 2022. Non-oil activity increased 4.6%. South Africa’s (+4.2%) inflation rose at a slower-than-expected pace in December, leading the central bank to cut the repo rate by 25 bps, to 7.5%. The United Arab Emirates’ (+5.0%) non-oil private sector expanded in December at its fastest pace in nine months, with the S&P Global UAE PMI rising for the third consecutive month.
In Asia (+0.9%), China’s (+1.1%) economy expanded 5% annually in 2024, in line with the government’s target growth. Exports rose 7.1% annually, resulting in a trade surplus of nearly US$1 trillion, which helped offset a lingering slump in construction. The property market showed some signs of stabilizing as new-home prices stopped declining in December for the first time in 18 months. The government announced that it will sharply increase funding from ultra-long Treasury bonds in 2025 to spur business investment and consumer spending as weaker-than-anticipated manufacturing and nonmanufacturing activity in January amplified calls for more supportive fiscal and monetary policies. Taiwan’s (+3.1%) export orders rose 20.8% year over year in December, the fastest pace in almost three years amid high demand for AI technology. Fourth-quarter GDP grew less than forecast, at 1.84%, as a substantial increase of imported equipment offset the contribution of exports. India’s (-2.4%) government lowered its annual economic growth estimate to 6.4%, from 6.5% – 7% for the year ending in March, which would be the slowest growth in four years.
Fixed Income
Growing geopolitical tensions and tariff concerns dominated headlines. Credit spreads tightened and most spread sectors posted positive excess returns.
Solid overall US economic data was countered by a few lackluster data points. Consumer confidence lost ground on a softer outlook for business conditions and employment. The S&P Global US Manufacturing PMI inched into growth territory, while weakness in the volatile transportation component dragged down durable goods orders. Payroll growth beat expectations in December and weekly jobless claims remained range-bound. Housing data showed some improvement with increases in existing-home sales despite elevated mortgage rates. However, cold weather likely induced a drop in pending home sales, most pronounced in the West region. A slowdown in the German and French economies weighed down fourth-quarter eurozone GDP, while the HCOB Eurozone Manufacturing PMI remained in contraction. Germany’s ifo Business Climate Index improved as assessments of current conditions and expectations both moved higher. The UK’s manufacturing PMI improved relative to the prior month but stayed in contractionary territory. China’s official manufacturing PMI weakened, falling below the expansionary marker, likely impacted by the Lunar New Year festivities. High-tech production, as well as hybrid and fuel-cell electric vehicles boosted industrial activity. Canada’s rail strike hindered the mining and transportation sectors.
The Fed kept rates unchanged, while the BOC and the ECB cut rates by 25 bps. The BOJ was an outlier, raising rates by 25 bps and signaling further hikes.
Global sovereign yields ended mixed, following further divergence in the policy-rate trajectory. Canadian yields declined the most, driven by the BOC’s rate cut amid mounting concerns about US tariffs. US Treasury yields were volatile, initially rising on stronger employment data then plunging following an equity market sell-off triggered by news of DeepSeek’s AI models. In Europe, UK gilt yields rallied, particularly at the front end of the curve, amid cooling inflation and deteriorating consumer confidence. German bund yields rose across all tenors despite the ECB’s dovish rate stance, influenced by the delayed implementation of tariffs by the Trump administration. In APAC, Japanese government yields reached a three-year high as the BOJ raised its short-term rate target to its highest level in 17 years and signaled more hikes ahead amid sustained inflationary pressures. In EM, sovereign yields declined broadly, led by Mexico, with its economy contracting for the first time in three years. Brazil’s central bank hiked its benchmark rate by 100 bps for the second straight time, signaling another hike of the same size in March. The Bloomberg TIPS index delivered a total return of 1.29%, and the 10-year breakeven inflation rate increased by 9 bps to 2.43% during the month.
Global credit outperformed duration-equivalent government bonds as spreads tightened. Within the securitized sectors, agency mortgage-backed and asset-backed securities underperformed, while commercial mortgage-backed securities outperformed duration-equivalent government bonds, respectively. Within EM, local markets debt (2.05%) outperformed external debt (1.44%), in US-dollar terms. Spread narrowing contributed favorably to external debt performance, and a decrease in US Treasury yields also had a positive impact. EM currency appreciation drove positive performance within local markets, and EM rates also benefited from those results.
Currencies
The US dollar ended mixed versus major developed and EM currencies. Among G10 currencies, the US dollar firmed against the Canadian dollar, British pound, Swiss franc, and Swedish krona. The Fed left rates unchanged awaiting further inflation and jobs data, and clarity on Trump’s policies. Geopolitical tensions and the challenging economic growth outlook outside the US further boosted the dollar’s strength. Conversely, the dollar weakened against the Japanese yen, New Zealand dollar, and Australian dollar. The Japanese yen appreciated after stronger-than-expected wage growth and higher inflation raised expectations for another rate hike later this year. The Australian dollar and New Zealand dollar recovered after Trump agreed to pause tariffs on Mexico and Canada. In EM, performance was mixed. Latin American currencies, led by the Brazilian real, generally gained versus the greenback amid tentative optimism about a delay in US tariffs. The Mexican peso recouped heavy losses after US tariffs were delayed by one month.
Commodities
Commodities (+3.3%) rose in January as all four sectors registered positive returns. Energy (+2.6%) increased. Heating oil (+3.7%), crude oil (+1.9%), gas oil (+1.1%), and gasoline (+0.5%) continued to rise as the US Department of Treasury implemented additional sanctions against Russia, blocking two major oil producers, which heightened concerns about tightening global supplies. Cold and extreme weather patterns across the US and Europe bolstered oil demand, triggering fears of potential production disruptions. Additionally, the Biden administration’s ban on new offshore oil and gas drilling along most US coastlines further supported oil prices. A forecast for warmer-than-usual February temperatures in the northern US curtailed heating demand expectations and weighed on natural gas (-4.4%).
Industrial metals (+1.4%) advanced. Copper (+2.6%) was driven higher by the Shanghai Future Exchange’s report of a sharp inventory decline, along with rising Chinese imports, which fostered optimism about the country’s economic recovery. Higher demand from the electric vehicle and renewable energy sectors and potential trade disruptions from anticipated US tariffs on Canada and Mexico supported the prices of copper, aluminum (+0.5%), and lead (+0.1%). Conversely, nickel (-1.1%) and zinc (-9.3%) declined on higher supply and lower demand.
Precious metals (+7.0%) rallied during the month. Silver (+9.6%) and gold (+5.9%) surged following Trump’s announcement of tariffs on Canada, Mexico, and China. Uncertainty about the US administration’s trade and foreign policies spurred a move toward safe-haven assets like gold and silver.
Agriculture & livestock (+4.3%) delivered good results. Coffee (+17.8%) soared to a record high due to low inventory, with 70% to 80% of Brazil’s arabica stocks sold and global coffee supplies remaining low. Corn (+5.0%) rose after the US Department of Agriculture and the Argentina Grains Exchange reduced their forecast for the 2024/2025 harvest due to prolonged adverse weather in the growing regions. Tight cattle supply supported feeder cattle (+3.9%) and live cattle (+3.5%) prices. Cotton (-3.7%) slid due to increased production and lower exports. Cocoa (-9.7%) sank as recent rains in West Africa improved soil moisture and eased dry conditions, enhancing the production outlook. Persistently elevated prices also affected demand, while higher Nigerian exports helped to ease supply concerns.
