The past week brought us little of the excitement we’ve become accustomed to since the beginning of this year, and we may even argue that it has been a welcome relief. But that does not mean that the waves have settled on the global economic front.
Key themes:
- Muted week is a welcome change of pace
- Bonds tell a tale of two continents
- Equities rife with records and reversals
- Gold glitters, while oil sputters
- Dollar trading steady after losses, while pound stumbles
NAVIGATING ECONOMIC CROSSWINDS
As winter’s chill grips the United States (US), the economic landscape is heating up with unexpected twists and high-stakes policy shifts. Let’s dive in to look at America’s economic pulse and the market waves it’s creating.
US labour market: defying gravity or losing altitude?
The job market continues to be the Rubik’s cube of the economic world, presenting a puzzle that even the most seasoned analysts struggle to solve. This week’s data added new pieces to the conundrum:
- ADP’s crystal ball shines bright
According to the Automatic Data Processing (ADP) National Employment Report, US private sector hiring surged to 183,000 jobs in January, leaving forecasters’ predictions of 148,000 in the dust. This unexpected burst of corporate confidence raises eyebrows and questions. Are businesses seeing something the rest of us are missing, or is this the last hurrah before a cooldown?
- Jobless claims: a crack in the armour?
Initial unemployment filings climbed to 217,000, up from 203,000 the previous week. While not sounding alarm bells, this uptick serves as a reminder that the job market’s armour isn’t impenetrable. Is this a blip or the beginning of a trend?
- UKG’s Workforce Activity Report rollercoaster
The UKG’s Workforce Activity Report showed a 4.2% decline in January workforce activity, which paints a picture of post-holiday blues and winter woes. But dig deeper, and you’ll find a tale of two economies:
- The K-12 education (kindergarten to 12th grade) market grew by a whopping 17.3%, possibly signalling increased investment in the US’s future workforce.
- Energy and manufacturing sectors hit the brakes hard, down 13.2% and 5.9%, respectively, hinting at broader economic headwinds.
As we hold our breath for today’s Non-Farm Payrolls report, the question looms: will we see yet another robust number, or has the US labour market finally run out of steam
Trade Wars 2.0: the empire strikes back
Just when you thought it was safe to go back to the global marketplace, tariffs are back with a vengeance:
- The China syndrome
A sweeping 10% tariff on Chinese imports has reignited the trade war embers. But this time, China’s not taking it lying down. Their retaliatory 15% tariff on US energy exports is a precision strike at America’s booming LNG and coal industries. The message is clear: two can play this game.
- North American standoff
The threat of 25% tariffs on Canadian and Mexican goods hangs like the sword of Damocles over North American trade. The current 30-day reprieve buys time but also amps up the tension. Will cooler heads prevail, or are we on the brink of a continental trade showdown?
Central bank chess: a global game of economic strategy
While economic data and trade tensions grab headlines, central banks worldwide are making moves that could reshape the global economic chessboard:
- Fed’s steady hand
The US Federal Reserve (Fed) maintains its cautious stance, with the strong labour data reinforcing its “higher-for-longer” narrative. Rate cuts, once anticipated for early 2025, now seem unlikely before mid-year at the earliest. The Fed’s patience underscores its commitment to seeing sustained progress on inflation before easing monetary policy.
- BoE’s dovish turn
Across the Atlantic, the Bank of England (BoE) is charting a different course. With inflation cooling to 2.5% year-over-year and unemployment ticking up to 4.4%, the BoE has found room to manoeuvre. This week’s 25 basis point rate cut to 4.5% marks its third reduction since August 2024. Although lower-than-expected by parts of the market, it signals a more accommodative stance to support the UK’s fragile economic recovery.
- ECB’s balancing act
The European Central Bank (ECB) finds itself in a delicate position. Eurozone retail sales dipped 0.2% month-over-month, highlighting persistent weakness in consumer demand. Yet, with inflation still above target in several member states, the ECB faces a complex decision-making environment as it weighs growth concerns against price stability.
Continuing to navigate uncharted waters
As we look to the horizon, the economic seas are choppy. The Fed’s steady hand on the interest rate rudder suggests it sees storms ahead. But with labour markets still showing signs of life, trade tensions threatening to boil over, and global central banks charting divergent courses, the path forward is far from clear, and volatility remains the name of the game.
A LOOK AT THE MARKET
Bonds
In the US, Treasury yields held their ground, with the 10-year note hovering around 4.43%. Treasury Secretary, Scott Bessent’s comments on prioritising yields over Fed rates raised eyebrows, while the Fed itself maintained a cautious stance.
Across the pond, UK Gilts rallied as the BoE surprised parts of the market with a lower-than-expected 25 basis point rate cut. The decision wasn’t unanimous, with some policymakers pushing for an even steeper 50 basis point reduction. This dovish turn sent the 10-year yield tumbling below 4.4%, its lowest level since mid-December.
Meanwhile, German Bunds are on a rollercoaster ride. Yields initially dipped on trade concerns but rebounded above 2.4% as Mexico and Canada announced a delay in US tariff implementation. The ECB’s recent rate cut and hints of further easing added another layer of complexity.
South African bonds held steady, with the 10-year yield at 10.42%, reflecting the country’s unique economic challenges, coupled with the global risk environment.
Equities
US stock futures dipped as investors brace for today’s US Non-Farms Payroll report. Tech giants like Amazon faced headwinds in after-hours trading, while consumer staples and financials led gains during the regular session.
European markets painted a different picture. Germany’s DAX surged to new heights, up 1.5%, as traders looked past trade worries to focus on earnings. Chemical giant, BASF, stole the show with a 7% jump.
The FTSE 100 also hit record territory, climbing over 1.5% on the back of the BoE’s rate cut. Pharmaceutical company, AstraZeneca’s strong performance, along with a rally in mining stocks, fuelled the gains.
South Africa’s FTSE/JSE All Share index has started 2025 on a positive note, up 3.68% year-to-date despite ongoing economic hurdles.
Commodities
Gold continued its ascent, flirting with $2,870/ounce and eyeing a sixth straight weekly gain. Safe-haven demand and central bank buying provided tailwinds.
Oil markets faced pressure, with Brent crude hovering around $74.50/barrel. Trump’s production-boost plans and swelling US inventories weighed on prices, though geopolitical tensions offered some support.
Currencies
The greenback is holding firm as traders await today’s jobs data, with the US Dollar Index near 107.7. Bessent’s strong dollar rhetoric and Fed rate cut expectations are keeping markets on their toes.
Sterling took a hit, dropping about 1% to $1.23/£ following the BoE’s 25 basis point rate cut. Traders, however, have ramped up bets on further cuts, now pricing in nearly 100 basis points of easing for 2025.
The euro found some strength, climbing above $1.04/€ as the dollar softened and eurozone business activity showed signs of life.
South Africa’s rand continued its march stronger, with its rate against the dollar making strides towards R18.42/$, as a less tumultuous week and a softer dollar played in its favour.
Key indicators:
USD/ZAR: 18.43
EUR/ZAR: 19.13
GBP/ZAR: 22.90
GOLD: $2,867
BRENT CRUDE: $74
Sources: UKG Workforce Activity Reports, Refinitiv, Reuters News, Bloomberg and Trading Economics.
Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.