Shaw and Partners

US stocks sold off for the week as investors continued to navigate uncertainty around tariffs as well as mounting recession worries. Over the previous weekend, President Trump did not rule out a recession, stating that there will be a “period of transition” for the economy. This pushed the S&P 500 to its biggest daily drop of the year on Monday, falling 2.7%, while the Nasdaq Composite plunged 4% in its biggest drop since September 2022. In Trump’s latest back-and-forth on tariffs, he had threatened to double the planned 25% duties on Canadian steel and aluminium, in response to Ontario imposing a 25% surcharge on exports of electricity to some US states, which was later dropped.

The above mostly overshadowed the latest inflation data. The consumer price index advanced 2.8% year-on-year in February, slowing from the previous month’s reading, although it won’t yet reflect the full impact of tariffs. US stocks found some support on Friday as a vote to fund the government through September was able to pass through the Senate, averting a shutdown. In addition, investors also bought back in following the recent steep losses, pushing the S&P 500 and Nasdaq to their best session since the day after the US election. Despite Friday’s advance this was not enough to avoid weekly losses. US Treasury yields climbed higher over the week, with the 10-year note ending at 4.32%.

European markets logged another weekly loss, following their strong start to the year, with the pan-European STOXX 600 falling 1.2%, weighed down by US tariff concerns. Regional performance was mixed, with French and Spanish indices losing over 1%, Germany’s DAX lost 0.1% while Italian equities saw slight gains. The German index rallied on Friday on news that incoming chancellor Friedrich Merz had reached a deal to increase state borrowing. The 10-year Bund yield also jumped on the announcement, continuing its quarterly gains. Trade tensions between the European and US bubbled up, with the EU announcing retaliatory duties, including goods like whiskey and motorcycles and then Trump later threatening a 200% tariff on wine and other alcohol imports.

The mood in the Asia Pacific region was a bit brighter, with Japan’s Nikkei 225 adding 0.5% for the week, despite still being pressured by proposed US duties. The index benefited from the yen weakening against the US dollar, while 10-year Japanese government bond yields continued to hover near their 2008 highs. China’s Shanghai Composite gained 1.4%, supported by hopes that authorities would step up stimulus measures to support consumption. The weak consumption was evident in the latest inflation figures with the consumer price index coming in lower-than-expected in February, rising 0.7%, while the producer price index spent its 29th consecutive month in contraction territory. The Hang Seng pulled back 1.1% with the recent rally around artificial intelligence related names pausing.

Weekly macro highlights

US CPI inflation eases in February

US consumer price index (CPI) inflation rose 2.8% year-on-year (YoY) in February according to data published by the Bureau of Labor Statistics. The data was below market expectations for a decline to 2.9% YoY and below the 3.0% YoY registered in January. In month-on-month (MoM) terms, inflation was 0.2% in February, below the 0.5% MoM increase in January. The index for shelter rose 0.3% over the month and accounted for almost half of the MoM headline inflation in February. Strong shelter inflation was partially offset by 4.0% and 1.0% MoM declines in airline fares and gasoline prices respectively. Despite the decline in gasoline prices, energy prices rose 0.2% MoM in February as electricity and utility gas service prices rose 1.0% and 2.5% MoM respectively. Food inflation was 0.2% MoM in February. Excluding food and energy, core CPI inflation was 0.2% MoM in February and 3.1% YoY, below the 3.3% YoY increase in January.

Bank of Canada cuts rates in March

The Bank of Canada’s (BoC) Governing Council reduced the overnight rate by 25 basis points to 2.75% at its meeting on 12 March. Canada’s gross domestic product (GDP) grew by an annualised 2.6% quarter-on-quarter in Q4 2024, stronger than the BoC forecast in January. The Governing Council noted that past interest rate cuts have boosted economic activity. However, the BoC expects GDP growth to slow in Q1 2025 as the trade conflict with the US weighs on sentiment and activity. Consumer price index inflation was 1.9% year-on-year (YoY) in January, and the BoC expects it to increase to around 2.5% YoY in March. The Governing Council highlighted that “short-term inflation expectations have risen in light of fears about the impact of tariffs on prices”. The decision to lower the overnight rate was made against the backdrop of the uncertainty created by “continuously changing US tariff threats” which are “restraining consumers’ spending intentions”.

UK GDP contracts in January

UK gross domestic product (GDP) is estimated to have contracted by 0.1% month-on-month (MoM) in January according to data published by the Office for National Statistics. The data was below the 0.4% MoM increase registered in December and market expectations for a 0.1% MoM expansion. January’s contraction reflected a 0.9% MoM decline in production sector output, following a 0.5% MoM increase in December. This was driven by a 1.1% MoM decline in manufacturing output, with nine of the 13 subsectors reporting lower output. The construction sector also saw its output decline, falling by 0.2% MoM in January as a 0.4% increase in repair and maintenance was offset by a 0.7% decline in new work. Services output is estimated to have grown by 0.1% MoM in January, partially offsetting the declines seen in the production and construction sectors. Growth in services output was driven by administrative and support services, where output rose 1.9% MoM.