Pain thunders down on the US markets. The TPP weekend wrap

The U.S. leads losses as the sell-off continues.

Global markets suffered this week with the S&P 500 going into correction, a drop of 10% or more from its highs.

Europe didn’t escape unscathed either. The FTSE 100 fell -0.55%, the STOXX Europe 600 lost 1.23%, the CAC in France dropped 1.14%, while the DAX in Germany managed to end the week flat.

The UK economy unexpectedly shrank 0.1% in January, reflecting a fall in production. Gross domestic product (GDP) had expanded 0.4% sequentially the month before. Nevertheless, the rolling quarterly growth rate of 0.2% was higher than the 0.1% posted in December.

The figures showed that production output fell by 0.9% on the month in January following a 0.5% increase in December 2024. This was due mainly to a 1.1% fall in manufacturing output.

ONS director of economic statistics Liz McKeown said: "The fall in January was driven by a notable slowdown in manufacturing, with oil and gas extraction and construction also having weak months.

"However, services continued to grow in January, led by a strong month for retail, especially food stores, as people ate and drank at home more."

Paul Dales, chief UK economist at Capital Economics, said the contraction in real GDP in January highlights the weakness of the economy before the full effects of the rise in business taxes and the uncertain global backdrop is felt.

Europe

Days after the European Central Bank (ECB) decided to lower interest rates for a sixth time since June, comments from a clutch of policymakers appeared to cast doubt on another cut in April. “Exceptionally high uncertainty” could make it harder for the ECB to meet its 2% inflation target in the short term, ECB President Christine Lagarde suggested in a speech in Frankfurt.

Executive Board member Isabel Schnabel warned that inflation was more likely to remain above the target than fall below it, indicating her reluctance to back an even easier stance, according to the Handelsblatt newspaper. Governing Council member Martins Kazaks said at a conference in Lisbon that rate-setters needed to keep an open mind on April’s decision because of uncertainty stoked by geopolitical shocks and a potentially massive increase in defence spending, according to Bloomberg.

In contrast, in an interview with The Wall Street Journal, Bank of Portugal governor Mário Centeno stuck to his view that borrowing costs needed to be even lower to shore up a weak economy and prevent inflation from settling below target. “I would prefer to move sooner rather than later,” Centeno said.

Germany’s coalition government-in-waiting and the Greens agreed to a deal for a huge increase in state borrowing, according to two sources close to the talks cited by Reuters. Friedrich Merz, the next chancellor, wants the outgoing parliament to approve a EUR 500 billion infrastructure fund and a loosening of the so-called debt brake to increase spending on defence.

The U.S.

U.S. stocks posted losses for the week, with the S&P 500 Index, Nasdaq Composite, and Russell 2000 Index all notching a fourth consecutive week of negative returns and the S&P MidCap 400 Index falling for the seventh week in a row, while the Dow Jones Industrial Average slid 3.07%.

Ongoing uncertainty surrounding trade policy seemed to drive much of the negative sentiment as new tariff announcements from the Trump administration continued throughout the week. Growth concerns and increasing recession fears, which were amplified by comments from President Donald Trump regarding a “period of transition” for the U.S. economy, also weighed on sentiment during the week.

The week’s relatively light economic calendar was highlighted by Wednesday’s release of the Labor Department’s consumer price index (CPI), which indicated that consumer prices rose 0.2% month over month in February, while core CPI (less food and energy) saw its lowest year-over-year increase since April 2021, rising 3.1% over the prior 12 months. February’s readings for both monthly and annual inflation slowed from January, and both were slightly below consensus expectations.

The encouraging inflation print seemed to help alleviate some concerns about the U.S. economy entering a period of stagflation—an economic scenario in which growth is stagnant, inflation is high, and unemployment rises; however, data from the report predate a large portion of the Trump administration’s recent tariff actions, and investors were quick to return their focus to the uncertainty surrounding the impact that these actions will have on prices over the next several months.

Thursday’s producer price index (PPI) data painted a similar picture for February, with headline prices unchanged from January and core prices declining for the first time since July compared with expectations for a 0.3% increase for both readings. While the overall results appeared promising, several components of the PPI that feed into the personal consumption expenditures (PCE) index, the Fed’s preferred measure of inflation, remained elevated, which suggests that the PCE will likely remain well above the Fed’s 2% target when it is released at the end of the month. Fed policymakers are widely expected to hold interest rates steady following their upcoming meeting on March 18–19.

Meanwhile, the University of Michigan reported its Index of Consumer Sentiment for March on Friday morning, which declined 11% month over month to 57.9. The index has now declined three months in a row and is down 22% from December 2024. According to the report, consumer expectations “deteriorated across multiple facets of the economy, including personal finances, labour markets, inflation, business conditions, and stock markets,” primarily due to “uncertainty around policy and other economic factors.” Notably, year-ahead inflation expectations increased to 4.9% from 4.3% in February, the highest since November 2022 and the third consecutive monthly increase of 0.5 percentage points or more.

Asia

Japan’s stock markets rose modestly over the week, with the Nikkei 225 Index gaining 0.45% and the broader TOPIX Index up 0.27%. The yen weakened to around JPY 148.7 against the U.S. dollar, from about 148.0 at the end of the prior week, providing a tailwind for Japanese exporters. However, uncertainties about global trade dented sentiment, capping gains. Japan is particularly concerned about the Trump administration’s proposed duties of around 25% on imported cars, as autos make up roughly one-third of Japan’s total exports to the U.S.

The yield on the 10-year Japanese government bond hovered around its highest levels since the 2008 global financial crisis in anticipation of further rate hikes this year. BoJ Governor Kazuo Ueda said that the rising JGB yield trend since last year was a natural reflection of the market’s view on the economy and inflation, or shifts in interest rates overseas, and emphasised that bond yields should be determined freely in the market. Ueda stressed that only if yields rose sharply in a way that differs from normal market movements would the central bank step up its JGB purchases to curb yield rises. Some interpreted this as raising the bar for intervention.

Mainland Chinese stock markets rose on stimulus hopes after Beijing said it would hold a press conference on Monday with policymakers focusing on boosting consumption. The onshore benchmark CSI 300 Index advanced 1.59%, and the Shanghai Composite Index added 1.39% in local currency terms, according to FactSet. In Hong Kong, the benchmark Hang Seng Index shed 1.06%.

Officials from China’s finance ministry, commerce ministry, central bank, and financial markets watchdog are expected to appear at Monday’s briefing, which “will introduce the situation of boosting consumption,” according to the announcement from the State Council. News of the conference sparked a rally in Chinese shares on Friday, pushing the CSI 300 Index to its highest level since mid-December.

Increasing consumption to drive economic growth has become more important for China’s policymakers since the onset of the U.S.-sparked trade war. At the just-concluded National People’s Congress meeting, China set an ambitious economic growth target of about 5% for the third straight year and stated that boosting consumption is the government’s top priority for 2025.

The Week Ahead

This week will be dominated by Central Banks. On Wednesday, the FOMC will meet to decide U.S. rates, followed by the Bank of England on Thursday. Both are expected to keep rates on hold at 4.5%.

We see a very small chance that the BoE will lower again, but the most likely scenario is that they’ll wait until May. The next inflation figure should be a favourable one so they could wait for confirmation. Looking at the economic data, the lowering rates and boosting growth would be very welcome and the sooner they do something the better. However, they are known for erring on the side of caution so don’t hold your breath.

Enjoy the rest of your weekend and good luck in the markets this week.

Disclaimer: The views expressed in this article are the author’s own and should not be considered in rendering any legal, business or financial advice.

Past performance may not be indicative of future results. Therefore, you should not assume that the future performance of any specific investment or investment strategy will be profitable or equal to the corresponding past performance.

‍