It could just be that St. Valentine impacted President Trump last week. Or it could be his truthful desire to improve relations with the "enemies", Russia and China, as he has been "flirting" with Presidents Putin and Xi Jinping since the first day of his inauguration. He has also expressed his will to win the Peace Nobel prize this year. Truth to be told, Trump is a businessman believing in pure capitalism and he knows that military conflicts are an obstacle to global economic expansion. Having promised to end the Ukraine-Russia war "in a day", it seems that he is moving fast in that direction. He spoke with Putin on the phone for 90 minutes according to the reports and they could be meeting soon in Saudi Arabia. He even said that he would welcome Russia back to the G-7, in a clear sign of his intentions to end the three-year long geopolitical and economic isolation of the eastern country. Europe has been left out of these developments and the region is fuming.
With respect to China, his intentions are even more friendly. Not only China's Premier was invited to Trump's inauguration ceremony, but the US has until now refrained from imposing harsh tariffs or even using tough language against China. Last week Trump expressed his admiration for President Xi Jinping, characterizing him a bright man and said that "China has an important role to play" in the global economic and geopolitical arena. Even after DeepSeek's emergence , which poses a clear threat to the dominance of US mega Tech companies, Trump has been rather benign in his speeches and comments with respect to China. How and if this "love-affair" will end is anybody's guess.
Equities continued to welcome the potentially good news with respect to the new US relations with China and Russia, and European companies were of course the main beneficiaries. The region's main indices rose by a further 3% to reach a year-to-date performance of more than 12%. At the same time, the S&P500 registered a new record high, but is "just" 4% since the beginning of the year. Hang Seng also exploded higher by 7%, and is now +13% for the year. As a reminder, we had mentioned in December, that during Trump's first year in office (2017) Chinese equities were the best performer among the major global equity markets and history could be repeating itself.
US January inflation was worse than expected, but with some pockets of optimism in the details. The headline CPI increased 47bp and we should note that the monthly changes have been on a notable upward trend since June. The 12-month change in the CPI, was announced at 3% and has also risen in recent months, after hitting a low of 2.4% in September. Core CPI prices rose 0.5% in January, an increase that was above consensus average of 0.29%. The 12-month core CPI inflation edged up to 3.3% from 3.2%, but if we expand a decimal then the change was to 3.26% from 3.24%, not really a big deal. Core has been sticky around this level since June of last year. On the positive side, the closely watched OER (owners’ equivalent rent) increased 31bp, which was lower than expected. When we factor in the fact that the 7 smallest monthly OER increases since 2021 have occurred in the past 8 months, then we can assume that the trend in OER continues to slow. All in all, the data are consistent with a wait-and-see stance at the FED for at least several months, before they decide to make any move with interest rates.
FED Chairman Powell did not spark any fireworks, during his testimony before the Senate's Committee on Banking, Housing, and Urban Affairs. His prepared remarks essentially reproduced language from the December and January FED meetings. He presented an optimistic view of the economy and centered primarily on trade issues and regulation in the Q&A. He noted that "the labor market is very strong" and their concern about it has diminished significantly since late summer. He similarly repeated the prior observation about inflation, "inflation has moved much closer to our two percent goal though it remains somewhat elevated." And, as expected, he said "we do not need to be in a hurry to adjust our policy stance". It should be the central scenario for now that the FED will not be able to cut rates in the next six months, and any decision will be probably be made after the summer and when Trump's policies will have shown some initial impact on the economy and consumer prices.
US January Retail sales fell 0.9% much below consensus expectations for a rise by 0.3%. This should also be taken in context with an upward cumulative revision of 0.15% over November and December. The control group Retail Sales, which feed into the GDP calculation, fell sharply by 0.8% in January. Nominal control group sales rose have now risen just 0.1% over the three months ending in January, which means that after the 3% inflation they are actually negative. Overall, the data suggest that consumer spending growth has deteriorated in the last few months.
Bonds also had a volatile but positive week, despite the worse than expected US inflation numbers. The worse-than-expected retail numbers in the US played some role, and the 10yr US yield fell below 4.50% again, down almost 30bp from its recent peak. The German yields also fell in sympathy with the 10yr trading closer to 2.40%. Both yields are now close to the levels they were at the end of December.
The German elections on Sunday, 23rd of February, are perhaps one of the most important of the last decades. The three-party coalition led by today's Chancellor Olaf Scholz condemned Germany to three years of zero to negative economic growth, lack of coordination and determination on issues like the fiscal policy and the debt-break constitutional rules, as well as the perception that illegal immigration is out of control. In this context, the far-right AfD has risen to 20% according to the polls, with the support of Musk&Co. However, it will most certainly not enter the government as no other party wants to have a coalition with them. The CDU, Friedrich Merz's party, should win the elections, reaching 30% but this is not enough for forming a government. It is still unclear which coalition will eventually govern Germany, at a time when huge challenges lie ahead.
Please note that there will be no Weekly Review next week, due to the spring vacations.
Chart of the Week : Europe's outperformance can continue a few more months.
The above chart shows the relative performance of the European equity index Stoxx600 against the S&P500. for the last 25 years or so. When the lines moves lower, it means that Europe is underperforming the US and vice versa. The first observation is that the US has been performing much better than Europe on a 15-yr basis since the years prior to the great financial crisis (2008). Within this US supremacy decade, there have been periods when Europe has managed to perform better than the US, and these are highlighted with the red and green dots. The table on the right specifies the exact dates of these periods and the magnitude of European outperformance vs the US. We see that the duration varies significantly, from just 4 months in 2012 to 4 years in 2003-2007. We are now on the 3rd month of such, surprising for many outperformance of Europe with 6% return differential. Given that the average outperformance is close to 20% and the average duration is almost 1.5 years, this phenomenon can last for a few more months.
Disclaimer
• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.
• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.
• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.
• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.
• Sources: Chart of the Week : Pictet
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