Unexpectedly low inflation data gave the market a boost
This week’s key economic data delivered an unexpected reprieve for markets. The core consumer price index (CPI), which excludes food and energy, came in at 0.2%, slightly below expectations and marking its first decline in six months. This softer inflation increase eased concerns that the U.S. economy could be running too hot, concerns that had kept Treasury yields elevated and led to speculation that the U.S. Federal Reserve (the Fed) might need to delay or even reverse rate cuts. Following the release of the data, Fed Governor Christopher Waller struck a notably more positive tone towards rate cuts, acknowledging that if inflation continues to trend lower, cuts in the first half of the year are very much on the table. However, he tempered expectations by reminding markets that everything still depends on the data. If inflation proves stickier than anticipated, expectations for multiple rate cuts could quickly be scaled back.
The U.S. market’s reaction was swift. With both the CPI and producer price index (the change in selling prices for domestically produced goods) showing slight downside surprises, investors jumped back into the central bank easing trade, triggering a strong rally in risk assets. Rate-cut expectations for 2025 moved, with markets now pricing in 40 basis points of easing (0.4 percentage points), up from just 28 basis points (0.28 percentage points) earlier in the week. This optimistic sentiment was further reinforced by solid earnings from major banks, which helped push equities higher across the board.
Meanwhile, the luxury goods sector had a breakout week. Richemont shares surged, recording its best performance since November 2022, after the Swiss luxury conglomerate posted blockbuster earnings, driven by soaring demand for high-end jewellery during the holiday season. The broader luxury space followed suit, with LVMH and Gucci posting gains on the back of strong consumer spending in the premium market segment.
Looking ahead, all eyes are on Washington as Donald Trump prepares for his first day in office. His day-one policy promises will face their first real test next Monday, and market reactions remain uncertain. It’s unclear how much of his proposed actions — ranging from tariffs to tax policy shifts — are already priced in. Given the potential for sudden volatility, investors will be watching closely. We’ll be tracking developments in real time and breaking them down on our podcast, as usual.
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