MacroQuant Insights: Weekly Market Lens

US Sovereign Risk Jumps 38% as Market Recovery Defies Logic

Mateo — Sun, 04 May 2025 14:35:53 GMT

U.S. sovereign default risk surged 38% in April as investors priced in growing concerns about political interference with the Federal Reserve, even as major stock indices staged a remarkable recovery to end the month flat. This divergence between rising sovereign risk and resilient equity markets, driven by the administration's threats to replace Jerome Powell and subsequent policy reversals on tariffs, presents a market contradiction that challenges conventional economic relationships. The combination of deteriorating economic fundamentals—evidenced by Q1's 0.3% GDP contraction—with S&P 500 companies reporting Q1 earnings that exceed analyst estimates by an average of 8.6%, creates a market environment where traditional indicators and price action appear disconnected as May trading begins.

⏱️ Global Markets in 10 Seconds:

🇺🇸 Economy contracts 0.3% Q1 first decline since 2022 ⚠️
🇺🇸 S&P 500 up 2.92% for week defying economic headwinds 📈
🇪🇺 Eurozone GDP doubles to 0.4% exceeding expectations 🚀
🇨🇳 Manufacturing PMI falls to 49.0 worst since December 2023 🏭
🇯🇵 BoJ maintains rates at 0.5% amid global trade concerns 🏦

🔍 The Big Picture

In a financial world increasingly defined by contradictions, this week delivered a masterclass in market psychology over economic fundamentals. The tension between policy uncertainty and investor optimism created some of the strangest market dynamics we've seen in years, with risk indicators flashing warning signs while stock indices continued their improbable climb.

United States: The economy just shrank by 0.3% in Q1—its first contraction since 2022—while employers still added a robust 177,000 jobs in April. Strong corporate earnings (beating estimates by 8.6% on average) continue to power markets forward despite deteriorating economic fundamentals.
International: Europe is experiencing the economic equivalent of swimming upstream and actually making progress, with Eurozone GDP doubling to 0.4% when analysts expected just 0.2%. Even more striking is how this growth occurred with Spain (+0.6%) and Italy (+0.3%) leading the charge while traditional powerhouses Germany and France merely returned to minimal growth, suggesting a potential reshuffling of Europe's economic deck.
Emerging Markets: China's manufacturing sector contracted sharply with its PMI falling to 49.0, its worst reading since December 2023, yet the government is signaling potential trade talks with Washington. This economic temperature drop comes at a critical moment when China has already started exempting some U.S. goods from tariffs covering roughly $40 billion worth of imports.

Source: Aswath Damodaran - https://aswathdamodaran.blogspot.com

💼 Market Indicators

SPY Performance

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Performance and Valuations by Region

Source: MSCI

ACWI Momentum performance by Style

Source: MSCI

S&P 500 Earnings Per Share

Source: Yardeni Research

Source: FactSet

🗺️ Around the World in Detail

🇺🇸 United States: Defying Economic Gravity

The U.S. economy contracted by 0.3% in Q1 2025, its first negative reading since 2022, yet employers still added 177,000 jobs in April, significantly outpacing expectations of 135,000.
Job openings fell to 7.2 million in March, down from 7.5 million in February and hitting their lowest level since September. Companies are becoming more selective in hiring but haven't halted recruitment completely.
The S&P 500 finished with its ninth straight positive session on Friday, logging two consecutive weeks of gains for the first time since January. Markets continue to show remarkable resilience despite economic headwinds.
Corporate earnings are telling a surprisingly robust story with 76% of S&P 500 companies beating estimates and aggregate earnings coming in 8.6% above expectations. This strength in corporate performance stands in stark contrast to the broader economic contraction.

🌐 International Markets: Unexpected Strengths

Canada 🇨🇦

Manufacturing activity decreased to 45.3 in April, its lowest reading since May 2020, as U.S. tariff policies weighed heavily on Canadian factories. Trade uncertainties continue to impact production decisions.
According to advance estimates, Canada's GDP increased by a modest 0.1% in March, suggesting a 0.4% expansion for Q1 2025 despite February's 0.2% contraction. The economy appears to be maintaining minimal forward momentum.

Europe 🇪🇺

Eurozone GDP growth doubled to 0.4% in Q1 from 0.2% in the previous quarter, significantly outpacing the consensus estimate of 0.2%. This unexpected acceleration comes despite persistent headwinds.
Spain's economy grew by 0.6% and Italy by 0.3%, exceeding forecasts, while traditional powerhouses Germany and France merely returned to growth with small increases. A notable shift in regional economic performance is emerging.
Inflation remained steady at 2.2% in April, just above the ECB's target, but core inflation climbed to 2.7% from March's three-year low of 2.4%. Price pressures remain a concern for policymakers.

UK 🇬🇧

The housing market showed signs of losing momentum with the Nationwide Building Society's house price index falling 0.6% in April. Property markets appear to be cooling after previous strength.
Business sentiment deteriorated sharply in April, with Lloyds Bank's business barometer falling by 10 points to 39%, its lowest level since January. Confidence among British businesses continues to erode amid global uncertainties.

Japan 🇯🇵

The Bank of Japan held interest rates steady at 0.5% and downgraded its forecasts for economic growth and inflation. The central bank maintains a cautious approach amid growing concerns about global trade tensions.
Manufacturing sector conditions continued to weaken in April while both industrial production and retail sales underwhelmed in March. Key economic indicators suggest persistent challenges for the Japanese economy.

🌏 Emerging Markets: Cooling Momentum

China 🇨🇳

Manufacturing PMI fell more than expected to 49 in April from 50.5 in March, marking the worst contraction since December 2023. Factory activity has reversed its previous expansion amid new challenges.

India 🇮🇳

While specific Indian data wasn't provided in our dataset, the country remains a relative bright spot in emerging markets based on previous trends. India continues to exhibit resilience when compared to regional peers.

South Korea 🇰🇷

Retail sales declined by 0.3% month-on-month in March, reversing February's 1.9% gain, signaling weakening consumer spending. This pullback suggests growing caution among Korean consumers.
Inflation held steady at 2.1% year-on-year in April, matching March's reading and meeting market expectations. Price stability persists despite global uncertainties.

Taiwan 🇹🇼

Taiwan's economy expanded by an impressive 5.37% in Q1 2025, dramatically exceeding market expectations of 3.3%. This strong performance highlights Taiwan's continued economic dynamism.
Private consumption rose 1.22% while gross capital formation jumped 14.72%, fueled by higher investment in machinery, construction, and intellectual property products. Investment and technology sectors continue to drive Taiwan's impressive growth.

🔑 Key Takeaway

This week's data reveals a fundamental disconnect between market performance and economic reality, challenging conventional wisdom about how economies and investments interact. The paradox is striking: while the U.S. economy contracted 0.3% and sovereign risk rose 38%, equity markets staged their ninth consecutive positive session with the S&P 500 gaining 2.92% for the week. As Damodaran points out in his analysis, the divergence between these signals represents a profound tension between sentiment and fundamentals, with market psychology seemingly prevailing over economic data.

The global picture further complicates this narrative, with Eurozone growth doubling expectations to 0.4% while China's manufacturing PMI slid to 49.0. What emerges is a pattern of market resilience that defies traditional correlations—a phenomenon Damodaran describes as "a shift in sentiment back to the forces that have borne markets upwards for the last few years." Most telling is his observation that sovereign CDS spreads rose not during the market's initial collapse but during its recovery, suggesting we're witnessing not just volatility but a fundamental reassessment of trust in institutions and government stability. Investors navigating this environment face an unusual challenge: determining whether the market's confidence or the economy's contraction represents the true leading indicator of what's to come.

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51.2 PMI Signals 16-Month Low While Stocks Climb

Mateo — Sun, 27 Apr 2025 15:04:43 GMT

The S&P 500 advanced 4.39% this week as U.S. equities rallied strongly despite April's composite PMI falling to a 16-month low of 51.2. This recovery, fueled by reports of easing trade tensions with China and better-than-expected corporate earnings with 73% of companies beating estimates. While manufacturing activity unexpectedly expanded to 50.7, the sharp slowdown in services activity and fastest price increases in over a year highlight the complex impact of tariffs on the economic landscape, even as markets respond positively to potential diplomatic breakthroughs.

⏱️ Global Markets in 10 Seconds:

🇺🇸 S&P 500 +4.39% despite 16-month PMI low 📈
🇪🇺 Services PMI drops to 49.7 first contraction in 5 months 📉
🇬🇧 Retail sales +0.4% defying forecasts as manufacturing sinks 🛍️
🇰🇷 GDP -0.2% q/q surprise contraction amid trade tensions ⚠️
🇮🇳 Services PMI hits 59.1 fastest expansion since December 🚀

🔍 The Big Picture

This week reveals a striking disconnect between deteriorating economic fundamentals and rising market optimism. Global markets rallied on signs of easing trade tensions despite PMIs weakening across multiple regions, highlighting how political developments can sometimes outweigh economic realities in driving investor sentiment. The contrast between cautious business outlook and enthusiastic market response creates an interesting tension as we move deeper into 2025.

United States: The composite PMI sliding to a 16-month low of 51.2 shows economic momentum clearly fading, yet the S&P 500 jumped 4.39% as investors embraced potential trade de-escalation rather than current conditions. Manufacturing surprisingly improved to 50.7, but the sharp services slowdown suggests tariffs are starting to bite in unexpected ways, with price pressures building faster than anticipated.
International: Europe's services PMI dropping below the crucial 50 mark to 49.7 signals the region's first contraction in five months, with particular weakness in economic powerhouses France (46.8) and Germany (48.8). The UK's unexpected retail sales growth of 0.4% provides a rare bright spot, but with both manufacturing and services now firmly in contraction territory, the region faces mounting pressure as we head toward summer.
Emerging Markets: The contrast between South Korea's surprise GDP contraction of 0.2% and India's robust services PMI of 59.1 perfectly illustrates the divergent paths emerging economies are taking. Export-dependent economies are feeling the immediate pain of trade disruptions, while domestically-driven economies with large internal markets are demonstrating remarkable resilience – a pattern that may define investment opportunities throughout the remainder of 2025.

Source: X - Peter Berezin

💼 Market Indicators

SPY Performance

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Performance and Valuations by Region

Source: MSCI

ACWI Momentum performance by Style

Source: MSCI

S&P 500 Earnings Per Share

Source: Yardeni Research

Source: FactSet

🗺️ Around the World in Detail

🇺🇸 United States: Unexpected Divergence

Manufacturing PMI surprised at 50.7 in April, climbing above expectations of 49.1 while most analysts were bracing for contraction. The modest expansion marks the fourth consecutive month of growth, suggesting domestic producers might be adapting to the new tariff environment.
Services PMI plummeted to 51.4 from 54.4, falling well below market expectations of 52.5 and marking the second softest growth rate in a year. Client uncertainty due to tariffs and economic policy concerns appears to be hitting the services sector harder than manufacturing.
Consumer sentiment fell for the fourth straight month to 52.2, with expectations down a stunning 32% since January – the steepest three-month decline since the 1990 recession. The 6.5% inflation expectation is the highest since 1981, suggesting consumers are increasingly worried about rising prices.

🌐 International Markets: Recession Shadows

Canada 🇨🇦

Retail sales rose 4.7% year-on-year in February, following a 5.3% increase in January. While slightly slowing, Canadian consumers continue to show resilience compared to their international counterparts.

Europe 🇪🇺

Manufacturing PMI edged up to 48.7 in April, the highest in 27 months but still in contraction territory. The slight improvement comes despite ongoing weakness in new orders and exports, showing the sector remains fragile.
Services PMI dropped below the critical 50 mark to 49.7 in April from 51 in March, marking the first contraction in five months. The weakness was particularly pronounced in France (46.8) and Germany (48.8), suggesting the core of the European economy is struggling.
German growth forecasts were slashed to zero for 2025, with Bundesbank President Nagel even warning of a possible "slight recession" as trade tensions impact the export-dependent economy. After two consecutive years of GDP contraction, Germany appears unable to break free from its economic malaise.

UK 🇬🇧

Manufacturing PMI collapsed to 44 in April, the deepest contraction since August 2023. Export sales were particularly devastated, with the steepest decline outside pandemic times since February 2009, highlighting the market's vulnerability to global trade tensions.
Services PMI fell back into contraction at 48.9 in April after 17 straight months of expansion, catching markets off guard as forecasts expected 51.3. The unexpected reversal suggests the UK's economic foundation might be more fragile than previously thought.
Retail sales surprisingly rose 0.4% in March, defying forecasts of a 0.4% decline. Clothing stores led the way with 3.7% growth, attributed to favorable weather, providing a rare bright spot in an otherwise gloomy economic landscape.

Japan 🇯🇵

Tokyo inflation accelerated to 3.4% in April, the fastest pace in two years and above market expectations of 3.2%. The jump from March's 2.4% strengthens the case for further Bank of Japan rate hikes despite uncertainty about tariff impacts.
Services PMI rebounded to 52.2 in April from a neutral 50.0 in March, with new orders seeing the strongest growth in three months. However, business optimism slipped to its lowest since January 2021 amid concerns over potential U.S. tariff hikes.
Manufacturing PMI remained stuck in contraction at 48.5 in April, marking the tenth consecutive month below 50. New orders declined at the fastest pace since February 2024, while business sentiment weakened to its lowest point since June 2020.l.

🌏 Emerging Markets: Dramatic Contrasts

China 🇨🇳

The Politburo announced preparations for "emergency plans" in response to external shocks, promising new monetary tools and policy financing instruments to boost technology, consumption, and trade. The measured response suggests Beijing is taking a patient approach to countering U.S. tariff impacts.
The PBoC maintained key lending rates for the sixth consecutive month, holding the one-year loan prime rate at 3.1% and the five-year rate at 3.6%. Policymakers appear to be waiting to assess the evolving impact of U.S. trade disputes before introducing further stimulus.

India 🇮🇳

Services PMI jumped to 59.1 in April from 58.5 in March, marking the 45th consecutive month of growth and the fastest expansion since December. New export orders picked up sharply, likely benefiting from the 90-day pause in tariff implementation.
Manufacturing PMI rose to 58.4 in April from 58.1, indicating the fastest pace of growth in a year. New export orders saw their most pronounced increase in over fifteen years, highlighting India's growing strength as a manufacturing alternative to China.

South Korea 🇰🇷

GDP contracted by 0.2% quarter-on-quarter in Q1 2025, shocking analysts who had expected 0.1% growth. Private consumption dipped 0.1%, government consumption fell 0.1%, construction investment plunged 3.2%, and exports dropped 1.1% – a broad-based deterioration suggesting significant vulnerability to global trade disruptions.
Annual GDP growth slowed to just 0.1% year-on-year in Q1, a dramatic deceleration from previous quarters. The near-stagnation highlights how quickly external shocks can impact export-dependent economies, even those with relatively strong fundamentals.

Taiwan 🇹🇼

Unemployment edged higher to 3.36% in March from 3.35% in February, with youth unemployment ticking up to 11.35%, the highest in six months. The modest deterioration suggests labor markets remain relatively stable despite external pressures.
Retail sales rose 0.4% year-on-year in March, recovering from a 3.8% drop in February and surging 10.5% month-on-month. The bounce-back was led by general merchandise (+4.3%) and food and beverages (+4%), demonstrating the resilience of domestic consumption.

🔑 Key Takeaway

This week's data reveals a striking paradox between worsening economic fundamentals and bullish market sentiment, highlighting how trade policy expectations are outweighing actual economic performance.

The U.S. composite PMI's drop to a 16-month low (51.2) didn't prevent the S&P 500 from surging 4.39% as investors focused on possible trade de-escalation rather than deteriorating business conditions. We're witnessing remarkable regional divergence – Eurozone services contracting, UK manufacturing collapsing despite retail resilience, and South Korea's GDP surprisingly contracting while India posts exceptional PMI strength.

The market rally aligns with reports of potential U.S.-China trade tension easing, yet economic data shows concerning trends – multi-year lows in business sentiment, accelerating price increases attributed to tariffs, and consumer inflation expectations surging to 6.5%, their highest since 1981. These contradictions suggest markets are prioritizing hope over economic reality.

ECB Cuts to 2.25% While Global Banks Hold

Mateo — Sun, 20 Apr 2025 16:46:50 GMT

The European Central Bank slashed interest rates by 25 basis points to 2.25% this week, marking its seventh consecutive cut since last summer amid escalating global trade tensions. This monetary easing, driven by the ECB's concerns about deteriorating growth prospects and confidence that inflation is returning to target, stands in stark contrast to the holding patterns at the Federal Reserve, Bank of Canada, and Bank of Korea. While European policymakers pivot toward supporting economic growth, Federal Reserve Chair Jerome Powell emphasized that unexpectedly large tariff increases would likely slow growth and raise inflation, creating a precarious balancing act for central banks worldwide.

⏱️ Global Markets in 10 Seconds:

🇺🇸 Retail sales +1.4% highest in two years as consumers rush ahead of tariffs 🛒
🇪🇺 ECB cuts to 2.25% amid trade war uncertainty, 7th consecutive reduction 🏦
🇨🇳 GDP grows 5.4% exceeding expectations despite looming tariff impacts 📈
🇬🇧 Inflation eases to 2.6% as falling fuel prices offset housing costs 💰
🇯🇵 Exports slow to 3.9% as trade tensions with US intensify ⚠️

🔍 The Big Picture

Central banks are diverging in their policy responses to the escalating global trade war, creating a fascinating laboratory for how different monetary approaches perform under similar external pressures. While some are prioritizing growth concerns, others remain focused on inflation risks, highlighting the fundamental tradeoff that defines central banking in uncertain times.

United States: Retail sales jumped 1.4% in March, the strongest gain in over two years, with auto sales surging 5.3% as consumers rushed to beat tariff-driven price increases. This represents a pull-forward of demand that boosts current numbers but potentially at the expense of future consumption, creating temporary strength that might mask underlying weakness.
Europe: The ECB's decision to cut rates to 2.25% stands in stark contrast to the Bank of Canada's pause at 2.75% and the Fed's holding pattern. This divergence highlights different policy priorities – the ECB is addressing growth concerns more aggressively while others are still primarily focused on inflation risks.
Emerging Markets: China's surprising 5.4% GDP growth in Q1 arrived just as new tariffs threaten to reshape global trade flows. The Chinese economy demonstrated impressive momentum in early 2025, but now faces significant headwinds that could require additional stimulus to maintain growth targets.

💼 Market Indicators

SPY Performance

Created with TradingView

Performance and Valuations by Region

Source: MSCI

ACWI Momentum performance by Style

Source: MSCI

S&P 500 Earnings Per Share

Source: Yardeni Research

Source: FactSet

🗺️ Around the World in Detail

🇺🇸 United States: Consumption Contradiction

Retail sales surged 1.4% in March, the strongest gain in over two years. This represents consumers accelerating purchases, with auto sales jumping 5.3% as buyers rushed to beat tariff-driven price increases.
Housing starts plunged 11% to 1.32 million annualized units in March, missing expectations by a wide margin. Developers are pausing construction plans as they struggle to accurately forecast project costs when they don't know how much materials will cost after tariffs take effect.
Fed Chair Powell acknowledged the economic impact of tariffs will include "higher inflation and slower growth," while indicating the Fed is "well positioned to wait" before adjusting rates. The central bank is carefully evaluating incoming data before making policy changes.

🌐 International Markets: Divergent Strategies

Canada 🇨🇦

Bank of Canada held rates at 2.75% after seven consecutive cuts, citing "unpredictability on the magnitude of tariffs." The BoC is pausing to assess how trade tensions will affect the economic outlook.
Inflation cooled to 2.3% in March from 2.6% in February, a welcome development that provides the BoC with additional flexibility. This improvement gives policymakers more room to respond to changing conditions.

Europe 🇪🇺

ECB cut rates by 25bps to 2.25%, its seventh consecutive reduction, amid growing confidence inflation is returning to target. European policymakers are moving more aggressively than their counterparts in North America.
The central bank acknowledged that "growth prospects have weakened" due to rising global trade tensions, which are "hurting confidence and tightening financial conditions." The ECB sees deteriorating economic conditions requiring proactive policy intervention.

UK 🇬🇧

Inflation eased to 2.6% in March from 2.8%, falling below both market and BoE forecasts of 2.7%. This gradual improvement provides the BoE with greater flexibility in considering rate cuts.
Unemployment remained steady at 4.4% for the fourth consecutive period, while employment rose by 206,000 to a record high of 34 million. The UK labor market continues to demonstrate remarkable resilience despite broader economic uncertainties.

Japan 🇯🇵

Export growth slowed sharply to 3.9% year-on-year in March from 11.4% in February, as U.S. steel and aluminum tariffs began to bite. This is the canary in the coal mine for Japan's export-dependent economy.
Inflation edged down to 3.6% in March from 3.7%, while core inflation rose to 3.2% from 3.0%. The BoJ is walking a tightrope – trying to normalize monetary policy while watching trade tensions threaten their export-oriented growth model.

🌏 Emerging Markets: Resilience Testing

China 🇨🇳

GDP grew 5.4% year-on-year in Q1, maintaining the same pace as Q4 and exceeding expectations of 5.1%. China's economy has performed well thus far, but now faces significant new challenges.
Retail sales jumped 5.9% in March from 4% in January-February, the strongest reading since December 2023. Chinese consumers are showing surprising strength, but questions remain whether this can continue as trade tensions escalate.

India 🇮🇳

Inflation fell to 3.34% in March, the lowest since August 2019 and the fifth consecutive monthly decline. India has achieved an enviable balance maintaining growth without significant inflationary pressure.
Food inflation, which accounts for nearly half of India's price basket, dropped to a near four-year low of 2.69%, providing relief to consumers. This represents a significant improvement in a critical component of the country's inflation basket.

South Korea 🇰🇷

Bank of Korea maintained its base rate at 2.75% following a 25bps cut in February, aligning with market expectations. Korean policymakers are taking a measured approach to monetary policy.
The central bank slashed its 2025 growth forecast to below 1.5% from 1.5%, citing U.S. tariff policy changes and domestic political uncertainty. This downgrade highlights that even strong economies are vulnerable to global trade disruptions.

🔑 Key Takeaway

This week's data paints a vivid picture of central bank divergence amid escalating trade tensions. The ECB's decisive cut to 2.25% contrasts sharply with the Fed and BoC's holding pattern, highlighting how policymakers weigh the same challenges but reach different conclusions about whether inflation or growth poses the greater risk. American consumers rushed to beat tariffs with retail sales jumping 1.4%, while China's strong 5.4% GDP growth now faces significant headwinds as new tariffs reshape global trade.

The tension between economic resilience and policy uncertainties creates both risks and opportunities, particularly in currency and fixed-income markets where these divergences are directly priced. Think of it as sailing in waters where different weather systems are colliding – you need to understand both current conditions and how they might shift when these systems interact. Investors who correctly assess which central bank's diagnosis proves right will find themselves with significant advantage in positioning across asset classes.

145% Tariffs Impact China Trade While Markets Rebound

Mateo — Sun, 13 Apr 2025 14:51:42 GMT

U.S. stocks rebounded sharply this week, with the Nasdaq Composite climbing 7.29%, following President Trump’s announcement of a 90-day delay on higher tariffs for most trade partners—excluding China, where tariffs rose to 145%. This contributed to heightened market volatility, with the VIX spiking above 40. Treasury yields climbed over 50 basis points, while consumer sentiment dropped to 50.8, reflecting growing recession fears and rising inflation expectations, now at 6.7%.

⏱️ Global Markets in 10 Seconds:

🇺🇸 VIX above 40 for first time since 2020 pandemic crisis ⚠️
🇺🇸 Consumer sentiment 50.8 lowest since June 2022 📉
🇨🇳 Consumer prices -0.1% second month of deflation 🌊
🇬🇧 GDP +0.5% m/m strongest growth in 11 months 🚀
🇯🇵 Yen strengthens to ¥142 as safe-haven flows intensify 💰

🔍 The Big Picture

Trade tensions have become the driving force behind markets, creating a fascinating disconnect between cooling inflation data and surging inflation expectations. This paradox reveals just how much uncertainty is shaping investor psychology, with traditional safe-haven assets behaving in unexpected ways as markets digest what a potential trade war might mean for global growth.

United States: Consumer sentiment crashed to 50.8—the lowest since June 2022—while inflation expectations simultaneously surged to 6.7%, a level we haven't seen since 1981. It's like watching a car with one foot slamming the brake (CPI dropping 0.1% in March) while the other foot floors the accelerator (inflation fears). This split between current reality and future expectations is creating a perfect recipe for market volatility.
Europe: The UK economy surprised everyone with 0.5% monthly growth in February (the strongest in 11 months), completely defying the market's expectation of just 0.1%. This resilience stands in stark contrast to the eurozone, where central banks have shifted to crisis monitoring mode, stepping up their oversight of financial institutions and market liquidity as trade tensions escalate.
Emerging Markets: China's in a peculiar spot—fighting deflation (-0.1% CPI in March) while simultaneously raising tariffs to 125% against the US. It's like trying to revive a fire while simultaneously preparing for a flood. Meanwhile, factory deflation worsened to -2.5%, suggesting Beijing will likely roll out more stimulus measures to counter both deflationary pressures and the growth-dampening effects of escalating trade barriers.

💼 Market Indicators

SPY Performance

Created with TradingView

Performance and Valuations by Region

Source: MSCI

ACWI Momentum performance by Style

Source: MSCI

S&P 500 Earnings Per Share

Source: Yardeni Research

Source: FactSet

🗺️ Around the World in Detail

🇺🇸 United States: Sentiment Crater, Price Relief

Core inflation dropped to 2.8% year-over-year in March, the lowest since March 2021. Think of this as the economy finally getting its temperature down after a three-year fever—right as new trade war symptoms are emerging.
Monthly CPI fell 0.1% in March, marking the first monthly decline since May 2020. This should be a victory lap moment for the Fed, but it's being completely overshadowed by tariff anxiety.
Consumer sentiment plunged to 50.8 in April, sinking for the fourth consecutive month to levels not seen since the darkest days of 2022. When consumers feel this bad historically, they don't just talk about spending less—they actually do it.
The Fed minutes revealed policymakers see "increased downside risks to employment and economic growth" while simultaneously flagging "upside risks to inflation." It's the monetary policy equivalent of being caught between a rock and a hard place—cut rates to support growth, or hold them to fight inflation? The Fed can't do both.

🌐 International Markets: Pockets of Resilience

Canada 🇨🇦

The Ivey PMI settled at 51.3 in March, still in expansion territory despite dropping from February's seven-month high. It's like the Canadian economy is treading water—not swimming forward vigorously, but not drowning either.
Inflationary pressures intensified with the prices index jumping to 75.6 from 71.5, suggesting the Bank of Canada might need to think twice before cutting rates further despite employment numbers turning south (48.2 vs 53.7).

Europe 🇪🇺

Retail sales surprised on the upside, growing 2.3% year-over-year in February and exceeding market expectations of 1.8%. European consumers are still spending despite everything, giving the ECB some breathing room on rate decisions.
Central banks have switched to crisis-monitoring mode, with both the ECB and BoE stepping up surveillance of financial institutions and markets. It's like watching the financial system's vital signs more frequently when the patient shows signs of distress.

UK 🇬🇧

The British economy expanded by a robust 0.5% month-over-month in February, completely blowing past expectations of 0.1%. This is like finding unexpected growth in the garden during what was supposed to be a frosty winter.
Manufacturing output surged 2.2%, with computer and electronics production soaring 9.8%. The UK manufacturing sector is showing remarkable resilience just as global trade tensions threaten to upend supply chains.

Japan 🇯🇵

Consumer confidence fell to 34.1 in March, declining for the fourth straight month to reach its lowest level since March 2023. Japanese consumers are battening down the hatches even before the full impact of global trade tensions hits.
The yen strengthened dramatically to the JPY 142 range against the dollar, emerging as a classic safe-haven play. It's like watching investors grab a financial umbrella as storm clouds gather over global markets.

🌏 Emerging Markets: Divergent Fortunes

China 🇨🇳

Consumer prices fell 0.1% year-over-year in March, marking the second consecutive month of deflation. China's economy is like a patient struggling with low blood pressure while the doctor (policymakers) prepares stronger medicine.
Factory-gate deflation worsened to -2.5%, suggesting China's manufacturing sector continues to struggle with overcapacity. This deflationary pressure couldn't come at a worse time as tariffs with the U.S. escalate to unprecedented levels (China's now at 125%, while U.S. tariffs on China hit 145%).

India 🇮🇳

The Reserve Bank of India cut its key repo rate by 25bps to 6%, the second consecutive cut, bringing rates to their lowest level since November 2022. Think of this as India's central bank giving the economy a gentle push forward while carefully watching for inflation.
RBI revised GDP growth forecasts slightly downward to 6.5% for FY2025/26, while inflation estimates were trimmed to 4% from 4.2%. India's stance is essentially: "We're still growing faster than almost anyone else, but maybe not quite as fast as we thought."

South Korea 🇰🇷

Unemployment ticked up to 2.9% in March from 2.7%, the first increase in three months. This small deterioration is hitting right as South Korea braces for the impact of U.S. tariffs, including a 25% levy on its exports.
Labor force participation climbed to 64.6% despite rising unemployment, suggesting South Koreans are actively seeking work rather than dropping out of the labor market—a potential sign of economic confidence despite headwinds.

Taiwan 🇹🇼

Inflation climbed to 2.29% in March from a near four-year low of 1.58%. Food prices jumped 4.9%, eating into consumer purchasing power just as trade tensions threaten Taiwan's export-heavy economy.
Taiwan Semiconductor Manufacturing Co. saw quarterly revenue surge 42%, as electronics manufacturers rushed to stockpile goods ahead of tariff implementation. It's like watching people fill their shopping carts before a price increase hits the shelves.

🔑 Key Takeaway

This week's data reveals the profound psychological impact of trade tensions, creating a market paradox where actual inflation is cooling while inflation fears are skyrocketing to 1980s levels. The explosive disconnect between sentiment (plunging to 50.8) and forward inflation expectations (surging to 6.7%) demonstrates how uncertainty reframes economic data, transforming what should be good news into warning signals.

Supply chains have already begun adapting to the new reality, with semiconductor stocks up 4.33% and hardware companies scrambling to deliver products before tariffs hit—pushing PC shipments to their fastest growth since the pandemic. Meanwhile, traditional market relationships are breaking down as Treasury yields spike alongside safe-haven currencies like the yen, suggesting investors are fundamentally reassessing risk in a potential trade war environment where even defensive assets need a second look.

S&P 500 Tumbles 13.7% as Trump Tariffs Shock Markets

Mateo — Sun, 06 Apr 2025 13:27:48 GMT

Global stocks plunged this week, with the S&P 500 posting a 13.7% loss, its worst weekly performance in over five years. This sharp selloff, triggered by the Trump administration's announcement of harsher-than-expected tariffs, sent the Russell 2000 Index tumbling to levels 30% below its all-time high. As countries including China and Japan quickly announced retaliatory measures, investors fled to safe-haven assets, pushing the 10-year Treasury yield below 4% for the first time since October amid growing expectations for multiple Federal Reserve rate cuts in 2025.

⏱️ Global Markets in 10 Seconds:

🇺🇸 S&P 500 -13.7% worst weekly drop in five years 📉
🇪🇺 Inflation falls to 2.2% as ECB weighs April cut 🎯
🇨🇳 Manufacturing PMI 50.5 amid retaliatory tariffs ⚠️
🇯🇵 Nikkei down 9% on 24% US tariff announcement 📉
🇨🇦 Employment falls by 33,000 first decline since 2022 💼

🔍 The Big Picture

The global economy faces its biggest test since the pandemic as new tariffs threaten to disrupt trade flows, increase inflation pressures, and potentially trigger a recession. Central banks that were preparing for a gradual easing cycle now face a complex policy dilemma as slowing growth collides with renewed price pressures. Markets have quickly recalibrated expectations, with investors fleeing to safe havens amid heightened uncertainty about global trade relationships.

United States: The 13.7% drop in the S&P 500 tells only part of the story - the real concern lies in the manufacturing PMI falling back into contraction at 49 while price pressures soared to 69.4, the highest since 2022. This toxic combination of weakening activity and rising inflation creates a nightmare scenario for the Fed, which must now weigh its mandate amid conflicting signals from the surprisingly strong jobs report showing 228,000 new positions in March.
International: Europe's remarkably low 2.2% inflation rate and record-low 6.1% unemployment would normally give the ECB confidence to cut rates, but policymakers are now considering pausing their easing cycle due to tariff uncertainties. The ECB's Christine Lagarde emphasized there's "still a bit of work to do" to reach the 2% inflation target, highlighting how quickly the global trade landscape has complicated monetary policy decisions worldwide.
Emerging Markets: China's resilient manufacturing PMI of 50.5 stands in stark contrast to its aggressive retaliatory response to US tariffs, including a matching 34% duty on American imports and targeted restrictions on rare earths and other strategic goods. The rapid escalation suggests China is preparing for a prolonged trade conflict that could reduce its GDP by 1-2% annually, though Beijing appears ready to deploy fiscal stimulus to offset these headwinds.

💼 Market Indicators

SPY Performance

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Performance and Valuations by Region

Source: MSCI

Momentum performance by Style

Source: MSCI

S&P 500 Earnings Per Share

Source: Yardeni Research

🗺️ Around the World in Detail

🇺🇸 United States: Trade Shock Tremors

Manufacturing PMI fell to 49 in March, the first contraction in three months. The tariff impact is already visible in the price index jumping to 69.4, the highest since 2022.
Services PMI dropped to 50.8 from 53.5, barely hanging in expansion territory. Businesses are reporting "significant cost increases due to tariff activity," suggesting inflation pressures could build quickly.
The economy added 228,000 jobs in March, significantly beating expectations of 135K. This labor market resilience contrasts sharply with the manufacturing weakness, complicating the Fed's potential response to tariff pressures.
Treasury yields plummeted with the 10-year falling below 4% for the first time since October as investors sought safety. Markets are now betting the Fed will be forced to cut rates more aggressively to counter growth concerns.

🌐 International Markets: Policy Dilemmas Intensify

Canada 🇨🇦

Employment fell by 33,000 in March, the first decline since January 2022, with the loss of 62,000 full-time jobs. This unexpected weakness could push the Bank of Canada toward more aggressive rate cuts.
Manufacturing PMI sank to 46.3, with firms noting clients have adopted a cautious approach due to uncertainty over US-Canada tariffs.

Europe 🇪🇺

Inflation eased to 2.2% in March, the lowest since November 2024, while core inflation fell to 2.4%, its lowest since January 2022. This would typically reinforce rate cut expectations.
The unemployment rate hit a fresh record low of 6.1% in February, highlighting the region's tight labor market despite slowing growth.
ECB policymakers are now considering pausing their rate cut plans given the pronounced uncertainty from US trade policies, with Bloomberg reporting hawks are gaining influence.

UK 🇬🇧

House price growth was flat in March, ending seven consecutive months of gains as buyers reacted to upcoming transaction tax increases.
Mortgage approvals fell to 65,481 in February, the lowest since August, signaling further cooling in the UK housing market.

Japan 🇯🇵

The Nikkei 225 plunged 9% for the week as investors reacted to the surprise 24% US tariff announcement targeting Japanese goods.
The yen strengthened to around 146 against the dollar as safe-haven flows increased, further pressuring Japan's export-heavy industries.
Market expectations for Bank of Japan rate hikes have diminished as officials assess both direct and indirect impacts of the US tariffs.

🌏 Emerging Markets: Diverging Responses

China 🇨🇳

Beijing announced a matching 34% tariff on all US imports starting April 10, along with restrictions on rare earth exports and other retaliatory measures.
Manufacturing PMI rose to 50.5 in March, the highest in a year, suggesting domestic stimulus measures were gaining traction before the trade war escalation.

South Korea 🇰🇷

Manufacturing PMI declined to 49.1 in March, the second consecutive month of contraction as domestic demand stagnated.
Inflation ticked up to 2.1%, slightly exceeding expectations as the Bank of Korea has cut rates by 75 basis points in the current easing cycle.

Taiwan 🇹🇼

Manufacturing PMI dropped sharply to 49.8 in March from 51.5, marking the first contraction in a year as global trade fears increased.
Companies continued cutting staff and adopted a more cautious approach to inventory management, though business confidence remains high for future output.

🔑 Key Takeaway

This week's market upheaval perfectly illustrates why portfolio diversification isn't just investment theory. While the S&P 500 crashed 13.7% and the Russell 2000 plunged 30% from its peak, Treasury yields dropped below 4% as bonds rallied during the equity sell-off. This negative correlation between asset classes—the cornerstone of modern portfolio theory—demonstrated its value in real-time during a crisis scenario. Think of diversification as financial insurance: you don't appreciate its value until your house is on fire, and this week, several market houses were definitely ablaze.

The dramatic divergence between regions further reinforces the case for geographic diversification. While US markets suffered their worst week in five years, China's manufacturing PMI actually strengthened to 50.5, showing expansion despite broader concerns. This isn't just about reducing risk—it's about capturing opportunity. A well-constructed portfolio acknowledges that we can't predict which asset class or region will outperform next, especially during policy shocks like tariff announcements. Just as you wouldn't put all your eggs in one basket when crossing a rocky stream, investors navigating today's turbulent markets need exposure across asset classes, geographies, and sectors to weather storms while positioning for the eventual recovery.

European Markets Thrive at 10.8% as Tech Drags S&P Down

Mateo — Sun, 23 Mar 2025 14:00:41 GMT

European equities have surged 10.8% year-to-date in local currency terms, while the S&P 500 has retreated 3.9% - creating a remarkable 14.7 percentage point performance gap between the regions. This divergence, fueled by defense sector strength and ECB rate cut expectations, represents one of the most significant regional rotations since the post-pandemic recovery. As U.S. markets continue to be weighed down by tech underperformance and lofty valuations, European stocks are benefiting from both a valuation advantage and sector composition that's well-positioned for the current macroeconomic environment.

⏱️ Global Markets in 10 Seconds:

🇺🇸 Fed holds at 4.25%-4.5% amid "increased uncertainty" ⚠️
🇪🇺 European stocks +10.8% YTD outperforming S&P by 14.7 points 📈
🇯🇵 BoJ remains cautious at 0.5% as inflation eases to 3.7% 🏦
🇨🇳 Unemployment rises to 5.4% highest in two years 💼
🇬🇧 BoE votes 8-1 to maintain 4.5% rate despite inflation concerns 🎯

🔍 The Big Picture

The financial markets are giving us a tale of regional divergence, with European stocks dramatically outperforming their American counterparts. This rotation away from U.S. dominance reflects shifting investor priorities from growth to value, changing central bank expectations, and sector-specific advantages that are reshaping the global investment landscape.

United States: The Fed's decision to hold rates at 4.25%-4.5% while projecting only 50 basis points of cuts for 2025 highlights their cautious stance despite acknowledging "increased uncertainty." What's particularly telling is their simultaneous downward revision of GDP growth (to 1.7% from 2.1%) and upward revision of inflation forecasts (to 2.7% from 2.5%) – signaling the sticky inflation problem isn't going away easily, even as growth moderates.
International: European equities' stunning 10.8% YTD gain versus the S&P 500's 3.9% decline represents one of the most significant regional rotations we've seen in years. Defense stocks are the unsung heroes here – strip them out (as Mathieu Savary's analysis shows) and Europe's outperformance narrows considerably. This sector advantage, combined with relative undervaluation (UK stocks trading at nearly a 50% discount to the S&P) creates a compelling value proposition that's becoming harder for global investors to ignore.
Emerging Markets: China's rise in unemployment to 5.4% (a two-year high) tells us that despite better-than-expected retail sales growth of 4.0%, structural challenges persist beneath the surface. The property sector remains a significant drag with development investment sinking 9.8% in the first two months of 2025, suggesting that even as consumption improves, the economy's foundation still has serious cracks that monetary easing alone may struggle to repair.

💼 Market Indicators

SPY Performance

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Performance and Valuations by Region

Source: MSCI

Momentum performance by Style

Source: MSCI

S&P 500 Earnings Per Share

Source: Yardeni Research

🗺️ Around the World in Detail

🇺🇸 United States: Mixed Signals Ahead

Fed maintains caution: The central bank kept rates steady at 4.25%-4.5% and still projects just 50 basis points of cuts in 2025, despite acknowledging "uncertainty around the economic outlook has increased." Think of this as your cautious friend who keeps one foot on the brake even when the road looks clear ahead.
Retail disappointment: February's retail sales crawled up just 0.2%, well below the expected 0.7% rise and following January's steep 1.2% decline. The consumer engine that powers nearly 70% of the US economy might be running on fumes, though the control group sales (the part that feeds directly into GDP) jumped a surprising 1%, giving economists something to chew on.
Housing silver lining: Existing home sales rose 4.2% in February while housing starts jumped 11.2% to an annual rate of 1.5 million. Like finding unexpected growth in your garden after a long winter, the housing market is showing signs of life despite high mortgage rates, largely thanks to increased supply.
Value's winning streak: Value stocks have outperformed growth for five consecutive weeks, racking up an impressive 897 basis point advantage year-to-date. This rotation is like watching a steady marathoner finally overtake the flashy sprinter who's been hogging the spotlight.

🌐 International Markets: Europe's Surprising Strength

Canada 🇨🇦

Inflation jumped dramatically to 2.6% in February from 1.9% in January, largely due to the end of GST and HST tax breaks. Like removing a bandage, this tax credit expiration exposed the underlying inflation pressure that was there all along.
Core inflation rose for the fourth consecutive month to 2.7%, putting Canada's central bank in a tricky position after its recent dovish pivot. The Bank of Canada might need to reconsider its rate-cutting path if this trend continues.

Europe 🇪🇺

European equities have delivered a stunning 10.8% YTD return while the S&P 500 has fallen 3.9%, creating a remarkable 14.7 percentage point performance gap. This isn't just a brief moment in the sun – it's a fundamental shift that's catching many global investors by surprise.
The defense sector is Europe's secret weapon, with companies like Rheinmetall seeing substantial gains amid increased military spending. As Mathieu Savary's (BCA Research) analysis shows, if you strip out aerospace and defense stocks, Europe's outperformance narrows considerably.

UK 🇬🇧

The Bank of England held rates at 4.5% with a surprisingly hawkish 8-1 vote, when markets had expected more members to favor cuts. This cautious stance reflects ongoing concerns about sticky inflation, particularly in services.
Unemployment remained steady at 4.4%, with employment increasing by 144,000 to 33.92 million, primarily driven by growth in full-time positions. The UK labor market continues to show resilience despite economic headwinds.

Japan 🇯🇵

The Bank of Japan kept its short-term policy rate unchanged at 0.5%, taking a wait-and-see approach amid rising global economic risks. Unlike its Western counterparts, the BoJ is still in the early stages of normalizing rates after decades of ultra-loose policy.
Inflation eased to 3.7% in February from January's 4.0% two-year high, with core inflation dropping to 3.0%. This gives the BoJ breathing room to move gradually on further rate hikes.

🌏 Emerging Markets: Contradictory Signals

China 🇨🇳

Retail sales rose 4.0% year-over-year in January-February, the strongest increase since October, suggesting consumer spending is holding up better than expected. This is like finding water in a desert – a welcome sign amid challenging economic conditions.
The urban unemployment rate climbed to 5.4%, the highest level in two years, while property development investment sank 9.8%. These structural challenges are the equivalent of termites in the foundation – not immediately visible but potentially destabilizing if left unaddressed.

Taiwan 🇹🇼

Taiwan's central bank maintained its key discount rate at 2%, reflecting concerns about US trade policies and their potential impact on Taiwan's export-driven economy. Like a smaller boat in choppy waters, Taiwan must navigate carefully between major economic powers.
The central bank slightly lowered its 2025 economic growth forecast to a still-impressive 3.05%, while expecting inflation to moderate to 1.89%. Taiwan continues to outperform many of its regional peers despite heightened geopolitical tensions.

🔑 Key Takeaway

This week's data illuminates a profound regional divergence in equity markets, with European stocks outperforming their American counterparts by a staggering 14.7 percentage points year-to-date. This rotation isn't merely a statistical curiosity – it reflects a fundamental shift in market dynamics where European value-oriented sectors (particularly defense) are thriving while the tech-heavy U.S. market struggles under the weight of lofty valuations and reduced growth expectations.

The Fed's simultaneous downward revision of GDP forecasts (to 1.7% from 2.1%) and upward revision of inflation expectations (to 2.7% from 2.5%) underscores the challenging environment for growth stocks, especially as central banks diverge in their policy approaches. Savary's research highlighting the outsized contribution of defense stocks to Europe's performance reveals a crucial insight: sector composition, not just regional economics, is driving this divergence – a reminder that in today's market, understanding what's under the hood matters far more than the brand name on the vehicle.

Stocks Fall for Fourth Straight Week Amid 11% Consumer Sentiment Plunge

Mateo — Sun, 16 Mar 2025 16:54:02 GMT

U.S. stocks tumbled for the fourth consecutive week, with the S&P 500 declining 2.3%. This selloff, fueled by escalating trade tensions and an 11% drop in consumer sentiment, has pushed the S&P 500 from a lofty 22.5x forward earnings multiple down to 20x—right at its five-year average but still well above long-term norms. While February's inflation data offered a glimmer of hope with core CPI easing to 3.1%, investors remain fixated on the potential stagflation risks as tariff announcements continue to rattle markets and consumers increasingly brace for higher prices ahead.

The market's reaction mirrors what often happens when sentiment deteriorates faster than fundamentals—investors sell first and ask questions later. This pullback doesn't just reflect shifting asset prices but signals something potentially more concerning: consumers, who drive roughly 70% of economic activity, are rapidly losing confidence despite a labor market that continues to show surprising resilience with job openings increasing by 232,000 in January.

⏱️ Global Markets in 10 Seconds:

🇺🇸 Consumer sentiment falls 11% to 57.9, third straight monthly decline ⚠️
🇨🇳 CPI contracts 0.7% in February, deflation concerns intensify 📉
🇯🇵 Wage negotiations yield largest pay deal in three decades 💰
🇬🇧 Economy contracts 0.1% in January, production sector falls 0.9% 🏭
🇨🇦 BoC cuts rates to 2.75% amid US trade conflict concerns 🏦

🔍 The Big Picture

Markets are functioning like a nervous driver approaching a foggy intersection – slowing down dramatically despite green lights in some directions. The disconnect between improving inflation data and deteriorating sentiment highlights how policy uncertainty can override economic fundamentals. This growing divergence between what the data says and what market participants believe is creating both risks and opportunities across global markets.

United States: February's core inflation dropped to 3.1% (lowest since April 2021) while the University of Michigan's consumer inflation expectations jumped to 4.9% (highest since November 2022). It's like watching one person put out a fire while another stockpiles matches and gasoline – and markets are struggling to determine which view will prevail as tariff threats cast long shadows over future price stability.
International: The UK's 0.1% GDP contraction shows how fragile the recovery remains, with manufacturing taking the biggest hit (-1.1%) as global trade uncertainties compound domestic challenges. Meanwhile, Japan secured its largest wage deal in three decades during spring negotiations, potentially providing the sustained wage growth that the BOJ has been desperately waiting for before committing to further rate hikes.
Emerging Markets: China continues battling deflation with consumer prices falling 0.7% year-over-year while India's inflation plummeted to 3.62%, well below the 4% target and expectations. This creates a fascinating policy divergence – China preparing stimulus announcements to boost consumption while India enjoys the flexibility to continue its easing cycle from a position of unexpected price stability.

💼 Market Indicators

SPY Performance

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Performance and Valuations by Region

Source: MSCI

Momentum performance by Style

Source: MSCI

S&P 500 Earnings Per Share

Source: Yardeni Research

🗺️ Around the World in Detail

🇺🇸 United States: Sentiment vs Reality

Core inflation eased to 3.1% in February, its lowest level since April 2021 and below consensus expectations. Think of this as your fever finally breaking after a long illness – encouraging but not quite back to normal yet.
Consumer sentiment plunged 11% to 57.9 in March, now down 22% from December. This isn't just a minor mood shift – it's like watching restaurant patrons suddenly rush for the exits while the kitchen is still sending out perfectly good food.
Job openings increased by 232,000 to 7.74 million in January, exceeding expectations and showing particular strength in retail trade (+143,000) and finance (+77,000). The labor market resembles a sturdy foundation still supporting a house while the homeowners are frantically discussing whether to sell.

🌐 International Markets: Mixed Policy Paths

Canada 🇨🇦

The Bank of Canada cut rates by 25bps to 2.75%, marking 225bps in cuts since starting its easing cycle last June. Canada's central bank is navigating monetary policy like a kayaker paddling ahead of approaching rapids – moving decisively while eyeing the turbulence coming from its southern neighbor.

Europe 🇪🇺

ECB officials expressed doubts about an April rate cut just days after lowering rates for a sixth time since June. ECB President Christine Lagarde cited "exceptionally high uncertainty" that could make it harder to meet the 2% inflation target. Europe's central bankers appear increasingly divided – like a kitchen with too many chefs arguing over whether the soup needs more salt.

UK 🇬🇧

The British economy contracted 0.1% in January after growing 0.4% in December, with production falling 0.9% and manufacturing down 1.1%. The UK's manufacturing sector is struggling to find its footing – like someone trying to climb a ladder during an earthquake.

Japan 🇯🇵

Spring wage negotiations secured the largest pay deal in more than three decades, marking the third straight year of significant wage increases. This wage growth momentum is exactly what the BOJ has been waiting for – like a farmer finally seeing rain after years of drought.
Japan's GDP grew by 0.6% in Q4 2024, above the previous quarter's 0.4% and marking the third consecutive quarter of growth. The Japanese economy is gradually finding its rhythm – slow but increasingly steady, like a marathoner who starts conservatively but maintains pace while others fade.

🌏 Emerging Markets: Divergent Strategies

China 🇨🇳

Consumer prices fell 0.7% year-over-year in February, while core CPI declined 0.1% – its first decrease since 2021. China's deflation problem resembles a bicycle that's losing momentum – the longer it goes on, the harder it becomes to keep balance.
Officials announced a press conference on Monday focusing on boosting consumption, sparking a rally that pushed the CSI 300 Index to its highest level since mid-December. Markets are responding like parched plants to the mere forecast of rain – showing just how desperately investors want policy action.
Retail sales rose 3.7% year-on-year in December, accelerating from November's 3.0% and exceeding expectations. The consumer sector shows glimmers of life, but like a patient with occasional good days amid a chronic condition, sustainability remains the bigger question.

South Korea 🇰🇷

Unemployment rate dropped to 2.7% in February, its second consecutive monthly decline from 3.7% in December. South Korea's labor market recovery suggests the economy is regaining its strength after last year's brief disruption – like a boxer quickly getting back to form after a stumble.

India 🇮🇳

Annual inflation rate dropped dramatically to 3.62% in February, well below the 4% expectation and marking the first time in six months inflation fell below the RBI's 4% mid-point target. India's disinflation streak is arriving like an unexpected inheritance – a pleasant surprise that creates new opportunities.

🔑 Key Takeaway

This week's data reveals a precarious disconnect between cooling inflation and deteriorating sentiment, creating one of the market's most challenging valuation environments. The S&P 500's P/E compression from 22.5x to 20x forward earnings reflects not just price declines but growing concerns about future earnings revisions – a critical dynamic as analysts maintain optimistic projections of 10-12.5% growth through 2027 despite mounting headwinds. Consumer inflation expectations (4.9%) now dramatically outpace actual core inflation (3.1%), indicating psychology has overtaken fundamentals in driving market behavior. Meanwhile, central banks face divergent challenges: some cutting rates aggressively (Canada), others signaling caution (ECB), and some preparing for tightening (Japan) – creating a fragmented global policy landscape that compounds the uncertainty stemming from escalating trade tensions.

S&P 500 Plunges 3.2% as Tariff Anxiety Rocks Markets

Mateo — Sun, 09 Mar 2025 23:26:46 GMT

U.S. stocks tumbled this week, with the S&P 500 shedding 3.2% in its worst performance since early September as uncertainty surrounding Trump's trade policies dominated sentiment. This selloff, fueled by the implementation deadline for 25% tariffs on Canadian and Mexican imports alongside an additional 10% on Chinese goods, came despite later exemptions and delays that failed to calm investor nerves. As manufacturing activity slowed to just 50.3 and new orders contracted sharply to 48.6%, the simultaneous spike in price pressures to 62.4% underscored the complex challenges now facing both corporate earnings and Fed policy in the months ahead.

⏱️ Global Markets in 10 Seconds:

🇺🇸 S&P 500 -3.2% worst week since September amid tariff fears 📉
🇨🇦 Manufacturing PMI 47.8 first contraction since August on trade anxiety 🏭
🇪🇺 ECB cuts rates to 2.5% as growth forecast drops to 0.9% 🏦
🇯🇵 10-year bond yield 1.53% highest since 2008 as deflation era ends 📈
🇨🇳 Fiscal deficit 4% of GDP highest since 1994 to counter trade headwinds 💰

🔍 The Big Picture

This week's market narrative centered around escalating trade tensions and their ripple effects across global economies. The deadline for Trump's tariff implementation rattled investors despite last-minute exemptions, while central banks navigated the delicate balance between inflation concerns and slowing growth trajectories.

United States: Talk about a split economy – services activity accelerated to 53.5 while manufacturing barely hung on at 50.3 with new orders plunging into contraction territory at 48.6. This divergence, combined with the jump in price pressures to 62.4%, suggests we're seeing the first economic casualties of the new administration's tariff policy, with the Fed's Powell now emphasizing they're in no rush to cut rates further amid this "phenomenal uncertainty."
International: The ECB's decision to cut rates to 2.5% while simultaneously slashing their 2025 growth forecast to just 0.9% reveals the precarious position Europe finds itself in. Meanwhile, Canada's manufacturing PMI collapse to 47.8 represents the sharpest contraction since December 2023, driven directly by cross-border trade anxiety. Japan's story adds another layer of complexity with 10-year government bond yields reaching 1.53% – their highest since 2008 – as the country prepares to officially declare the end of its decades-long deflationary era.
Emerging Markets: China's approach to countering trade headwinds shows a government willing to pull out all the stops, setting their fiscal deficit target at 4% of GDP (highest since 1994) while maintaining an ambitious 5% growth goal. Contrast this with Taiwan, where inflation eased considerably to 1.58% from 2.66%, creating potential monetary policy flexibility that China simply doesn't have. South Korea sits somewhere in between with inflation at 2%, allowing their central bank to cut rates while maintaining relative price stability – essentially giving us three distinct EM playbooks for navigating this increasingly turbulent global environment.

💼 Market Indicators

SPY Performance

Created with TradingView

Performance and Valuations by Region

Source: MSCI

Momentum performance by Style

Source: MSCI

S&P 500 Earnings Per Share

Source: Yardeni Research

🗺️ Around the World in Detail

🇺🇸 United States: Sector Divergence

Manufacturing PMI slipped to 50.3 in February, barely hanging onto expansion territory while new orders plunged into contraction at 48.6. This is our first real economic indicator showing the impact of tariff policy uncertainty, with ISM specifically citing "the first operational shock of the new administration's tariff policy."
Services PMI surprisingly strengthened to 53.5, marking the third consecutive month with all four sub-indexes in expansion. Looks like the American consumer isn't too concerned about trade wars yet, though the ISM chair noted "anxiety continues" among survey respondents regarding tariff impacts.
Job growth increased to 151K in February from January's downwardly revised 125K, still missing expectations but showing labor market resilience. The interesting wrinkle? Federal government jobs declined by 10K, giving us an early taste of the promised spending cuts.
Unemployment ticked up to 4.1% while the U-6 underemployment rate jumped more significantly from 7.5% to 8.0%. That half-point jump suggests the headline numbers might be masking some deterioration beneath the surface.

🌐 International Markets: Policy Pivot

Canada 🇨🇦

Manufacturing PMI collapsed to 47.8 from 51.6, the sharpest contraction since December 2023. The culprit? Uncertainty around cross-border trade policy, with firms reporting clients have adopted a "cautious approach" – corporate speak for "we're terrified about tariffs."
Services PMI plummeted to 46.6, marking the third straight month of contraction at an accelerating pace. The synchronized decline across both sectors reveals just how dependent Canada's economy is on its southern neighbor, with businesses already pulling back before a single tariff has actually been collected.

Europe 🇪🇺

ECB cut rates by 25 basis points to 2.5%, describing policy as now "meaningfully less restrictive." When Christine Lagarde describes the current environment as having "phenomenal uncertainty," you know central bankers are sweating.
Growth forecast for 2025 was slashed to just 0.9%, reflecting the ECB's concern that trade uncertainty is already impacting investment and exports. The eurozone is caught in the crossfire of a trade war it didn't start but can't escape.

Japan 🇯🇵

10-year government bond yields surged to 1.53%, their highest level since 2008, as the government prepares to officially declare the end of deflation. After decades of fighting falling prices, Japan is about to close that chapter – a genuine economic regime change.
Unemployment rate edged up to 2.5% in January, slightly above expectations, while the jobs-to-applications ratio improved to 1.26 – its highest in nine months. This mixed labor picture complicates the Bank of Japan's rate path as they navigate the post-deflation era.

🌏 Emerging Markets: Divergent Strategies

China 🇨🇳

Fiscal deficit target was set at 4% of GDP, the highest since 1994, signaling Beijing's willingness to spend heavily to counter trade headwinds. When China breaks its longstanding 3% deficit cap, you know they're getting serious about stimulus.
Annual inflation climbed to 0.5% in January from 0.1% in December, suggesting recent stimulus measures might be starting to gain traction. Food prices finally rebounding after a prolonged slump offers a glimmer of hope for domestic consumption.
Growth target remained unchanged at 5% for the third straight year, a sign of confidence amid mounting challenges. The question remains: can China hit this ambitious target with tariffs rising and a property sector still in the doldrums?

South Korea 🇰🇷

Inflation rate eased to 2% in February from January's six-month high of 2.2%, creating space for monetary policy flexibility. This moderation follows the Bank of Korea's first rate cut, suggesting their policy pivot was well-timed.
The central bank maintained its inflation forecast at 1.9% for both 2025 and 2026, projecting confidence in their disinflationary trajectory.

Taiwan 🇹🇼

Annual inflation rate dropped dramatically to 1.58% in February from 2.66% in January, marking the lowest reading since March 2021. This sharp deceleration creates policy flexibility just when Taiwan might need it most given cross-strait tensions.
Food inflation edged higher to 3.98% from 3.72%, creating a potential pressure point for households despite the overall disinflationary trend. This divergence between headline and food inflation presents a classic policy dilemma for Taiwanese authorities balancing growth and stability.

🔑 Key Takeaway

This week's data spotlights the immediate economic shockwaves from Trump's tariff policy, creating a market environment defined by uncertainty across regions and sectors. The stark manufacturing/services divide in the U.S. (50.3 vs 53.5 PMI) mirrors the broader global pattern where trade-exposed sectors are already showing strain despite minimal actual tariff implementation to date. Canada's synchronized manufacturing and services contraction (47.8 and 46.6 respectively) serves as the canary in the coal mine, showing how rapidly trade uncertainty can infect broader economic activity. Meanwhile, central banks like the ECB find themselves navigating what Lagarde aptly called "phenomenal uncertainty," cutting rates to 2.5% while slashing growth forecasts.

US Markets Slide as Consumer Inflation Expectations Hit 6%

Mateo — Sun, 02 Mar 2025 17:08:56 GMT

Stock markets retreated this week with the S&P 500 falling 1.2%. This decline, in part driven by The Conference Board's Consumer Confidence Index registering its largest monthly drop since August 2021 (7 points to 98.3), came as inflation expectations surged from 5.2% to 6.0%. As the Expectations Index fell below the critical 80-point threshold that typically signals a recession ahead, investors are increasingly concerned that persistent inflation combined with new tariff threats could significantly impact both consumer spending and corporate earnings in the coming quarters.

⏱️ Global Markets in 10 Seconds:

🇺🇸 Consumer confidence drops 7 points to 98.3, worst since August 2021 ⚠️
🇨🇦 GDP grows 2.6% in Q4, beating expectations 🚀
🇪🇺 German economy -0.2% in Q4, France contracts -0.1% 🏭
🇨🇳 Manufacturing PMI rises to 50.2 as stimulus takes effect 📈
🇯🇵 Retail sales +3.9% fastest growth since February 2024 💼

🔍 The Big Picture

This week revealed a clear disconnect between deteriorating consumer sentiment and resilient economic output across major economies. Tariff concerns and persistent inflation expectations overshadowed otherwise steady growth figures, creating significant market volatility. The contrast between North American economic resilience and European contraction highlights diverging regional paths heading into spring.

United States: Consumer confidence dropped by a steep 7 points to 98.3 in February, the largest monthly decline since August 2021, while inflation expectations surged to 6%. Despite this pessimism, the economy still grew at a steady 2.3% in Q4, with consumer spending increasing at a healthy 4.2% - creating a puzzling gap between what consumers say versus what they actually do.
International: Europe's economic struggles continue with Germany contracting 0.2% and France shrinking 0.1% in Q4, highlighting the region's persistent growth challenges. Meanwhile, Japan showed unexpected consumer resilience with retail sales jumping 3.9% year-over-year in January, its fastest growth in nearly a year, suggesting stronger domestic demand despite global uncertainties.
Emerging Markets: China's manufacturing sector returned to expansion territory with February's PMI rising to 50.2, signaling that stimulus measures are finally gaining traction. In contrast, India's economy accelerated to 6.2% growth in Q4, maintaining its position as the fastest-growing major economy while demonstrating remarkable resilience to global headwinds affecting other emerging markets.

⭐️ Research of the week:

The Market's Most Important 4% and Today's Magnificent 7

Arizona State professor Hendrik Bessembinder's seminal research on stock market wealth creation provides crucial context for understanding the current market dominance of the Magnificent 7 stocks. His findings challenge the widespread assumption that most individual stocks outperform Treasury bills over their lifetimes, when in fact less than half actually do, mirroring today's top-heavy market structure.

Why This Research Is Critical For Understanding Today's Market

Bessembinder's methodology reveals that just 4% of companies account for all net wealth creation in the US stock market since 1926, a concentration pattern that continues with the Magnificent 7 (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla) now representing over 33% of the S&P 500.
The positive skewness in historical returns helps explain the current market dynamic where the Magnificent 7 have contributed approximately 50% of the S&P 500's returns in 2024.
Just as Bessembinder identified Apple, Microsoft, and Exxon Mobil among the five greatest wealth creators in market history, we're witnessing the same concentration effect in real-time, with today's tech giants accounting for a disproportionate share of market capitalization growth

The Supporting Evidence Connects Past and Present

The historical pattern of five companies accounting for 10% of all wealth creation since 1926 is echoed by recent performance where Nvidia alone contributed over 20% of the S&P 500's returns in 2024.
Bessembinder's research showed most individual stocks (57.88%) destroy shareholder value over their lifetimes, which explains why equal-weighted indexes have significantly underperformed cap-weighted indexes during the Magnificent 7's rise
The concentration in the Magnificent 7 represents the continuation of the market's winner-take-most dynamics, with network effects and scale advantages in technology creating the same wealth concentration Bessembinder documented throughout market history

Bottom Line

Bessembinder's work suggests that the current concentration in the Magnificent 7 is not an anomaly but a continuation of the market's fundamental wealth creation pattern. The challenge for investors isn't just whether these seven stocks are overvalued, but whether they can identify which companies among thousands will join the crucial 4% that will generate the majority of future market returns.

Source: Do Stocks Outperform Treasury Bills?

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Performance and Valuations by Region

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🇺🇸 United States: Consumer Confidence Crumbles

The Conference Board's Consumer Confidence Index dropped a steep 7 points to 98.3 in February, marking the largest monthly decline since August 2021 and clearly signaling growing pessimism about the economic outlook.
Consumer inflation expectations surged from 5.2% to 6% in February, suggesting households are increasingly concerned about persistent price pressures despite the Federal Reserve's aggressive rate hikes over the past two years.
Despite worsening sentiment, actual economic data shows resilience with Q4 2024 GDP holding steady at 2.3% and consumer spending increasing at a robust 4.2% during the period – highlighting an intriguing disconnect between perception and behavior.

🌐 International Markets: Mixed Growth, Policy Uncertainty

Canada 🇨🇦

GDP expanded a stronger-than-expected 2.6% (annualized) in Q4 2024, the strongest growth since Q1 2023, driven by a 1.4% increase in household spending despite persistent inflation concerns.
The economic strength was broad-based with rising exports (1.8%) and business investment in non-residential structures (0.7%), suggesting a more resilient economy than many analysts had projected.

Europe 🇪🇺

Germany's economy contracted 0.2% in Q4 2024 while France's shrank 0.1%, confirming the economic struggles of the eurozone's largest economies despite the ECB's initial rate cuts.
Inflation readings across Europe painted a mixed picture, with German inflation holding at 2.8% (above expectations), while France's fell to a four-year low of 0.9%, creating policy challenges for the ECB.
ECB minutes revealed ongoing inflation concerns with some policymakers arguing for "greater caution" on further rate cuts despite weakening economic performance.

United Kingdom 🇬🇧

House prices rose by a stronger-than-expected 0.4% in January, fueled by falling borrowing costs and buyers rushing to finalize deals before a tax increase on some properties at the end of March.

Japan 🇯🇵

Retail sales jumped 3.9% year-over-year in January, the fastest growth since February 2024, suggesting Japanese consumer spending remains resilient despite global uncertainties.
The Japanese yen logged significant gains in February on expectations the Bank of Japan will raise interest rates again this year as headline inflation remains above target and wage growth remains strong.

🌏 Emerging Markets: Divergent Trajectories

China 🇨🇳

Official NBS Manufacturing PMI climbed back into expansion territory at 50.2 in February from 49.1 in January, as companies resumed activities after the Lunar New Year break and various stimulus measures bolstered the economy.
Markets remain focused on China's upcoming "Two Sessions" political event starting March 4-5, where Beijing is expected to unveil a GDP growth target of "around 5%" for the third straight year, along with a record high fiscal deficit ratio of 4%.

India 🇮🇳

GDP grew 6.2% year-over-year in Q4 2024, accelerating from 5.6% in the previous quarter, underscoring India's position as the fastest-growing major economy despite global headwinds.
Growth was boosted by stronger private consumption (6.9% vs 5.9%) and public expenditures (8.3% vs 3.8%), while exports surged 10.4% – demonstrating the economy's broad-based momentum.

South Korea 🇰🇷

The Bank of Korea cut its base rate by 25 basis points to 2.75% in February, marking the third reduction in four months as policymakers revised their growth forecast downward to 1.5% for 2025.
The central bank maintained its inflation forecast at 1.9%, suggesting the rate-cutting cycle will remain measured despite the growth downgrade.

Taiwan 🇹🇼

Taiwan's Q4 2024 GDP growth was revised sharply upward to 2.9% from an initial estimate of 1.84%, driven by a remarkable 19.2% surge in gross capital formation and strong export growth of 8.9%.
Authorities have cut the 2025 GDP growth forecast to 3.14% from 3.29% amid concerns over U.S. tariff policies, highlighting the export-dependent economy's vulnerability to trade tensions.

🔑 Key Takeaway

This week's data highlights a fundamental disconnect between deteriorating consumer sentiment and the market's powerful concentration dynamics. The steep 7-point plunge in Consumer Confidence (to 98.3) – the worst since August 2021 – contrasts sharply with continued economic resilience shown in Canada's surprising 2.6% GDP growth and U.S. consumer spending rising at 4.2% in Q4. This divergence between what consumers say versus what they do occurs against the backdrop of Bessembinder's landmark research showing just 4% of stocks drive all market wealth creation – a pattern reinforced by today's Magnificent 7 stocks now representing over 33% of the S&P 500.

While inflation expectations surged to 6% and Europe's largest economies contracted (Germany -0.2%, France -0.1%), China's manufacturing returned to expansion territory and India accelerated to 6.2% growth, underscoring how radically different regional performances further complicate the global picture. The growing gap between consumer perception and spending behavior, combined with the extreme market concentration Bessembinder documented, suggests investors face a challenging environment where broad economic indicators may mask the winner-take-all reality of actual market returns.

S&P 500 Near Record as Fed Signals Higher-for-Longer

Mateo — Sun, 16 Feb 2025 17:57:22 GMT

The S&P 500 climbed 3.96% year to date, closing within 1% of its all-time high as investors digested hotter-than-expected inflation data and shifting Federal Reserve expectations. This rally, fueled by resilient corporate earnings and tempered rate-cut hopes, saw growth stocks extend their lead over value for the second time this year, while small caps struggled to keep pace. As inflation pressures persist and bond yields stay volatile, markets are recalibrating expectations for Fed policy, with rate cuts now seen as a late-2025 event rather than mid-year relief.

⏱️ Global Markets in 10 Seconds:

🇺🇸 S&P 500 nears record as rate cut bets fade 📈
🇪🇺 Eurozone GDP 0.9% as Germany contracts, UK surprises 🚀
🇯🇵 10Y JGB yield hits 1.35% on faster rate hike fears ⚠️
🇨🇳 Hang Seng +7.04% as tariff concerns ease 📊
🇮🇳 Inflation drops to 4.31%, boosting rate cut outlook 💰

🔍 The Big Picture

Markets surged this week, with the S&P 500 nearing record highs and global equities rising. However, sticky inflation and shifting rate expectations kept bond markets volatile. Investors are now recalibrating their outlooks, with the Fed and other central banks signaling caution on easing policy too soon.

United States: CPI rose 3.0% YoY, pushing Fed rate cut bets to late 2025. Meanwhile, retail sales plunged 0.9%, the worst drop since 2023, suggesting consumers are feeling the squeeze.
International: Eurozone GDP stagnated (0.0%), with Germany contracting again, while the UK surprised with 0.1% growth. The Bank of England remains cautious on rate cuts despite a softening economy.
Emerging Markets: India’s inflation dropped to 4.31%, bringing it closer to the RBI’s target, boosting rate cut hopes. Meanwhile, China’s Hang Seng soared 7.04%, as trade tensions eased, but factory deflation remains a concern.

⭐️ Research of the week:

The Power of Joint Factor Investing

Researchers Sunil Wahal and Eduardo Repetto published findings on how combining value and profitability factors can enhance portfolio outcomes. Their work challenges the common practice of treating investment factors as independent building blocks that can be simply mixed together.

Why This Analysis Matters:

The research employs portfolio-level analysis rather than individual security screening, allowing clearer visualization of tradeoffs between value and profitability characteristics
Traditional factor investing often treats value and profitability as separate components that can be independently combined, potentially missing crucial interaction effects
The study demonstrates how targeting the joint distribution of factors, rather than layering them sequentially, can meaningfully improve risk-adjusted returns while maintaining high market correlation

Key Evidence :

Over 1940-2019, portfolios tilted toward stocks ranking highly on both value and profitability metrics outperformed the market by up to 10 basis points monthly with similar volatility
The approach maintained its edge even during 2000-2019 when pure value strategies struggled, highlighting the diversification benefits of considering factor interactions
Bootstrap simulations across 1-30 year periods showed improved outcomes across multiple metrics: higher average returns, lower probability of negative returns, and better risk-adjusted performance at longer horizons

Bottom Line:

Factor investing benefits from understanding and targeting the relationships between different characteristics rather than treating them as independent components. This research highlights how careful portfolio engineering that considers factor interactions can enhance outcomes while maintaining practicality around trading costs and capacity constraints.

Source: On the Conjoint Nature of Value and Profitability

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SPY Performance

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Performance and Valuations by Region

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S&P 500 Earnings Per Share

Source: Yardeni Research

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🇺🇸 United States: Inflation Stubborn, Markets Steady

CPI rose 3.0% YoY, with core inflation unexpectedly rising to 3.3%. Monthly inflation climbed 0.5%, fueling concerns that the Fed may need to keep rates higher for longer. Markets have now pushed the first rate cut expectation to December from September.
Consumer spending fell 0.9% in January, the worst drop since March 2023, as severe weather and high borrowing costs weighed on purchases. This pullback could signal early signs of a slowing economy.
The 10-year Treasury yield spiked to 4.66% after the CPI print before easing. While equities surged, the bond market’s reaction suggests investors are reconsidering how soon the Fed can ease policy.

🌐 International Markets: Mixed Growth, Policy Uncertainty

Europe 🇪🇺

Eurozone GDP flatlined at 0.0% in Q4, with Germany shrinking by 0.2%, reinforcing its position as the weak link in the bloc. Meanwhile, Spain grew 3.5%, showing economic divergence across the region.
The ECB remains cautious about cutting rates despite economic stagnation, as employment rose for the 15th consecutive quarter, keeping wage pressures intact.
The STOXX 600 hit record highs, gaining 1.78%, as optimism over an end to the Russia-Ukraine conflict lifted sentiment.

United Kingdom 🇬🇧

The UK economy grew 0.1% in Q4, avoiding contraction. Growth was driven by services and construction, though production remains weak.
BOE Chief Economist Huw Pill warned against premature easing, but some policymakers are pushing for bigger rate cuts given slowing consumer demand.

Japan 🇯🇵

The 10-year JGB yield rose to 1.35%, its highest in nearly 15 years, as inflation concerns mount. Markets are pricing in a potential rate hike by mid-2025.
The corporate goods price index rose 4.2% YoY, higher than expected. The Bank of Japan may have to tighten policy sooner than anticipated.

🌏 Emerging Markets: Inflation Eases, Markets Rally

China 🇨🇳

The Hang Seng Index surged 7.0%, as U.S. tariff concerns eased and investors piled into AI stocks. However, factory deflation remains a headwind, with PPI falling 2.3% YoY for the 28th straight month.
Moody’s downgraded China Vanke’s credit rating, raising default concerns. Beijing is reportedly crafting a $6.8 billion rescue plan, signaling selective intervention.

India 🇮🇳

Inflation dropped to 4.31%, cooling faster than expected and nearing the RBI’s 4% target, increasing odds of rate cuts later this year.
Consumer demand remains resilient, keeping growth steady despite global economic headwinds.

South Korea 🇰🇷

The jobless rate dropped to 2.9% from 3.7%, rebounding from last year’s labor disruptions. This suggests economic stability returning after recent turmoil.

🔑 Key Takeaway

This week's data reveals a complex interplay between market optimism and persistent inflation concerns, as the S&P 500 surged toward record highs despite hotter-than-expected inflation readings. The stark contrast between strong equity performance and deteriorating retail sales highlights the delicate balance between economic resilience and consumer strain, pushing Federal Reserve rate cut expectations significantly further into the future.

The divergence between regional performances – from the Eurozone's stagnation to India's cooling inflation and China's strong equity rally – underscores the importance of geographic diversification. This week's research on joint factor investing offers particularly timely wisdom: just as value and profitability factors demonstrate enhanced returns when considered together rather than independently, today's market requires investors to evaluate seemingly contradictory signals as interconnected parts of a larger whole. This becomes especially relevant as bonds and equities send opposing signals about economic health, suggesting that successful navigation of current markets demands a sophisticated understanding of how different market factors and regional trends amplify or moderate each other's effects.

US Job Growth Slows to 143K as Tariff Fears Hit Markets

Mateo — Mon, 10 Feb 2025 00:09:36 GMT

U.S. stocks slid this week as job growth slowed to 143,000 in January, falling short of expectations and reinforcing concerns about a cooling labor market. This weakness, paired with renewed tariff threats from the White House and softer services activity, pushed investors toward Treasuries, sending yields lower across the curve. While a resilient unemployment rate at 4.0% suggests underlying stability, rising trade uncertainty and slowing consumer demand point to growing economic fragility as 2025 unfolds.

⏱️ Global Markets in 10 Seconds:

🇺🇸 Job growth slows to 143K as hiring cools, yields drop 📉
🇪🇺 Eurozone inflation rises to 2.5% while BoE cuts rates 🏦
🇨🇳 Lunar New Year spending +7% but PMI weakens ⚠️
🇨🇦 76K jobs added, unemployment dips to 6.6% 🚀
🇯🇵 Yen strengthens to 151/USD as BoJ signals more hikes 💰

🔍 The Big Picture

Markets faced shifting economic signals this week, with U.S. job growth slowing, European inflation ticking higher, and China’s recovery showing mixed signals. Trade policy uncertainty added a new layer of risk, while central banks remained divided—the Bank of England cut rates, but the Fed held steady. Investors are weighing whether these trends mark the start of a broader economic slowdown or just a temporary adjustment.

United States: 143K jobs added, missing estimates, while unemployment dipped to 4.0%. The slowdown in hiring and rising jobless claims point to a cooling labor market, reinforcing expectations for a Fed rate cut later this year. Meanwhile, Treasury yields fell as markets priced in weaker growth ahead.
International: Eurozone inflation rose to 2.5%, keeping the ECB cautious, while the Bank of England cut rates to 4.5%. Sticky core inflation (2.7%) and slow economic growth continue to challenge policymakers, as Germany’s industrial production dropped to its lowest level since 2020.
Emerging Markets: China’s Lunar New Year spending rose 7%, but manufacturing activity softened, with PMI slipping to 50.1. While consumer demand remains strong, weaker factory output and rising job losses highlight Beijing’s challenge in sustaining economic momentum.

⭐️ Research of the week:

The Profitability Edge in Value Investing

This week, we examine Robert Novy-Marx's groundbreaking 2011 research, The Other Side of Value, which challenges traditional value investing frameworks by demonstrating that gross profitability has similar predictive power for stock returns as the famous book-to-market ratio. This finding questions the common assumption that value stocks outperform primarily because they are riskier, distressed companies.

Why This Analysis Matters:

The research introduces a powerful analytical tool by focusing on gross profits-to-assets rather than bottom-line earnings, demonstrating how "cleaner" accounting measures better capture economic reality and predict future returns
It challenges the traditional dichotomy between value and growth investing by showing that profitable "growth" companies can generate superior returns despite higher valuations—contradicting classic value theory
Portfolio construction benefits significantly when combining profitability and value metrics, as these seemingly opposing factors work together to enhance risk-adjusted returns

Key Evidence :

Historical data shows that high-profitability firms outperformed low-profitability ones despite having higher valuations and larger market caps, demonstrating that the effect persists even among the most liquid stocks
A four-factor model including profitability alongside market, value, and momentum factors better explains various market anomalies, suggesting profitability captures a fundamental aspect of expected returns
The gross profitability metric predicted long-term growth in earnings, cash flows, and payouts, while combining profitability with value strategies reduced portfolio volatility despite increased exposure to risky assets

Bottom Line:

Novy-Marx's research fundamentally reshapes our understanding of value investing by revealing profitability as a crucial missing piece in factor-based investing. Rather than viewing value and growth as opposing forces, investors can enhance their process by identifying companies that are both cheap and productive, creating more resilient portfolios that capture multiple return premiums.

Source: The Other Side of Value: The Gross Profitability Premium

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SPY Performance

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Performance and Valuations by Region

Source: MSCI

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Source: MSCI

S&P 500 Earnings Per Share

Source: Yardeni Research

🗺️ Around the World in Detail

🇺🇸 United States: Cooling Jobs, Rising Uncertainty

143K jobs added in January, missing expectations of 170K. This marks a sharp slowdown from December’s 307K gain, reinforcing signs that the labor market is gradually cooling. While the unemployment rate unexpectedly dipped to 4.0%, job openings fell to a three-month low of 7.6 million, pointing to softer hiring ahead.
Manufacturing expands for the first time in over two years. The ISM Manufacturing PMI rose to 50.9, finally crossing into expansion territory after 26 straight months of contraction. However, supply chain pressures and looming tariffs remain key risks.
Treasury yields drop as markets price in rate cuts. Weak job data pushed investors toward bonds, driving yields lower across most maturities. Markets are now betting the Fed will need to ease policy sooner rather than later, with rate cut expectations pulling forward to mid-2025.

🌐 International Markets: Growth, Inflation, and Rate Cuts

Canada 🇨🇦

76K jobs added in January, triple the forecast. Full-time hiring surged, pushing unemployment down to 6.6% instead of the expected 6.8%. The strong labor market complicates the Bank of Canada’s rate cut timeline, as policymakers remain cautious about inflation risks.
Manufacturing PMI falls to 51.6, expansion slows. Export sales picked up as U.S. clients frontloaded orders ahead of potential tariffs, but overall sentiment declined, with businesses growing more cautious about trade policy uncertainty.

Europe 🇪🇺

Eurozone inflation edges up to 2.5%, pressuring the ECB. Core inflation held at 2.7%, driven by services costs, making it harder for the European Central Bank to justify rate cuts. Markets are now questioning whether the ECB will ease policy as aggressively as previously expected.
Germany’s factory orders surge 6.9%, but industrial production drops 2.4%. The split suggests volatile demand, with strong capital goods orders offset by a 10% decline in auto manufacturing.

United Kingdom 🇬🇧

The BoE’s rate cut reflects slowing growth, not easing inflation. The central bank now expects inflation to remain above target until 2027, despite weaker GDP projections. The risk? A slower policy response than markets anticipate.
FTSE 100 rises 0.31%, defying global weakness. The index outperformed amid expectations that UK borrowing costs will keep falling, supporting equities despite broader market uncertainty.

Japan 🇯🇵

Nikkei 225 falls 2.0% as yen strengthens. The yen rose to 151/USD, as the Bank of Japan signaled potential rate hikes ahead. A stronger currency weighed on export-heavy industries, particularly autos and tech.
Wage growth accelerates, supporting the BoJ’s tightening stance. December saw a sharp rise in nominal wages, boosting expectations that inflationary pressures will persist in 2025.

🌏 Emerging Markets: Mixed Signals

China 🇨🇳

Lunar New Year spending jumps 7%, but manufacturing slows. 501 million domestic trips and a record $94.4B in travel spending highlight strong consumer demand, yet factory activity weakened, with the Caixin PMI slipping to 50.1. Beijing faces an uneven recovery as services thrive while industry lags.
Consumer inflation climbs to 0.5%, highest in six months. Food prices rebounded, but overall price pressures remain weak, keeping expectations for further policy easing on the table.

India 🇮🇳

RBI cuts rates to 6.25%, first reduction since 2020. With growth slowing, policymakers moved to support the economy, revising 2025 GDP projections down to 6.7%. The cut signals a shift toward stimulus, even as inflation concerns linger.
Manufacturing PMI remains strong at 57.7, but services slow. Factory activity is expanding at its fastest pace in six months, but services PMI dipped to 56.5, showing uneven momentum in Asia’s fastest-growing economy.

South Korea 🇰🇷

Manufacturing PMI climbs back to expansion at 50.3. This marks the first return to growth in five months, helped by strong export orders. However, input costs are rising sharply, raising concerns about profitability.
Inflation ticks up to 2.2%, delaying rate cut bets. A weaker won pushed import prices higher, prompting the Bank of Korea to hold rates at 3% instead of cutting. Markets now expect easing to be pushed back further into 2025.

Taiwan 🇹🇼

Manufacturing PMI slows to 51.1, weakest in three months. While still expanding, output and new orders softened, raising concerns about global tech demand. Exporters remain cautious, with U.S. trade policy a growing risk.

🔑 Key Takeaway

This week’s data highlights the growing divergence between slowing labor markets, resilient inflation, and shifting monetary policies. In the U.S., job growth cooled to 143K, reinforcing expectations for Fed rate cuts, while Treasury yields dropped in response. Meanwhile, Eurozone inflation ticked up to 2.5%, keeping the ECB cautious, even as the Bank of England cut rates to 4.5% to support slowing growth. In China, Lunar New Year spending surged 7%, but weak manufacturing PMI (50.1) and falling employment underscore lingering economic fragility.

Novy-Marx’s insights on profitability as a key return driver offer an important lens here: as markets recalibrate around slower growth and higher uncertainty, investors should look beyond simple valuation metrics and focus on fundamental productivity and economic resilience to navigate the evolving landscape.

17% Nvidia Plunge Shakes Tech as AI Rival Emerges

Mateo — Sun, 02 Feb 2025 21:14:18 GMT

Nvidia shares tumbled 17% on Monday, dragging the Nasdaq 1.64% lower as China’s DeepSeek unveiled an AI model that threatens to disrupt the industry. This steep sell-off, driven by concerns over lower energy and processing costs of DeepSeek’s model, wiped billions off semiconductor stocks before a late-week rebound, buoyed by strong earnings from Meta and Apple. As tech volatility surged, the Federal Reserve’s steady rate stance and rising tariff risks under Trump added another layer of uncertainty, setting the stage for shifting market narratives in the weeks ahead.

⏱️ Global Markets in 10 Seconds:

🇺🇸 Nvidia -17% as AI rival DeepSeek shakes tech 📉
🇪🇺 ECB cuts rates to 2.75% but growth stalls 🏦
🇨🇳 Manufacturing PMI 49.1 slips back into contraction ⚠️
🇯🇵 BoJ signals more hikes as inflation remains sticky 💰
🇨🇦 BoC cuts rates to 3.00%, ends QT to boost liquidity 🚀

🔍 The Big Picture

Markets navigated a volatile week, with tech stocks reeling from AI competition, central banks adjusting their rate paths, and economic growth showing signs of divergence across regions. Nvidia’s 17% plunge rattled sentiment, while the ECB cut rates, marking a shift in global monetary policy. Meanwhile, China’s manufacturing slowdown added to concerns about its post-pandemic recovery.

United States: 2.3% GDP growth signals a slowdown, but strong consumer spending (4.2%) kept the economy afloat. Meanwhile, the Fed held rates steady, reinforcing its cautious stance on inflation, while tariff threats from Trump added fresh uncertainty.
International: The ECB’s rate cut to 2.75% underscores its confidence that inflation is easing, but Eurozone GDP stalled at 0% in Q4 as Germany and France contracted. Weak growth raises doubts about how much further the ECB can ease policy.
Emerging Markets: China’s PMI dropped to 49.1, slipping back into contraction, while industrial profits fell 3.3% for the third straight year. This contrasts sharply with India, where economic momentum remains strong, highlighting a widening gap in Asia’s growth outlook.

⭐️ Research of the week:

The Shocking Truth About GDP Growth and Returns

Think fast-growing economies deliver better stock returns? Think again. In their paradigm-shattering 2003 paper, William Bernstein and Robert Arnott exposed an uncomfortable truth: even in booming economies, shareholders consistently lose about 2% of economic growth to dilution. Their research, "Earnings Growth: The Two Percent Dilution," dismantled two cherished myths - that corporate earnings could outpace GDP growth, and that stock buybacks would turbocharge per-share returns.

Why This Analysis Matters:

The researchers used two independent analytical methods - comparing 20th century dividend growth across 16 countries against GDP, and measuring the gap between market cap growth versus share price growth in the CRSP database
Both approaches revealed a consistent 2% annual dilution effect where per-share earnings and dividends grew about 2% slower than the broader economy, contrary to common assumptions
The analysis exposed how focusing solely on aggregate corporate profits without accounting for share dilution can lead investors to overestimate sustainable earnings growth rates

Key Evidence :

Data from 1871-2000 showed real stock prices grew at 2.48% annually versus 3.45% for GDP, with nearly half of the stock price growth coming from multiple expansion rather than fundamental growth
Across 16 developed countries in the 20th century, dividend growth lagged GDP growth by an average of 3.3%, with even peaceful nations seeing a 2.3% gap
Despite the popular narrative around buybacks, the ratio of market cap to price index growth revealed net share issuance consistently exceeded buybacks

Bottom Line:

Investors would do well to focus less on headline GDP growth rates and more on actual per-share earnings growth when evaluating investment opportunities. The persistent gap between economic growth and shareholder returns highlights why understanding company-level fundamentals matters more than macroeconomic headlines.

Source: Earnings Growth: The Two Percent Dilution

💼 Market Indicators

SPY Performance

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Performance and Valuations by Region

Source: MSCI

Momentum performance by Style

Source: MSCI

S&P 500 Earnings Per Share

Source: Yardeni Research

🗺️ Around the World in Detail

🇺🇸 United States: AI Shock & Rate Caution

Nvidia drops 17%: The emergence of China’s DeepSeek as an AI competitor sent shockwaves through tech, dragging the Nasdaq down 1.64% and sparking broader concerns over the sector’s dominance.
Fed holds rates at 4.25%-4.50%: Powell reinforced a patient stance, signaling that rate cuts aren’t imminent without more progress on inflation, recalibrating market expectations.
GDP growth slows to 2.3%: Consumer spending surged 4.2%, the strongest in nearly two years, but weaker investment and net exports signal a more uneven expansion heading into 2025.

🌐 International Markets: Central Banks Shift Gears

Canada 🇨🇦

BoC cuts rates to 3.00%: The first major central bank to ease further, the Bank of Canada also ended quantitative tightening, prioritizing liquidity as inflation nears target.
GDP rises 0.2% in December: Growth was supported by retail and manufacturing, but declines in real estate and wholesale trade hint at pockets of weakness.

Europe 🇪🇺

ECB cuts rates to 2.75%: The fifth rate cut since mid-2024 reflects cooling inflation, but with Eurozone GDP flat in Q4, questions remain about the region’s growth outlook.
Germany and France contract: The Eurozone’s two largest economies shrank in Q4, while Spain (+0.8%) and Portugal (+1.5%) saw stronger momentum, highlighting regional divergence.

Japan 🇯🇵

Retail sales jump 3.7%: December’s growth, the strongest in six months, underscores resilient consumer spending despite tighter monetary policy.
Yen strengthens to 154 per USD: Rising expectations of further BoJ rate hikes helped support the currency, though policymakers remain cautious.

🌏 Emerging Markets: Mixed Signals

China 🇨🇳

Manufacturing PMI falls to 49.1: A return to contraction territory signals ongoing weakness in factory activity, as deflationary pressures persist.
Industrial profits drop 3.3%: The third straight year of declines underscores fragile domestic demand, complicating Beijing’s policy response.

South Korea 🇰🇷

Manufacturing PMI slides to 49: A renewed downturn in new orders and rising cost pressures weigh on the sector, reversing earlier improvements.
Retail sales drop 1.9% YoY: The ninth consecutive decline points to weaker consumer confidence, adding to concerns about growth in 2025.

Taiwan 🇹🇼

Manufacturing PMI jumps to 52.7: The strongest reading since July reflects a pickup in export demand, particularly in electronics.
Input costs rise: Firms report higher pricing pressures, with output charge inflation reaching a four-month high, signaling margin compression risks.

🔑 Key Takeaway

This week’s data highlights the growing disconnect between economic resilience and market fragility, as tech-driven volatility, diverging central bank policies, and structural earnings dilution shape the 2025 outlook. Nvidia’s 17% plunge exposed the vulnerability of AI valuations, dragging the Nasdaq down 1.64%, while the Fed’s steady rate stance reinforced a cautious market mood. Meanwhile, the ECB’s rate cut to 2.75% underscored Europe’s stagnant growth, contrasting with Canada’s proactive BoC easing to 3.00% to support liquidity.

In China, the return of manufacturing PMI contraction (49.1) and a third straight year of industrial profit declines (-3.3%) signal deeper structural headwinds, complicating Beijing’s policy response. Japan, however, saw strong retail sales (+3.7%), reinforcing consumer resilience despite tightening monetary conditions. Meanwhile, South Korea’s falling retail sales (-1.9%) and weakening manufacturing PMI (49.0) suggest growing pressure on household spending, reflecting broader divergence in Asia’s economic momentum.

Bernstein & Arnott’s 2% dilution effect is particularly relevant here—investors often expect earnings to track GDP, but dilution from new equity issuance consistently erodes per-share gains. This reinforces the need to focus on productivity and valuation rather than headline growth alone, especially as shifting macro conditions challenge assumptions about long-term equity returns.

Yen Strengthens as BoJ Raises Rates to 17-Year High

Mateo — Sun, 26 Jan 2025 17:17:06 GMT

The yen appreciated to the high end of the JPY 155 range this week as the Bank of Japan raised its key policy rate by 25 basis points, lifting it to 0.5%, the highest level since 2008. This upward move, supported by rising inflation—Japan’s core CPI hit 3.6% year-on-year in December—and expectations of wage growth, signaled further monetary tightening ahead. While the BoJ’s hawkish stance highlights growing confidence in Japan’s economic momentum, it also points to potential headwinds for exporters and broader market volatility as global monetary policies diverge.

⏱️ Global Markets in 10 Seconds:

🇺🇸 S&P 500 +3.7% as AI spending fuels optimism 🚀
🇪🇺 Eurozone PMI 50.2 signals manufacturing rebound 📈
🇯🇵 BoJ hikes rates to 0.5%, yen strengthens to 155 range 🎯
🇨🇳 Youth unemployment 15.7%, recovery shows mixed signals ⚠️
🇮🇳 Manufacturing PMI 58, fastest expansion in 6 months 🏭

🔍 The Big Picture

A mixed global picture emerges this week as inflationary pressures, monetary policies, and economic momentum continue to diverge. Central banks are making bold moves, yet growth signals remain fragile in key regions, with stark contrasts between developed and emerging economies.

United States: The S&P 500 rallied 3.7% this week as AI spending announcements boosted optimism, while manufacturing PMI edged up to 50.1, signaling its first expansion in six months. However, consumer sentiment dropped to 71.1, reflecting inflation worries—suggesting confidence remains fragile despite market gains.
International: The Eurozone PMI rose to 50.2, driven by renewed optimism in services, while manufacturing contracted at a slower pace. Meanwhile, the ECB hinted at further rate cuts, reinforcing the region’s need for policy support amid weak demand and sluggish growth.
Emerging Markets: India’s Manufacturing PMI surged to 58, its fastest pace in six months, as new orders and export demand rebounded. Meanwhile, China’s youth unemployment fell to 15.7%, but weak factory activity and lingering trade concerns point to a slower recovery ahead.

⭐️ Research of the week:

Why Diversification Drives Reliability in Capturing Factors

This research from Dimensional Fund Advisors examines how diversification influences the reliability of capturing factor premiums—such as size, value, and profitability—within investment portfolios. It addresses a key question: How does broad diversification improve the consistency of outcomes in an unpredictable market environment?

Why This Analysis Matters:

Framework for Reliability: The study uses a probabilistic model to evaluate the likelihood of outperforming the Russell 1000 Index across portfolios with varying levels of diversification, illustrating how broad exposure increases reliability in capturing factor returns.
Challenges Common Assumptions: The findings question the assumption that concentrated portfolios are inherently superior, showing that broader diversification reduces tracking error and increases the likelihood of achieving factor-driven returns.
Deeper Analytical Takeaway: Diversification is not solely about reducing volatility—it is a mechanism for improving the consistency of capturing factor premiums across a wide range of securities.

Main Takeaways :

Increasing Probabilities with Diversification: Simulations show that a portfolio with 50 stocks has a 56% chance of outperforming the benchmark over 1 year, compared to 71% for a portfolio with 1,000 names. Over 10 years, this probability increases to 96% for fully diversified portfolios.
Diversification Reduces Noise: Tracking error steadily declines as portfolios include more stocks, enabling more stable exposure to factors like size, value, and profitability.
Factors Require Broad Coverage: Factor premiums are driven by different stocks at different times, meaning under-diversification increases the risk of missing key contributors to returns and reduces reliability.

Bottom Line:

Dimensional’s research underscores the analytical case for diversification as a critical tool for enhancing reliability in capturing factor-driven returns. Rather than focusing narrowly on specific securities, the findings highlight the role of broad and methodical portfolio design in aligning with long-term objectives.

Source: Dimensional Fund Advisors - How Diversification Impacts the Reliability of Outcomes

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Performance and Valuations by Region

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🗺️ Around the World in Detail

🇺🇸 United States: Manufacturing Under Pressure

S&P 500 rallies 3.7%: AI-driven optimism and softer trade rhetoric boosted markets, pushing growth stocks to outperform value for the first time this year.
Manufacturing PMI rises to 50.1: After six months of contraction, manufacturing returned to slight expansion, signaling cautious optimism in the sector. This is a key shift that might suggest supply chain issues are stabilizing.
Consumer Sentiment drops to 71.1: The first decline in six months highlights rising inflation expectations and unemployment concerns, hinting at potential pressure on consumer spending.

🌐 International Markets: Diverging Paths

Canada 🇨🇦

Inflation eases to 1.8%: The slowest price growth since September 2022 has solidified expectations for further BoC rate cuts, providing a tailwind for the housing market and retail sectors.
Retail sales rise 1.6%: December’s rebound, the largest since May 2022, shows resilience in consumer spending, particularly in motor vehicles and fuel.

Europe 🇪🇺

Eurozone PMI ticks up to 50.2: Modest growth in services offset a slowing manufacturing sector, suggesting the region is stabilizing, albeit at a sluggish pace.
ECB hints at rate cuts: Policymakers signaled easing measures to address weak demand, reinforcing expectations of gradual rate reductions into 2025.
German confidence stabilizes: Business sentiment improved after six months of declines, reflecting optimism that the worst of the industrial downturn may be over.

United Kingdom 🇬🇧

Unemployment climbs to 4.4%: The labor market softened with the sharpest payroll drop since November 2020, raising questions about the resilience of consumer spending.
Services PMI edges to 51.2: A marginal improvement in services highlights resilience, but falling new orders suggest underlying challenges.

Japan 🇯🇵

BoJ hikes rates to 0.5%: The third increase this year pushed rates to a 17-year high, signaling the central bank’s confidence in economic momentum and wage growth.

🌏 Emerging Markets: Recovery and Risks

China 🇨🇳

Youth unemployment falls to 15.7%: Gradual recovery in the labor market hints at improving confidence, though weak factory activity and export orders point to lingering challenges.
Non-Manufacturing PMI rises to 52.2: The strongest reading since March reflects government stimulus starting to yield results, albeit unevenly.

India 🇮🇳

Manufacturing PMI surges to 58: Factory activity saw its fastest growth in six months, driven by strong domestic and export orders, signaling robust economic momentum.
Input cost inflation retreats: Eased price pressures indicate a more sustainable environment for production growth.

South Korea 🇰🇷

GDP expands 0.1% QoQ: Steady growth despite global challenges was supported by higher semiconductor exports, reaffirming Korea’s resilience in a tech-driven rebound.
Construction investment declines 3.2%: Weakness in building activity raises concerns about the broader economic recovery.

Taiwan 🇹🇼

Retail sales grow 2.9% YoY: Stronger consumer spending on electronics and pharmaceuticals reflects Taiwan’s economic adaptability amidst global uncertainty.
Youth unemployment drops to 11.23%: The lowest rate since 2008 suggests improving job prospects for younger workers, boosting household confidence.

🔑 Key Takeaway

This week’s data highlights the growing importance of diversification as global markets navigate contrasting economic signals. U.S. markets rallied (+3.7% for the S&P 500) on AI-driven optimism and a slight rebound in manufacturing (PMI 50.1), even as consumer sentiment slipped, reflecting inflation concerns.

Meanwhile, Europe’s modest PMI uptick (50.2) was overshadowed by weak demand and the ECB’s signals for further rate cuts, emphasizing policy-driven market movements.

In Asia, Japan’s bold rate hike to 0.5% and China’s gradual recovery underscore the uneven recovery paths in emerging and developed markets.

Dimensional’s research on diversification reinforces the takeaway: capturing factor-driven returns reliably across these varied regional dynamics requires broad exposure and a long-term perspective.

China’s GDP Climbs 5.4%, While Housing Slump Stabilizes

Mateo — Sun, 19 Jan 2025 14:01:21 GMT

China’s economy expanded by 5.4% year-over-year in Q4 2024, accelerating from 4.6% in Q3 and surpassing market expectations of 5.0%. This growth, driven by robust industrial production (+6.2%) and a rebound in retail sales (+3.7%), signals the impact of Beijing’s targeted stimulus measures despite persistent property market weakness. While the broader economy shows signs of resilience, property investment declined by 10.6% year-over-year, underlining structural challenges that continue to weigh on growth prospects.

⏱️ Global Markets in 10 Seconds:

🇺🇸 Core Inflation 3.2% slows as stocks rally strong 📈
🇪🇺 STOXX 600 +2.37% amid ECB rate cut expectations 🎯
🇬🇧 Inflation 2.5% cools while GDP growth lags at 0.1% ⚠️
🇨🇳 GDP +5.4% YoY as industrial output surges 6.2% 🚀
🇯🇵 Nikkei -1.9% pressured by yen strength and BoJ signals 💼

🔍 The Big Picture

This week highlighted a mixed global narrative, with optimism building in the U.S. and China while Europe faced ongoing structural challenges. Emerging markets showed resilience, but diverging stories across regions hint at complex economic dynamics ahead.

United States: Core inflation eased to 3.2%, marking progress toward the Fed’s 2% target. Stocks rallied, with value outperforming growth for the first time since September, but the Fed is unlikely to cut rates soon. Keep an eye on retail sales momentum, which showed a modest +0.4% gain but lagged expectations.
International: UK inflation slowed to 2.5%, sparking hopes for a February rate cut, while GDP rose only 0.1% in November, underwhelming forecasts. Meanwhile, German GDP contracted by 0.2% in 2024, signaling lingering headwinds for Europe’s largest economy.
Emerging Markets: China’s GDP growth hit 5.4% YoY in Q4, boosted by industrial output at +6.2%, yet property investment slumped -10.6%, underscoring structural weaknesses. Elsewhere, India maintained solid growth momentum, supported by strong domestic demand.

⭐️ Post of the week

This week, BlackRock Investment Institute shared a striking analysis of 10-year U.S. Treasury yields, highlighting an unusual dynamic: yields have been climbing since the Federal Reserve began cutting interest rates in September 2024. This chart challenges the conventional wisdom that rate cuts invariably lower yields, underscoring how today’s macroeconomic environment diverges from historical patterns.

Source: Axel Christensen - Linkedin

Why This Analysis Matters

Framework Challenge: The chart juxtaposes the current trajectory of Treasury yields with past rate-cutting episodes, revealing that this cycle defies historical norms.
Market Assumptions Tested: It confronts the assumption that rate cuts are uniformly bullish for bonds, emphasizing how structural changes can rewrite market playbooks.
Interconnected Complexity: Rising term premiums and evolving global dynamics (e.g., fiscal pressures and geopolitical fragmentation) deepen our understanding of bond market behaviors.

Supporting Evidence:

Last Week’s Data: The 10-year yield touched 4.80%, its highest level in over a year, driven by robust U.S. labor market data and sticky inflation.
Historical Comparison: In past cycles, yields typically declined during rate cuts as lower rates reduced borrowing costs. Today, persistent fiscal deficits and rising term premiums are countering this trend.
Deeper Structural Factors: Elevated bond yields reflect market demands for higher compensation amid long-term risks like corporate refinancing at higher rates and fiscal policy uncertainty.

Bottom Line

This analysis is a masterclass in how structural factors can disrupt traditional market relationships. For investors, the key takeaway is clear: Always question assumptions and assess data within the broader macroeconomic context. Understanding these shifts is crucial for adapting investment strategies in today’s evolving regime.

💼 Market Indicators

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Performance and Valuations by Region

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S&P 500 Earnings Per Share

Source: Yardeni Research

🗺️ Around the World in Detail

🇺🇸 United States: Manufacturing Under Pressure

Core Inflation at 3.2%: December's core inflation slowed to its lowest annual pace since July, signaling progress in the Fed's fight against rising prices. While this offers hope, it may not be enough to prompt immediate rate cuts, keeping monetary policy tight.
Retail Sales up 0.4%: December sales missed expectations of 0.6%, indicating cautious holiday spending. Strong gains in sporting goods and clothing helped offset weaker categories like building materials.
Bank Earnings Boost Stocks: Major banks like JPMorgan and Citigroup saw strong Q4 profit growth, driving financial stocks higher. This renewed optimism suggests resilience despite economic uncertainty.

🌐 International Markets: Diverging Paths

Canada 🇨🇦

Muted Week: No significant data releases or policy changes this week, leaving markets largely steady. Investors await upcoming housing data for clues on the economy’s trajectory.

Europe 🇪🇺

German GDP Down 0.2% in 2024: The second consecutive annual contraction underscores lingering economic weakness, particularly in investment spending. The ECB’s cautious rate cuts may not be enough to reignite growth.
Consumer Confidence Ticks Up: The STOXX Europe 600 Index climbed 2.37%, driven by optimism over falling inflation across the region. This may provide short-term relief but fails to resolve deeper economic fragilities.

United Kingdom 🇬🇧

UK Inflation Cools to 2.5%: December’s unexpected slowdown in inflation raises expectations for a February BOE rate cut, but stagnant GDP at just +0.1% in November suggests deeper structural challenges remain.

Japan 🇯🇵

Nikkei Falls 1.9%: Rising 10-year bond yields and yen strength, fueled by hawkish BOJ signals, weighed on equities. Export-heavy sectors face pressure as the yen gains to JPY 155.6 per dollar, complicating Japan’s growth story.

🌏 Emerging Markets: Recovery and Risks

China 🇨🇳

GDP at 5.4% YoY in Q4: Industrial output surged +6.2%, driving growth above expectations, while retail sales rebounded +3.7%. However, deep declines in property investment (-10.6%) highlight persistent structural issues.
Trade Surplus at $104.8B: Exports soared 10.7%, boosted by front-loaded orders ahead of tariff risks. This reflects near-term resilience but underscores dependency on external demand.

India 🇮🇳

Resilient Growth: India’s PMI stayed robust above 56, reflecting strong domestic demand. This positions India as a regional outperformer amid global uncertainties.

South Korea 🇰🇷

Unemployment Rises to 3.7%: Economic uncertainty and political turmoil pushed joblessness to its highest level since 2021, highlighting the challenges facing the country’s recovery.

Taiwan 🇹🇼

Stable Growth: With limited major data this week, Taiwan remains focused on trade resilience amid evolving geopolitical tensions in Asia.

🔑 Key Takeaway

This week’s data highlights the diverging dynamics shaping global markets, with inflation progress, fiscal strains, and structural shifts driving key narratives.

In the U.S., core inflation eased to 3.2%, boosting optimism for long-term price stability, yet sticky wage growth and cautious retail spending kept rate-cut expectations in check. Meanwhile, Europe faces contrasting signals: a slowing German GDP (-0.2%) and cooling UK inflation (2.5%) suggest room for policy easing, but structural growth challenges remain unresolved. China’s stronger-than-expected GDP growth (+5.4%), driven by industrial gains, contrasts with persistent weaknesses in property investment (-10.6%), underlining its reliance on policy stimulus and external demand.

As the Post of the Week emphasized, climbing U.S. Treasury yields despite rate cuts reflect broader structural pressures, reminding investors that traditional playbooks often fail in this evolving regime. Regional disparities and rising risks demand a sharp focus on interconnected forces and adaptability in portfolio strategies.

US Adds 256K Jobs, Pushes Yields to 2023 Highs

Mateo — Sat, 11 Jan 2025 20:36:45 GMT

U.S. Treasury yields surged to their highest level since November 2023, driven by a robust 256,000 job gain in December that far exceeded expectations of 160,000. This yield spike, fueled by resilient labor market strength and hawkish Federal Reserve commentary, overshadowed equity market declines led by small caps. While the labor market signals economic momentum, persistent inflationary pressures suggest rates could stay elevated, shaping a challenging investment landscape in early 2025.

⏱️ Global Markets in 10 Seconds:

🇺🇸 +256K Jobs push Treasury yields to 2023 highs 📈
🇪🇺 2.4% Inflation sparks ECB rate cut debates 🎯
🇨🇦 6.7% Unemployment dips as labor market rebounds 💼
🇨🇳 52.2 Services PMI rises amid deflation risks ⚠️
🇯🇵 1.19% JGB Yield hits highest since 2011 📉

🔍 The Big Picture

Global markets delivered a complex picture this week, with stronger labor data in developed economies fueling higher yields, while inflation dynamics continue to diverge across regions. Emerging markets offered contrasting narratives, underscoring persistent challenges and pockets of resilience.

United States: +256K Jobs smashed expectations, driving Treasury yields to the highest level since late 2023. While this underscores labor market strength, wage growth of 3.9% YoY points to inflationary pressures, supporting the Fed’s cautious tone on rate cuts in 2025.
International: Eurozone inflation accelerated to 2.4%, with Germany leading the charge at 2.8%, even as retail sales slowed. This complicates the ECB’s rate-cut timeline, as policymakers navigate growth risks and sticky core inflation of 2.7%.
Emerging Markets: China’s 52.2 Services PMI highlights a domestic demand recovery, but deflation looms with CPI at 0.1% YoY. Meanwhile, India’s growth momentum softened, with projected GDP growth of 6.4%, the slowest pace in three years, raising concerns about regional headwinds.

⭐️ Post of the week

This week, Aswath Damodaran, a professor of finance at NYU Stern and a globally respected authority on valuation, shared his annual data update for 2025. More than just a collection of numbers, Damodaran’s update serves as both a powerful tool for challenging assumptions and a warning about the pitfalls of data misuse. For decades, his work has been a go-to resource for investors and analysts navigating the complexities of corporate finance and market valuation.

Source: Aswath Damodaran - X

Why This Analysis Matters

Data as a Truth Finder: Damodaran highlights how data can debunk myths, such as whether U.S. companies pay their fair share in taxes. His range of tax rates—from 6.75% to 26.43%, depending on calculation—shows how framing impacts conclusions.
Embracing Uncertainty: Unlike many experts, Damodaran stresses the importance of acknowledging uncertainty in predictions, noting that precise answers often hide significant noise.
Bias in Data Interpretation: Data isn’t inherently objective. As Damodaran demonstrates, analysts with biases can manipulate data to support preconceived notions, emphasizing the need for transparency and skepticism.

Supporting Evidence:

Last year’s U.S. tax rates demonstrate how data can be skewed by methodology: simple averages reflect 6.75%, but weighted averages rise to 23%-25%, depending on cash versus accrual methods.
The rise of U.S. equities—now 49% of global market cap, up from 42% in 2023—underscores the impact of sectoral dominance (e.g., tech at 30% of U.S. market cap) and challenges assumptions of mean reversion.
Historical data like P/E ratios often mislead when structural changes—such as global tech leadership or regional economic shifts—aren’t factored in, reinforcing the risks of overly simplistic analyses.

Bottom Line

Damodaran’s update is a masterclass in both the power and pitfalls of data. It challenges us to go beyond surface-level conclusions, embrace uncertainty, and carefully assess the context behind the numbers. For investors, the lesson is clear: data is a tool, not a shortcut to truth.

Full Article: https://aswathdamodaran.blogspot.com/2025/01/data-update-1-for-2025-draw-and-danger.html

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SPY Performance

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Performance and Valuations by Region

Source: MSCI

Momentum performance by Style

Source: MSCI

S&P 500 Earnings Per Share

Source: Yardeni Research

🗺️ Around the World in Detail

🇺🇸 United States: Manufacturing Under Pressure

+256K Jobs Added: December’s blowout job growth beat expectations of 160K, keeping unemployment at a steady 4.1%. This reinforces the Fed’s hawkish stance, with rates likely staying elevated longer than markets hoped.
Treasury Yields Surge: The 10-year yield reached its highest level since November 2023, driven by strong labor market data and inflation concerns. Rising yields could weigh on equities and corporate borrowing costs.
Services PMI at 54.1: The expansion in December signals continued consumer demand, though rising input costs at 64.4 highlight persistent inflationary pressures. This complicates the Fed’s balancing act between growth and price stability.

🌐 International Markets: Diverging Paths

Canada 🇨🇦

Unemployment Drops to 6.7%: December saw 91K new jobs, with full-time employment surging. While a bright spot, weakening PMIs hint at softening growth, creating a tough landscape for the Bank of Canada as it eyes rate adjustments.
Services PMI Contracts to 48.2: Postal strikes and subdued demand led to the first contraction in two months. Export business took the biggest hit, signaling global headwinds for the Canadian economy.

Europe 🇪🇺

Inflation Rises to 2.4%: December’s uptick, driven by energy prices, challenges the ECB’s rate-cut optimism despite stable core inflation at 2.7%. The ECB may need to navigate growth concerns more cautiously.
Retail Sales Barely Budge: November’s modest +0.1% MoM increase reflects weak consumer momentum, with Germany and Spain recording declines. Economic activity remains fragile heading into 2025.

Japan 🇯🇵

JGB Yields Hit 1.19%: The highest level since 2011, tracking U.S. Treasury yields. Speculation about the Bank of Japan’s rate hike timing remains, with concerns over weaker real wages adding to the uncertainty.
Yen Weakens to 158/USD: A widening U.S.-Japan rate differential pressures the currency, raising risks of intervention by Japanese authorities.

🌏 Emerging Markets: Recovery and Risks

China 🇨🇳

Services PMI Climbs to 52.2: December’s improvement signals a boost from domestic demand, but persistent deflationary pressures—CPI at 0.1% YoY—cast a shadow over recovery efforts.
Producer Prices Down 2.3% YoY: Factory gate deflation extends to 27 months, emphasizing sluggish global demand and prompting continued government stimulus.

India 🇮🇳

GDP Growth Slows to 6.4%: A weaker fiscal year projection reflects slowing private investment and manufacturing output. Nonetheless, exports grew 5.9%, offering a silver lining for policymakers.

South Korea 🇰🇷

Muted Data Release: No major updates this week, but broader concerns over global tech demand could impact Korea’s semiconductor-heavy economy in the months ahead.

Taiwan 🇹🇼

Inflation Rises to 2.1%: December’s acceleration reflects higher food and housing costs, adding pressure on consumer wallets. However, subdued global demand continues to weigh on Taiwan’s export-driven economy.

🔑 Key Takeaway

This week's data underscores the delicate balance between economic resilience and market risks in 2025, while highlighting the complexities behind seemingly simple metrics. Strong U.S. job growth (+256K) and a resilient services sector (PMI 54.1) drove Treasury yields higher, reflecting inflationary pressures that keep the Fed cautious. Meanwhile, Europe’s inflation ticked up to 2.4%, complicating the ECB’s path toward rate cuts as growth signals weaken. In China, services PMI improved to 52.2, but persistent deflationary risks (CPI 0.1%) continue to weigh on recovery efforts.

Damodaran’s insights on data interpretation provide a crucial lens here: while headline numbers like job gains or inflation shifts dominate attention, understanding the biases and variability in these figures is essential. As the U.S.’s growing tech dominance (49% of global market cap) reshapes global markets, this week’s data reminds investors that regional contrasts and heightened uncertainty demand careful, nuanced analysis beyond surface-level metrics.

Chicago PMI Plunges to 36.9, Manufacturing Slows Again

Mateo — Sun, 05 Jan 2025 15:02:06 GMT

Manufacturing sentiment in the U.S. deteriorated sharply in December, with the Chicago PMI plunging to 36.9, its lowest level since May and marking the 13th consecutive month of contraction. This steep decline, driven by collapsing new orders and fading business confidence, underscores the persistent challenges in the manufacturing sector amid high borrowing costs. While the U.S. labor market shows resilience with jobless claims hitting an 8-month low, the growing divide between robust employment and manufacturing weakness signals a complex economic landscape as 2025 begins.

⏱️ Global Markets in 10 Seconds:

🇺🇸 Chicago PMI 36.9, sharpest contraction since May 🏭
🇪🇺 Spain inflation 2.8%, fuels ECB hawks on gradual cuts 🎯
🇨🇳 Manufacturing PMI 50.1, growth slows amid weak demand ⚠️
🇨🇦 Manufacturing PMI 52.2, factory growth hits 10-month high 🚀
🇯🇵 Nikkei -1%, profit-taking caps strong year-end 📉

🔍 The Big Picture

Global economies entered 2025 with diverging trajectories. Manufacturing struggles persisted across major regions, highlighting the weight of higher interest rates, while select sectors and markets showed pockets of resilience. As policymakers balance inflation concerns with growth risks, this week’s data paints a complex but revealing picture for investors.

United States: Manufacturing remained under pressure, with the Chicago PMI falling to 36.9, its lowest since May, while the ISM Manufacturing PMI ticked up to 49.3, and the S&P Global Manufacturing PMI edged down to 49.4. All three indexes stayed below the critical 50 threshold, indicating contraction across the sector. The data underscores the persistent drag from high borrowing costs, even as the labor market shows resilience, with jobless claims dropping to an 8-month low of 211,000.
International: Inflation in Spain rose to 2.8%, up from 2.4%, fueled by higher energy prices and complicating the ECB’s case for rate cuts. This adds tension to Europe’s path toward balancing growth and inflation targets. Meanwhile, in Japan, the Nikkei dipped 1% on profit-taking but ended 2024 at a record high, supported by corporate reforms and a weaker yen. Rising bond yields and a cautious outlook for global demand pose challenges for early 2025.
Emerging Markets: In China, the official Manufacturing PMI slowed to 50.1, signaling weaker growth despite ongoing stimulus measures, while property sales showed tentative stabilization with a 24.2% monthly gain. The data highlights lingering headwinds for China’s economy despite policy support. Conversely, India’s PMI at 56.4 confirmed its status as a regional outperformer, with strong domestic demand fueling job creation and optimism for sustained growth into 2025.

⭐️ Post of the week

This week, Cliff Asness shared a thought-provoking retrospective from the imagined vantage point of 2035, reflecting on the lessons investors could learn from the 2025-2034 decade. By blending foresight and hindsight, the piece challenges today’s assumptions about valuations, diversification, and market trends, offering a creative forecast of potential outcomes.

Why This Analysis Matters

Forecasting with Valuations: Asness imagines a world where investing in U.S. equities at a CAPE of 30+ led to a decade of lackluster returns, underscoring the risks of ignoring valuation frameworks today.
Illusions of Stability: The piece forecasts private equity and private credit underperforming after fees, debunking the notion that these asset classes provide superior risk-adjusted returns.
Overlooking Diversification: Non-U.S. equities, long sidelined by investors, emerge as the surprise outperformer in the story, emphasizing the value of diversification even when U.S. markets dominate the narrative.

Key Takeways

Looking back from 2035, U.S. equities are imagined to have delivered just a few percentage points above cash over the decade, with CAPE declining to 20 despite continued earnings growth—showing how valuations can limit returns.
Private markets, while seen as a volatility hedge, are forecasted to track broader equity markets while underperforming net of fees, highlighting the costs of chasing stability.
International equities, often dismissed today, are forecasted to deliver 5-6% annual real returns, showcasing the long-term benefits of diversification as U.S. valuations normalize.

Bottom Line

Through the lens of 2035, Asness offers a creative reminder of the timeless principles of investing: valuations matter, diversification pays off, and perceived stability often comes with hidden costs. Adopting these insights into today’s analytical frameworks can help investors avoid the traps of complacency and overconfidence while staying resilient in an unpredictable decade ahead.

For more details, read the full analysis here: 2035: An Allocator Looks Back Over the Last 10 Years

Source: Clifford Asness - X

💼 Market Indicators

SPY Performance

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Performance and Valuations by Region

Source: MSCI

Momentum performance by Style

Source: MSCI

S&P 500 Earnings Per Share

Source: Yardeni Research

🗺️ Around the World in Detail

🇺🇸 United States: Manufacturing Under Pressure

Chicago PMI fell to 36.9, marking its lowest level since May and 13 straight months of contraction. Manufacturing struggles reflect ongoing high borrowing costs, a sharp contrast to the resilience seen in the services sector.
ISM Manufacturing PMI ticked up to 49.3, while S&P Global Manufacturing PMI slipped to 49.4. All major manufacturing indexes remain below 50, signaling contraction across the sector. This points to persistent industrial weakness despite modest improvements in new orders.
Jobless claims dropped to 211,000, an 8-month low, showing that the labor market remains strong. This divergence between labor market strength and manufacturing weakness creates a complex backdrop for policymakers heading into 2025.

🌐 International Markets: Diverging Paths

Canada 🇨🇦

Manufacturing PMI climbed to 52.2, the highest in 10 months, as output and new orders picked up. However, ongoing postal and port strikes have disrupted supply chains, increasing vendor delays and input prices.
Trade worries intensify as U.S. tariffs loom in 2025, creating uncertainty for Canadian exporters despite stronger domestic demand.

Europe 🇪🇺

Eurozone Manufacturing PMI fell to 45.1, extending its two-year contraction streak. Declining orders and workforce cuts in Germany and France highlight the region’s struggle to regain momentum.
Spain’s inflation rose to 2.8%, fueled by higher energy costs. This complicates the ECB’s plan to ease rates, with hawkish policymakers urging caution despite longer-term targets.

UK 🇬🇧

UK house prices jumped 0.7% MoM, the fastest growth since 2022, supported by tight supply and a weaker pound. Meanwhile, mortgage approvals slowed, reflecting affordability pressures as rates remain elevated.

Japan 🇯🇵

Manufacturing PMI improved to 49.6, the highest in three months, with new orders stabilizing. Rising input prices, however, weigh on profit margins, driven by a weaker yen and higher material costs.
Nikkei dipped 1%, closing the year at record highs, up nearly 20% in 2024. The profit-taking reflects global concerns about rising yields and volatility heading into 2025.

🌏 Emerging Markets: Recovery and Risks

China 🇨🇳

Official Manufacturing PMI slipped to 50.1, reflecting slower growth despite policy support. Property sales rose 24.2% MoM, signaling potential stabilization in the housing sector. Lingering headwinds, however, weigh on sentiment.
Non-Manufacturing PMI climbed to 52.2, highlighting strength in services but uneven recovery in broader economic activity.

India 🇮🇳

PMI edged down to 56.4, still one of the highest globally, driven by robust domestic demand and rising employment. Job creation hit a 4-month high, underscoring India’s resilience as a regional outperformer.
Policy outlook remains stable, with expectations of continued support for infrastructure investment to sustain growth in 2025.

South Korea 🇰🇷

Inflation rose to 1.9%, driven by higher food and transport costs, but remains below the Bank of Korea’s 2% target. This supports the central bank’s recent back-to-back rate cuts aimed at boosting growth.
Manufacturing PMI fell to 49, signaling renewed contraction due to sluggish domestic demand. Rising cost pressures add to concerns for South Korean manufacturers.

Taiwan 🇹🇼

Manufacturing PMI rose to 52.7, its highest since July, reflecting robust new orders and optimism for 2025. However, rising input costs suggest margin pressures may persist in the near term.
Export trends steady, supported by semiconductor demand, keeping Taiwan in a favorable position within the global supply chain.

🔑 Key Takeaway

This week’s data underscores the persistent strain of high interest rates on global manufacturing, contrasted with pockets of resilience in labor markets and services. U.S. manufacturing indexes remain mired in contraction territory, with the Chicago PMI plunging to 36.9, while jobless claims hit an 8-month low of 211,000, reflecting labor market strength.

In Europe, inflation in Spain rose to 2.8%, complicating the ECB’s plans for gradual rate cuts amid deepening manufacturing weakness (Eurozone PMI 45.1). Meanwhile, China’s 50.1 PMI signals a tentative recovery, supported by stabilizing property sales, but sluggish global demand remains a headwind. These interconnected dynamics highlight diverging economic paths, creating both challenges and opportunities for markets as 2025 unfolds.

4.50% Yields Shake Markets Amid Fed’s Hawkish Outlook

Mateo — Sat, 21 Dec 2024 17:45:53 GMT

Treasury yields climbed to 4.50%, driving U.S. stocks lower this week as the Fed signaled a more cautious path for rate cuts in 2025. This surge, fueled by higher-than-expected core inflation of 2.8% and a reduction in projected 2025 rate cuts from four to two, amplified fears of prolonged monetary tightening. While robust 3.1% GDP growth and resilient consumer spending underscore economic strength, rising yields and hawkish Fed commentary suggest tighter financial conditions ahead, setting the stage for challenging market dynamics in early 2025.

⏱️ Global Markets in 10 Seconds:

🇺🇸 Treasury Yields 4.50% as Fed signals fewer 2025 rate cuts 🎯
🇪🇺 45.2 Manufacturing PMI highlights deepening industrial slump 🏭
🇨🇳 Retail Sales +3% slowest growth since August, consumer caution ⚠️
🇮🇳 60.8 Services PMI fastest growth since August, demand surges 🚀
🇯🇵 2.7% Core Inflation hits three-month high, BoJ holds rates steady 🏦

🔍 The Big Picture

This week highlighted a global economy navigating shifting dynamics. Central banks remain cautious, with mixed inflation trends and slowing industrial activity shaping monetary policy outlooks. While developed markets grapple with diverging sectors, emerging economies showcase stark contrasts in growth trajectories.

United States: Core inflation held steady at 2.8%, reinforcing the Fed’s cautious stance as it lowered 2025 rate-cut projections. Meanwhile, GDP growth surprised at 3.1% for Q3, boosted by consumer spending. The tension between robust growth and sticky inflation signals tighter financial conditions heading into the new year.
International: Eurozone manufacturing PMI remained entrenched in contraction at 45.2, reflecting continued industrial struggles, particularly in Germany and France. However, services PMI rebounded to 51.4, suggesting pockets of resilience in the bloc's economy. Policymakers face a delicate balance as inflationary pressures linger.
Emerging Markets: China’s retail sales slowed to 3%, highlighting weak domestic demand, while property investment fell 10.4%, underscoring structural challenges. In contrast, India’s services PMI soared to 60.8, marking the fastest growth in four months and showcasing the region’s standout momentum.

⭐️ Post of the week

This week, Katie Hendrix from Dimensional Advisors highlighted a reality check on Capital Market Assumptions (CMAs) and how well they align with actual returns over a decade. Her analysis underscores the wide variability in forecasts and the importance of embracing uncertainty when planning long-term investment strategies.

Source: Dimensional Fund Advisors

Why This Analysis Matters

• Analytical Tool: Katie’s team compared 2014-2023 CMA return forecasts to realized outcomes across equities, fixed income, REITs, and commodities, showing the limits of long-term prediction tools.
• Challenge to Bias: It confronts the assumption that CMAs are precise predictors, showing average errors of 4+ percentage points in equities and 3+ points for commodities.
• Deeper Insight: This analysis reminds investors to use CMAs as guides for scenario planning, not definitive answers, highlighting the need for diversification and disciplined decision-making.

Supporting Evidence

• Equities: U.S. equity returns vastly outperformed CMAs, realizing 11.5% annually, compared to forecasts in the 5.5%-7.7% range. Emerging markets, however, fell below expectations.
• Fixed Income: Inflation consistently exceeded forecasts, while bond returns underwhelmed, emphasizing the challenge of predicting low-volatility assets over long horizons.
• Commodities & REITs: Commodities saw the largest forecast errors, with even the best predictions missing by over 3 percentage points, illustrating the difficulty of anticipating volatile asset classes.

Bottom Line

CMAs are invaluable tools for setting realistic expectations and planning for ranges of outcomes. However, as this analysis shows, they shouldn’t be used as a crystal ball. Investors are best served by focusing on broad diversification, goal alignment, and resilience to uncertainty rather than chasing precision in return forecasts.

For more details, read the full analysis here: Reality Check: Capital Market Assumptions vs. Actual Returns

Source: Katie Hendrix - LinkedIn

💼 Market Indicators

SPY Performance

Created with TradingView

Performance and Valuations by Region

Source: MSCI

Momentum performance by Style

Source: MSCI

S&P 500 Earnings Per Share

Source: Yardeni Research

🗺️ Around the World in Detail

🇺🇸 United States: Growth vs. Inflation

• Core inflation held at 2.8% in November, signaling persistent price pressures that pushed the Fed to forecast fewer rate cuts in 2025. This raises concerns about prolonged tighter financial conditions heading into next year.

• GDP grew 3.1% annualized in Q3, beating earlier estimates of 2.8%. Consumer spending remains a key driver, showcasing resilience even amid higher borrowing costs.

• Retail sales jumped 0.7% in November, buoyed by strong auto sales (+2.6%). Holiday spending has stayed robust, easing fears of a pullback in consumer demand.

🌐 International Markets: Mixed Momentum

Canada 🇨🇦
• Inflation slowed to 1.9%, easing below market expectations of 2%. While this supports the Bank of Canada’s cautious stance on further rate cuts, sticky core inflation at 2.7% may temper policy flexibility.

• Retail sales flat in November, with auto sales offsetting declines in fuel and food. Consumer demand appears steady, but rising borrowing costs could weigh on future spending.

Europe 🇪🇺
• Eurozone manufacturing PMI stuck at 45.2, extending its contraction streak to two years. Germany and France remain key drags, highlighting persistent industrial weaknesses.

• Services PMI rebounded to 51.4, signaling growth after November's contraction. This suggests pockets of resilience, though optimism remains fragile amid inflationary pressures.

UK 🇬🇧
• Core inflation rose to 3.5%, driven by higher rents and service costs. With CPI at an eight-month high of 2.6%, the Bank of England kept rates at 4.75%, but a divided vote signals hesitation about future cuts.

• Retail sales edged up 0.2% in November, with Black Friday promotions likely boosting activity. However, weak clothing sales (-2.6%) underscore continued pressure on discretionary spending.

Japan 🇯🇵
• Core inflation climbed to 2.7%, a three-month high, raising speculation about policy tightening. The BoJ, however, maintained rates, citing the need for more data on wage growth and global risks.

• Yen weakened to 156 per USD, aiding exporters but prompting intervention warnings. Market expectations of slower BoJ normalization may delay any significant policy shifts.

🌏 Emerging Markets: Contrasting Paths

China 🇨🇳

• Retail sales slowed to 3% YoY, the weakest growth since August, reflecting subdued consumer sentiment. Industrial production (+5.4%) was a bright spot, but property investment (-10.4%) underscores ongoing structural challenges.

• Property prices dipped 0.1% in November, marking the 17th straight monthly decline. Beijing’s stimulus efforts show limited traction as policymakers seek to stabilize the sector.

India 🇮🇳

• Services PMI soared to 60.8, the fastest growth since August, fueled by robust new orders and job creation. The private sector continues to outperform peers, bolstered by resilient domestic demand.

• Manufacturing PMI hit 57.4, reflecting strong export and domestic demand. Rising inventories suggest optimism among businesses heading into 2025.

South Korea 🇰🇷

Producer inflation rose 1.4% YoY, driven by manufacturing costs rebounding to +0.5%. This points to rising input costs that could weigh on exports, already challenged by weak global demand.

Taiwan 🇹🇼

GDP growth revised up to 4.25% for 2024, as strong tech exports drive economic momentum. However, uncertainty around U.S. trade policy under the Trump administration looms as a key risk.

🔑 Key Takeaway

This week’s data underscores the shockwaves from the Fed’s revised outlook, cutting 2025 rate-cut expectations from four to just two. U.S. markets reacted swiftly, with Treasury yields climbing to 4.50% and stocks sliding amid renewed concerns about prolonged monetary tightening. While resilient 3.1% GDP growth and robust retail sales (+0.7%) signal underlying economic strength, the Fed’s hawkish tone weighed on sentiment. Globally, Europe’s industrial slump (PMI 45.2) and China’s fragile 3% retail sales growth highlight challenges in sustaining growth, while India’s soaring 60.8 services PMI remains a rare bright spot. The Fed’s pivot casts a long shadow over 2025, setting the stage for tighter global financial conditions.

BoC Slashes Rates 50bps Amid Slower GDP Growth

Mateo — Sun, 15 Dec 2024 16:37:26 GMT

Canadian markets faced a pivotal shift this week as the Bank of Canada slashed its key interest rate by another 50 basis points, marking a cumulative 175 bps reduction this cycle. This move, driven by slowing GDP growth of 1.0% annualized in Q3 and mounting risks of a Q4 miss, signaled a cautious path ahead for policymakers. While inflation remains near the 2% target, the BoC’s restrained outlook for 2025 suggests that tighter borrowing conditions continue to weigh heavily on economic momentum.

As Canada recalibrates its policy stance, the implications for growth and global rate expectations underscore a growing divergence among central banks entering the new year.

⏱️ Global Markets in 10 Seconds:

🇺🇸 242K jobless claims point to a cooling labor market 💼
🇪🇺 ECB cuts rates to 3% as growth stagnates at PMI 47.8 🏦
🇨🇳 CPI at 0.2% signals persistent deflation risks ⚠️
🇨🇦 BoC slashes 50bps as GDP slows to 1% annualized 📉
🇮🇳 Inflation eases to 5.48%, growth remains resilient 🚀

🔍 The Big Picture

Global markets reflected diverging economic conditions this week, with central banks in Canada and Europe cutting rates to combat slowing growth while the U.S. edged closer to another Fed rate cut. Emerging markets showcased contrasting dynamics, as India’s resilience stood in stark contrast to China’s lingering deflation risks

United States: Core inflation held steady at 3.3% in November, while jobless claims jumped to a two-month high of 242,000, signaling a cooling labor market. These data points bolstered expectations for a Fed rate cut, with market pricing now showing a 97% probability. Meanwhile, the Nasdaq climbed above 20,000 for the first time, driven by tech gains, as Tesla rose 12.08% and Alphabet surged 8.44%.
International: Europe’s 25 bps ECB rate cut and a surprise 50 bps SNB cut underscored central banks’ focus on supporting sluggish growth, as Eurozone PMI contracted to 47.8. In the UK, the economy shrank 0.1% in October, with flat services output and a 0.6% drop in manufacturing highlighting broad weakness. Japan outperformed expectations, with GDP rising 0.3% in Q3, while speculation about a BoJ hike delay weighed on the yen.
Emerging Markets: India’s inflation eased to 5.48%, opening the door for potential rate cuts as food prices cooled sharply. In contrast, China’s CPI grew just 0.2%, heightening deflation risks, while exports slowed to 6.7% in November from 12.7% the prior month. South Korea’s unemployment held steady at 2.7%, reflecting resilience, though broader export-driven growth challenges persist in the region.

⭐️ Post of the week

This week, AQR Capital Management highlighted the critical relationship between high equity valuations and future returns, using the Shiller P/E ratio as a key measure. Their analysis challenges the assumption that strong past returns ensure continued growth, instead revealing how expensive markets can lead to muted long-term performance.

Why This Analysis Matters

• The Shiller P/E Framework: The Shiller P/E (price-to-earnings over a 10-year period) is a widely used tool to smooth out earnings volatility and gauge equity market valuation. AQR’s chart links today’s P/E levels to the potential real equity returns over the next decade.

• Challenging Market Optimism: With U.S. P/E levels at 37, their third-highest in history, the data underscores the inverse relationship between elevated valuations and future returns—a stark reminder that markets don’t always reward prolonged optimism.

• Structural Insight Over Simplicity: Instead of relying on short-term momentum, this approach connects valuation extremes to structural market outcomes, reinforcing the need for investors to consider long-term risk-adjusted returns in portfolio construction.

Supporting Evidence

• Last week’s data showed U.S. P/E ratios remain at decade-high levels, surpassing all but the Tech Bubble (46) and pre-2021 peak (40). Historical data suggests that starting valuation extremes are often followed by lower real returns over 10 years.

• The chart demonstrates that when the Shiller P/E reaches the top decile (26.6+), average next 10-year real returns drop to near 0%, compared to the 10%-plus averages seen at lower valuation levels. This challenges complacent assumptions in current market optimism.

• While surface-level market strength may appear encouraging, AQR’s analysis reveals how valuations remain structurally stretched, even as returns have outpaced earnings. This disconnect underscores the importance of valuation as a forward indicator.

Bottom Line

This analysis is a clear reminder that valuation levels matter for long-term returns. Investors can improve their process by integrating tools like the Shiller P/E into their framework, challenging assumptions, and focusing on risk-adjusted opportunities rather than chasing past performance.

Source: AQR Capital Management - LinkedIn

💼 Market Indicators

SPY Performance

Created with TradingView

Performance and Valuations by Region

Source: MSCI

Momentum performance by Style

Source: MSCI

S&P 500 Earnings Per Share

Source: Yardeni Research

🗺️ Around the World in Detail

United States 🇺🇸: Rate Cuts on the Horizon

Core Inflation Steady at 3.3%: Inflation held firm in November, driven largely by shelter costs, which rose 0.3% and accounted for nearly 40% of the monthly increase. With inflation showing no signs of a further cooldown, markets remain laser-focused on next week’s Fed decision.
Jobless Claims Hit 242,000: Weekly claims jumped to a two-month high, pointing to a labor market that is cooling but not collapsing. This aligns with the Fed’s soft-landing narrative and reinforces expectations of a rate cut in early 2025.
Nasdaq Crosses 20,000: While most major indices dipped, tech stocks surged, with Tesla rising 12.08% and Alphabet posting its strongest gains since 2015. Growth continues to dominate as investors weigh rate cuts and slowing economic momentum.

International 🌐: Central Banks Ease Up

Canada 🇨🇦

BoC Cuts Rates by 50 bps: The Bank of Canada delivered its second consecutive 50-basis-point cut, bringing rates down to 4.25%. Policymakers emphasized caution for next year, signaling a pause in further cuts amid uncertainties over U.S. trade policies.
GDP Misses Expectations: Growth slowed to 1% annualized in Q3, below forecasts. The risk of a fourth-quarter contraction looms, even as consumer spending holds up better than expected.

Euro Area 🇪🇺

ECB Cuts Rates to 3%: The European Central Bank eased policy for the fourth time this year, citing a softer inflation outlook. With growth expected at just 0.7% in 2024, the ECB left room for more cuts in 2025 to stabilize sluggish economies.
Eurozone PMI at 47.8: Manufacturing continues to contract, with Germany struggling to offset broader regional weakness. This highlights the delicate balancing act for European policymakers as they seek growth without reigniting inflation.

United Kingdom 🇬🇧

Economy Contracts 0.1%: October GDP data showed the second straight monthly decline, driven by a 0.6% drop in manufacturing output. Flat services growth reflects weakening demand, pressuring the Bank of England to maintain its cautious stance.

Japan 🇯🇵

GDP Beats Expectations: The economy grew 0.3% in Q3, surpassing forecasts, as business investment contracted less than anticipated. However, speculation about a delayed BoJ rate hike pushed the yen lower, boosting Japanese equities.

Emerging Markets 🌏: Diverging Paths

China 🇨🇳

Inflation Stuck at 0.2%: Persistent deflation risks remain, despite government pledges for proactive fiscal policies and infrastructure spending. Weak consumer demand continues to challenge China’s recovery narrative.
Exports Slow to 6.7%: After a strong October, export growth moderated, partly due to firms frontloading shipments to the U.S. ahead of potential tariffs. Global demand uncertainty looms for 2025.

India 🇮🇳

Inflation Falls to 5.48%: Food prices cooled sharply, bringing inflation back within the RBI’s target range. This could pave the way for rate cuts in 2025, reinforcing India’s position as the region’s growth leader.
Economic Momentum Holds: Strong domestic demand continues to underpin India’s resilience, even as global trade faces headwinds.

South Korea 🇰🇷

Unemployment at 2.7%: Jobless rates remained steady, reflecting labor market stability. However, concerns about global trade persist as South Korea navigates a slowing export environment.

Taiwan 🇹🇼:

Quiet on Growth: With no major updates this week, Taiwan remains steady as global tech demand holds the key to its near-term economic trajectory.

🔑 Key Takeaway

This week's data highlights a global economy grappling with slowing momentum and diverging policy responses. While the Bank of Canada and ECB delivered rate cuts to counter sluggish growth—underscored by Canada’s 1% GDP and Eurozone PMI at 47.8—the U.S. labor market softened further, with jobless claims rising to 242,000. Meanwhile, China’s lingering deflation risks, with CPI at just 0.2%, contrasted sharply with India’s resilient inflation cooldown to 5.48%, positioning it for continued strength. These trends signal a shifting monetary landscape as central banks balance growth concerns against inflation targets, with clear implications for investor positioning heading into 2025.

Growth Stocks Surge 5.5% as Yields Slide Across Curve

Mateo — Sat, 07 Dec 2024 16:04:16 GMT

Growth stocks led global markets this week, surging 5.5% ahead of value - their strongest outperformance since March 2023. This rally, fueled by falling Treasury yields and strengthening rate-cut expectations, came amid a pronounced shift in monetary policy expectations. The contrast between robust U.S. job gains and weakening European manufacturing data highlighted the complex backdrop facing central banks heading into 2025.

🔍 Takeaway

Policy divergence emerged as a key theme this week, as central banks faced increasingly different domestic challenges. While the Fed weighs rate cuts amid cooling inflation, the ECB confronts stagflation risks, and Asian central banks navigate property sector challenges

United States: Growth stocks soared, outpacing value by 5.5%, as November’s 227K job gains exceeded expectations. Meanwhile, Treasury yields fell, fueling speculation of a 25bps Fed rate cut in December. Labor market resilience and softening inflation set the stage for pivotal policy moves.
International: Europe’s PMI slumped to 45.2, with Germany and France dragging the region’s manufacturing sector deeper into contraction. Political turmoil in France spiked bond spreads before easing, as markets eyed potential ECB policy shifts. This economic slowdown raises concerns for 2024’s growth outlook.
Emerging Markets: China’s 51.5 PMI signaled steady manufacturing growth, but a -6.9% YoY drop in home sales underscored property sector fragility. In contrast, India maintained robust activity with a 56.5 PMI, highlighting a rare divergence within Asia. These trends hint at uneven regional recovery paths.

⭐️ Post of the week

This week, BCA Research's European strategist shared a powerful chart that challenges one of investing's most tempting biases - the assumption that deep underperformance must eventually snap back.

Here's why this analysis matters for your investment process:

The chart visualizes 35 years of relative performance between European and US stocks, highlighting that mean reversion isn't guaranteed after significant divergences
Instead of relying on intuition ("it's fallen so much, it must bounce"), BCA's analysis forces us to examine historical patterns and their underlying drivers
The focus on structural factors (trade tensions, China's influence) rather than just price action demonstrates how deep fundamental analysis should inform mean reversion expectations

Last week's economic data reinforces the importance of this framework:

Manufacturing PMI at 45.2 and Services PMI dipping to 49.5 highlight how structural headwinds can create persistent underperformance
Even with unemployment at historic lows (6.3%), retail sales declining 0.5% shows how multiple data points need to be considered to build a complete picture
Price discounting in manufacturing despite cost pressures suggests complex dynamics that simple mean reversion theories might miss

Bottom Line: BCA's analysis offers a valuable lesson in market analysis - instead of assuming mean reversion, successful investors should examine historical patterns, understand structural drivers, and look for concrete catalysts.

Source: BCA Research - LinkedIn

💼 Market Indicators

SPY Performance

Created with TradingView

Performance and Valuations by Region

Source: MSCI

Momentum performance by Style

Source: MSCI

S&P 500 Earnings Per Share

Source: Yardeni Research

🗺️ Around the World in Detail

United States 🇺🇸: Growth vs. Restraint

Growth Stocks Shine: Growth stocks outperformed value by 5.5%, their largest margin since March 2023, as investors bet on tech and consumer discretionary sectors. This rally signals optimism about lower rates driving innovation-heavy sectors.
Jobs Surprise: The U.S. added 227,000 jobs in November, exceeding expectations, while unemployment ticked up to 4.2% as more people joined the workforce. A resilient labor market could influence the Fed’s rate-cut decision in December.
Manufacturing Still Struggles: The ISM Manufacturing PMI improved to 48.4, remaining in contraction but signaling a softer downturn. New orders rebounded, suggesting some stabilization heading into 2024.

International 🌐: Policy Pivots

Canada 🇨🇦

Labor Market Stays Strong: Employment rose by 51,000, while the unemployment rate climbed to 6.8% as more people entered the job market. This suggests resilience but highlights concerns about softening economic momentum.
Manufacturing Growth Returns: The PMI hit 52.0, its highest level since February 2023, driven by domestic demand. Rising input costs due to the strong U.S. dollar could pressure inflation further.

Euro Area 🇪🇺

Manufacturing Woes Deepen: The Eurozone Manufacturing PMI dropped to 45.2, led by declines in Germany and France. Weak demand forced businesses to offer steep discounts, reflecting a challenging fourth quarter.
Political Instability in France: The collapse of France’s government over its deficit-reducing budget widened French-German bond spreads to 90bps, their highest since 2012, before Macron’s intervention eased tensions.
Consumer Struggles: Eurozone retail sales fell 0.5% MoM in October, driven by weak non-food and auto fuel demand. Softening consumer activity could weigh on holiday-season spending.

United Kingdom 🇬🇧

Manufacturing Slumps: The PMI fell to 48.0, its worst reading since February, as output and orders tumbled. Rising input costs and prolonged supply chain issues add to the sector’s challenges.
Service Sector Resilience: Services PMI held above 50 at 50.8, though business confidence dropped due to concerns about rising taxes and weak consumer confidence.

Japan 🇯🇵

Manufacturing Weakness Continues: The PMI dipped to 49.0, marking its fifth straight month of contraction as export demand falters. Hopes for recovery hinge on a rebound in global trade.
Services Rebound: Services PMI edged up to 50.5, supported by strong domestic demand and rising employment, signaling cautious optimism despite international challenges.

Emerging Markets 🌏: Diverging Fortunes

China 🇨🇳

Manufacturing Expands: PMI climbed to 51.5, reflecting improving foreign demand and resilient domestic activity. However, a -6.9% YoY drop in home sales highlights ongoing property market weakness, keeping pressure on policymakers for further stimulus.
Policy Expectations: The upcoming Central Economic Work Conference could deliver fresh stimulus measures to shore up confidence and maintain economic stability.

India 🇮🇳

Strong Growth Signals: The Manufacturing PMI eased to 56.5, still signaling robust expansion driven by new domestic orders. Rising input costs pushed selling prices to a 10-year high, potentially pressuring inflation.
Policy Steady: The RBI held rates at 6.5% but cut the Cash Reserve Ratio to 4% to boost liquidity, reinforcing its accommodative stance amid softening growth.

South Korea 🇰🇷

PMI Back in Growth: Manufacturing PMI rose to 50.6, signaling stabilization after months of contraction, with renewed export orders driving optimism. Rising input costs remain a concern, though firms continue absorbing price pressures.
Inflation Moderates: Annual inflation ticked up to 1.5%, remaining below the central bank’s target, allowing room for further rate cuts.

Taiwan 🇹🇼:

Manufacturing Recovery: PMI increased to 51.5, reflecting the highest growth in output and orders since August. Export-driven demand lifted sentiment, though delivery delays persist.
Inflation Picks Up: Annual inflation rose to 2.08%, driven by higher food and housing costs. Persistent price pressures may limit policy flexibility.

Russell 2000 Climbs 1.2% While US Durable Goods Fall

Mateo — Sat, 30 Nov 2024 14:51:25 GMT

This week brought record highs for US markets, with the Russell 2000 climbing 28 points (↑1.2%) even as durable goods orders slipped 0.2%. Meanwhile, Eurozone inflation ticked up to 2.3%, but core inflation held steady, defying expectations of a rise. Add in a surprise GDP slowdown in Canada (1% annualized), and the picture gets even more interesting. Here’s what these shifts mean for global investors.

🔍 Takeaway

This week’s data paints a picture of diverging economic realities. While the US hits record market highs, Europe grapples with mixed inflation signals, and China shows modest recovery amid persistent challenges. These contrasts underscore the complexity of navigating global markets in an evolving macro landscape.

United States: Small-caps hit record highs as the Russell 2000 climbed 1.2%, supported by strong consumer data (+0.6% income, +0.4% spending). Meanwhile, durable goods orders disappointed (-0.2%), and tariff threats weighed on automakers, highlighting a split economy.
International: Eurozone inflation ticked up to 2.3%, but core inflation held steady at 2.7%, fueling speculation of ECB rate cuts. Germany’s retail sales slump (-1.5%) contrasts with a resilient labor market, keeping the region’s growth outlook uncertain.
Emerging Markets: China’s PMI edged up to 50.3, signaling modest recovery, while India’s GDP slowed sharply to 5.4%, reflecting manufacturing weakness. These trends underscore the diverging paths of Asia’s two largest economies.

⭐️ Post of the week

Source: Alexander L Wolman - LinkedIn

What if the interest rate that keeps the economy balanced wasn’t one number but three wildly different ones? Current estimates of the natural rate of interest (r*) vary significantly—from 0.8% to 2.6%—depending on the model used. This wide gap is sparking debates on which rate policymakers should trust as they navigate a post-pandemic economic landscape.

Here's what stood out:

Diverging models, diverging rates: The Lubik-Matthes model pegs r* at 2.6%, emphasizing a statistical approach, while the Holston-Laubach-Williams model offers a more structured 0.8%, driven by trends in productivity growth. Johannsen-Mertens strikes a middle ground at 1.8%, focusing on long-term stability.
Policy implications are huge: A higher r* suggests today’s rates are too restrictive, while a lower one implies the Fed still has room to tighten. This makes understanding these differences crucial for calibrating monetary policy.
Trend or anomaly? The recent divergence stems from residual processes and factors like the U.S. Treasury’s “convenience yield,” complicating the picture further.

What this means for investors:

Immediate impact: Market sensitivity to interest rate decisions will increase as policymakers debate these conflicting signals.
Medium-term consideration: Bond markets may experience heightened volatility as central banks refine their interpretation of r*.
Long-term outlook: The r* debate underscores the need for adaptive investment strategies that account for shifts in monetary policy frameworks.

Bottom Line:

The natural rate of interest isn’t one size fits all. Understanding the models behind r* gives investors an edge in predicting central bank moves—and staying ahead of market surprises.

Discover more insights in Richmond Fed’s full analysis here

💼 Market Indicators

SPY Performance

Created with TradingView

Performance and Valuations by Region

Source: MSCI

Momentum performance by Style

Source: MSCI

S&P 500 Earnings Per Share

Source: Yardeni Research

🗺️ Around the World in Detail

United States 🇺🇸: Resilience Meets Strain

Small-cap rally: The Russell 2000 surged 1.2% this week, hitting record highs for the first time in over three years. This shows investor confidence in the US economy's broader recovery.
Consumer strength: Personal income jumped 0.6%, while spending increased 0.4%, both beating expectations. Strong consumer demand is driving market resilience despite global uncertainties.
Manufacturing struggles: Durable goods orders missed estimates, rising just 0.2%, with core capital goods down 0.2%. Weakness in industrial demand underscores ongoing sectoral divergence.

International 🌐: Inflation, Tariffs, and Growth

Canada 🇨🇦

GDP slows: Annualized Q3 growth cooled to 1%, dragged down by weaker business investment and declining exports (-0.3%). Domestic consumption (+0.9%) remains a bright spot, signaling uneven growth.
Tariff fears loom: Trump’s proposed 25% tariff on Canadian imports threatens key sectors like auto manufacturing, sparking investor concern over cross-border trade.

Euro Area 🇪🇺

Inflation steady, mixed outlook: Headline inflation ticked up to 2.3%, but core inflation remained flat at 2.7%. Markets expect the ECB to lower rates in December, though uncertainty persists.
Germany falters: Retail sales plunged 1.5% in October, far below forecasts, as consumer demand weakens. Yet, a stable labor market provides some optimism for Europe’s largest economy.

United Kingdom 🇬🇧

Mortgage approvals rise: The highest levels since August 2022 signal some housing market resilience. But weak retail sales and soft consumer credit growth paint a mixed economic picture.

Japan 🇯🇵

Yen strengthens: Safe-haven demand pushed the yen to JPY 150 against the dollar as geopolitical risks intensified. This added pressure on Japan’s exporters, leading to weekly losses in the Nikkei 225 (-0.2%).
Inflation heats up: Tokyo core CPI rose 2.2% YoY in November, raising speculation about an earlier-than-expected Bank of Japan rate hike.

Emerging Markets 🌏: Uneven Momentum

China 🇨🇳

Manufacturing recovers: PMI rose to 50.3, its highest since April, supported by government measures. However, weak foreign orders (48.1) and employment (48.2) highlight lingering headwinds for the economy.
Liquidity concerns: The PBOC’s RMB 900 billion injection provided relief but signaled tighter conditions ahead as Beijing ramps up bond issuance.

India 🇮🇳

GDP slows: Q3 growth dropped to 5.4%, below expectations of 6.5%, with manufacturing (+2.2%) dragging overall performance. Agriculture and services offered some stability, but the slowdown signals waning momentum.

South Korea 🇰🇷

Rate cut surprises: The Bank of Korea slashed rates to 3.0%, defying consensus. Lower inflation and weak exports are forcing policymakers to prioritize growth over financial stability.

Taiwan 🇹🇼:

Retail sales dip: October sales fell 0.5% YoY, marking the first contraction in over three years. Declines in key categories like vehicles and apparel signal softening consumer demand amid global trade pressures.