2025-02-03
Key Focus This Week: U.S. ISM PMI & Nonfarm Payrolls
Last week, concerns over weakened AI chip demand surged after China's DeepSeek claimed to achieve ultra-low training costs, triggering a sharp selloff in AI and semiconductor-related tech stocks. This dragged down the S&P 500 Index, which declined 1% to close at 6,040.53 points. In the bond market, U.S. 10-year Treasury yields fell 7.4 bps to around 4.5%, driven by the slowdown in core PCE and Trump's proposed tariffs on China, Canada, and Mexico. Meanwhile, the U.S. dollar index rose to 108.1, as escalating trade war risks fueled safe-haven demand.
Key Economic Data Last Week
China PMI: China’s January manufacturing PMI came in at 49.1 (prior: 50.1), ending three consecutive months of expansion and falling short of market expectations of 50.1.Breaking down the data, seasonal factors related to Lunar New Year contributed to declines in production (49.8, prior: 52.1) and new orders (49.2, prior: 51.0), pushing both into contraction territory. Inventory (47.7, prior: 48.3) and employment (48.1, prior: 48.1) remained in contraction, while the new orders minus client inventory index slid further to 2.7 (prior: 3.1).
Looking at historical January PMI trends, production and new orders typically decline 0.3–0.8 percentage points due to holiday effects but generally stay in expansion. However, this year’s declines of 2.3 and 1.8 percentage points, respectively, pushed both indicators into contraction, suggesting that policy stimulus measures introduced late last year were less effective than expected. This reinforces the urgency for China to expand fiscal stimulus in 2024.
Read more at Datatrack
United States GDP: The Q4 2024 U.S. GDP growth rate came in at 2.3% QoQ annualized (prior: 3.1%), while full-year GDP growth stood at 2.8% YoY (prior: 2.9%).
Breaking down the figures, personal consumption expenditure (PCE) remained robust, rising to 4.2% YoY (prior: 3.7%), contributing 2.82 percentage points to GDP growth. Within PCE, spending on goods (6.6%, prior: 5.6%) and services (3.1%, prior: 2.8%) both accelerated.
The GDP slowdown was primarily driven by a decline in domestic investment (-5.6%, prior: 0.8%), subtracting 1.03 percentage points from growth. However, this was largely due to continued inventory drawdowns, which contributed -0.93 percentage points, highlighting the overall strength of the economy despite lower headline growth.
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Federal Reserve Rate Decision: At its January FOMC meeting, the Federal Reserve unanimously voted to hold rates steady at 4.25%–4.50%.
In its statement, the Fed removed the language stating that the "labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective." Instead, it revised its stance to "the unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated." This highlights the Fed’s stable outlook on economic and labor conditions but a slightly more cautious stance on inflation.
On monetary policy adjustments, the Fed maintained its quantitative tightening (QT) pace, allowing $25 billion in Treasury securities and $35 billion in mortgage-backed securities (MBS) to mature monthly without reinvestment. Additionally, the Fed announced its five-year monetary policy framework review, set to conclude by late summer 2024. However, the 2% long-term inflation target remains outside the scope of this review.
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Key Economic Data This Week
United States ISM PMI: Due to Trump’s proposed tariffs on China, Canada, and Mexico, the market expects January manufacturing PMI to remain in contraction at 49.3. Meanwhile, services PMI is projected to hold steady at 54.1 (prior: 54.2).
Read more at Datatrack
U.S. Nonfarm Payrolls: With the labor market remaining stable, markets expect the unemployment rate to remain at 4.1% (prior: 4.1%) and nonfarm payrolls to increase by 156,000 (prior: 256,000), maintaining a healthy pace of job growth.
Read more at Datatrack