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A surprise rise in January consumer price inflation sent shivers around US markets earlier this month. Next week will see that mood tested with the release of the Federal Reserve’s preferred measure of price growth.
Core inflation, as measured by the consumer price index, rose to 3.3 per cent in January on a year earlier, above expectations of a 3.1 per cent rate, leading investors to scale back their bets on interest rate cuts this year. A sharp rise in the cost of eggs, as farmers fight an outbreak of avian flu, was a big driver of the surprise reading.
But while the personal consumption expenditures index, which uses a different methodology, is expected to show prices rising 0.3 per cent month-on-month, up from a rate of 0.2 per cent, according to a poll by Reuters, the annual rate is expected to fall to 2.6 per cent from 2.8 per cent.
Futures contracts imply that a quarter-point rate cut is fully priced in by the Fed’s September meeting, with roughly a 70 per cent chance of another reduction by year-end.
Nevertheless, many in the market remain worried that stickier inflation could mean the Fed keeps rates on hold for longer than currently forecast.
“Despite our expectation that inflation will slow solidly over the next couple of months, we feel the risks are skewed to the upside of our forecast over the next year or so — particularly from current and proposed administration policies,” said UBS economist Alan Detmeister. Jennifer Hughes
How much further can the rally in Hong Kong tech stocks run?
A huge rally in Chinese technology stocks has made Hong Kong’s Hang Seng index the best-performing big stock market so far this year, up 17 per cent.
The rally was sparked by Chinese start-up DeepSeek revealing its artificial intelligence model last month, a move that injected confidence into the idea that China could be a significant competitor to the US in AI and large language models. The Hang Seng Tech index has jumped 31 per cent this year.
A strong set of results from ecommerce giant Alibaba and a pledge to invest “aggressively” in AI further boosted the Hong Kong market on Friday.
Now, the prospect of the government working more closely with private enterprise has further boosted optimism.
“We think Beijing is repositioning the private sector as a pillar of national competitiveness amid economic and geopolitical headwinds, which is extremely important for setting the tone for the private sector to operate more freely in the current environment,” wrote Laura Wang, Morgan Stanley’s chief China equity strategist, in a note.
But other analysts have warned that, even with these positive tailwinds, the rally could soon falter as reporting season approaches.
“We think the [index of Chinese companies listed in Hong Kong] may experience near-term consolidation after a 20 per cent plus rally since mid-January as we see event risk around earnings season for index heavyweights and the National People’s Congress,” wrote analysts at BNP Paribas on Friday. Arjun Neil Alim
Can European stocks’ outperformance last?
The surprise story of 2025 has been a surge in European stocks, outstripping Wall Street to be one of the best-performing equity markets.
The benchmark Stoxx Europe 600 index has risen nearly 9 per cent this year, compared with a less than 4 per cent gain for the US S&P 500 and a 1 per cent gain for China’s CSI 300.
Europe emerging as an early winner in 2025 was not on many strategists’ end-of-year outlooks. It reflects the lack of immediate tariffs against the EU from the new US administration, the rising prospect of a Russia-Ukraine ceasefire, and the bloc’s improving economic prospects, analysts say.
The question is how long it can last, given previous rotations into European equities have been shortlived — before investors return to betting on the US tech story.
European equities “are priced for too rosy a scenario, especially given the risk of a softening in global growth dynamics”, Bank of America analysts warned in a note on Friday. The rally “more than fairly reflects the positive domestic growth catalysts ahead”, they argued.
Other strategists think it could be more of a lasting trend. “The long-term outlook for European assets is becoming brighter,” said BCA Research’s chief European strategist Mathieu Savary.
He thinks that Europe’s “growth deficit” with the US will narrow, helped by a mix of factors including economic policies, such as expected fiscal stimulus in Germany, and a better energy outlook.
But reflecting a wider caution, Savary argued that “while it makes sense to start increasing equity allocation to the Eurozone, it is too early to do so aggressively”, citing uncertainties including trade.
Each social media post from US President Donald Trump is a reminder that a sweeping tariff could immediately change Europe’s outlook. Ian Smith
