Market watch: Jan. 31

U.S. equity markets were initially buoyed by strong economic data and resilient consumer spending, but concerns over U.S. tariffs and the impact of Chinese AI startup DeepSeek’s advancements led to volatility. In Canada, markets were influenced by the Bank of Canada’s rate cut and the looming threat of U.S. tariffs, which pressured the CAD. European equities saw gains early in the week due to upbeat earnings, but the European Central Bank’s (ECB) rate cut and weak economic data from Germany and France tempered optimism. In China and emerging markets, slowing economic activity and weak PMI data raised concerns, though AI-related stocks saw positive movement ahead of the Lunar New Year.

Highlights:

U.S. markets returned -0.99%¹ for the week due to strong economic data and resilient consumer spending, but volatility spiked over concerns regarding potential U.S. tariff costs and the competitive threat posed by Chinese AI startup DeepSeek.
Canadian markets returned 0.36%² for the week, influenced by the Bank of Canada’s rate cut and the looming threat of U.S. tariffs, which pressured the Canadian dollar and introduced uncertainty into the market..
European markets returned 0.82%³ for the week following upbeat earnings, with optimism being somewhat tempered by the ECB’s rate cut and weak economic data from Germany and France.
Emerging markets closed 0.53%⁴ higher as slowing economic activity and weak PMI data that raised concerns about growth were not enough to overcome optimism regarding AI-related stocks which saw positive movements ahead of the New Year.

Bond markets remain firm despite trade uncertainty

U.S. fixed income markets experienced fluctuations driven by a mix of strong economic indicators and concerns over potential tariffs. The Federal Reserve’s decision to maintain rates, coupled with resilient GDP growth, initially supported bond prices. However, the anticipation of U.S. tariffs on Canada and Mexico, along with the impact of Chinese AI advancements, introduced volatility. Markets were notably muted following U.S. Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge, which was in line with expectations. In Canada, the Bank of Canada’s rate cut and the threat of U.S. tariffs led to a decline in yields, with safe-haven flows bolstering demand for government bonds. European fixed income markets saw yields fall as the ECB cut rates amid weak economic data from Germany and France. In China, slowing economic activity and weak PMI data prompted expectations of further fiscal and monetary support, influencing bond markets.

Highlights:

The 2- and 10-year U.S. Treasury yields were 8 and 3 basis points (bps) lower, respectively. In Canada, the 2- and 10-year yields were down 22 bps and 20 bps, respectively. Bond yields and prices move inversely to one another.
Both headline and core U.S. PCE measures met expectations while topline came in higher than the previous read.
Credit markets are stable, with new supply meeting projections amid robust demand. January is likely to close in the black, mainly driven by the recent rally in rates.

Weekly dashboard

Bank of Canada cuts rate by quarter point, highlights tariff risk

The Bank of Canada (BoC) cut its benchmark interest rate by a quarter-percentage-point and warned that the resilience of Canada’s economy “would be tested” if a trade war breaks out with the United States. As widely expected, the central bank lowered its policy rate to 3% from 3.25%, its sixth consecutive cut. It also announced the end of quantitative tightening – a years-long push to shrink the size of its balance sheet after its early pandemic bond-buying spree.

Highlights:

Given the uncertainty around a trade war, the BoC did not incorporate tariffs into the central forecast in its quarterly Monetary Policy Report. It did, however, model the potential impact.
If the U.S. imposes a 25% tariff on all imports and its trading partners retaliate in kind, that would significantly negatively impact Canadian gross domestic product while also increasing inflation.
In the bank’s “benchmark” tariff scenario, Canadian gross domestic product growth would be 2.4% lower than without tariffs in the first year and 1.5% points lower in the second year. Inflation would be 0.1% higher in the first year and 0.5% higher in the second year.

U.S. Federal Reserve keeps rates steady

The U.S. Federal Reserve (Fed) held interest rates steady and gave little insight into when further reductions in borrowing costs may take place in an economy where inflation remains above target, growth continues, and the unemployment rate is low. After several months in which inflation data has largely moved sideways, the U.S. central bank dropped from its latest policy statement language, saying that inflation “has made progress” towards the Fed’s 2% inflation goal, noting only that the pace of price increases “remains elevated.”

Highlights:

Fed officials say they largely believe the progress in lowering inflation will resume this year but have now put rates on hold as they await data to confirm it.
“Economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labour market conditions remain solid,” the central bank’s policy-setting Federal Open Market Committee said in a statement.
The unanimous decision to keep the overnight interest rate in the current 4.25%-4.50% range, coupled with the new statement, puts the Fed in a holding pattern as officials await further inflation and jobs data and clarity on the impact of President Donald Trump’s policies.

European Central Bank cuts rates with economy at a standstill

The European Central Bank (ECB) lowered interest rates by a quarter point, aiming to bolster a stagnant eurozone economy that is highly exposed to the trade tariffs threatened by U.S. President Donald Trump. The ECB reduced its key interest rate to 2.75% from 3%, widening a gap in benchmark borrowing costs with the U.S. Federal Reserve. While economic growth in the eurozone has slowed in the last three months of 2024, headline inflation has risen for three months in a row to 2.4%, creating an uncomfortable stagflationary backdrop.

Highlights:

According to recent economic data, output declined in France and Germany and stagnated in Italy. Spain and Portugal recorded growth, and the region’s unemployment rate increased to 6.3% in December from 6.2% the previous month.
The ECB is expected to continue to cut interest rates by a quarter-point at coming meetings until they reach around 2%. A trade war could change that.
A 10% U.S. tariff on all eurozone imports could reduce the bloc’s economic growth by up to 0.5% within one year, triggering deeper rate cuts.

The Global Week Ahead will be available Monday, February 3, 2025.

^{1 S&P 500 Index CAD}
^{2 S&P/TSX Composite Index CAD}
^{3 Bloomberg Developed Markets ex N. America Large & Mid Cap Price Return Index CAD}
^{4 Bloomberg EM Large & Mid Cap Price Return Index CAD}

by Scotia Wealth Management

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Market watch: Jan. 31

Week in review

Positive economic data takes a backseat to tariffs

Bond markets remain firm despite trade uncertainty

Weekly dashboard

Bank of Canada cuts rate by quarter point, highlights tariff risk

U.S. Federal Reserve keeps rates steady

European Central Bank cuts rates with economy at a standstill

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