Market Watch: Feb. 28, 2025

In the U.S., equity markets were initially buoyed by optimism surrounding U.S.-Russia talks in Saudi Arabia, but turned lower midweek as a series of policy pronouncements stoked anxieties. Finally, on Friday, U.S. markets turned markedly lower amid a 10% decline in the University of Michigan’s Consumer Sentiment Survey as consumers fret over future inflation expectations. Canadian markets reacted to sticky January Consumer Price Index (CPI) data, which reduced the likelihood of a rate cut by the Bank of Canada (BoC), causing rates to move higher. European equities were lifted by defense stocks on expectations of increased military spending, but later dipped due to concerns over Trump’s tariffs and Germany’s election. In China and emerging markets, premarket gains in U.S.-listed Chinese stocks contrasted with a decline in UnitedHealth shares amid a federal probe, while Japan’s strong GDP growth supported market sentiment despite a softer manufacturing output.

Highlights:

U.S. markets returned -1.61%¹ for the week as early week optimism following diplomatic talks was undermined by a sharp decline in consumer sentiment amid an uncertain policy outlook and increased inflation expectations.
Canadian markets returned -2.07%² for the week with tariffs weighing heavy on investors’ minds with a slight increase in January CPI decreasing the likelihood of additional rate cuts from the BoC.
European markets returned -0.12%³ for the week as renewed momentum in European defense spending came to the forefront, spurring a run on European defense stocks.
Emerging markets closed -0.14%⁴ lower with U.S.-listed Chinese stocks surging following upbeat earnings from Chinese tech companies.

Bond markets supported by risk-off sentiment amid uncertainty

Fixed income markets saw rates rise early in the week due to positive geopolitical developments, but by midweek, Trump’s tariff threats increased trade war concerns, leading to a decline in bond yields as investors sought safe-haven assets. In Canada, bond yields rose following January’s persistent CPI data, reducing expectations for a Bank of Canada rate cut at its next meeting in March. European bond markets initially benefited from reduced defense spending but experienced headwinds amid disappointing French Purchasing Managers Index (PMI) data for February that supported a hold on rate cuts. In Japan, bonds were supported by strong GDP growth despite weaker manufacturing output.

Highlights:

The 2- and 10-year U.S. Treasury yields were 4 basis points (bps) and 2 bps lower respectively. In Canada, the 2- and 10-year yields rose 8 bps and 9 bps respectively. Bond yields and prices move inversely to one another.
Investment grade corporate supply is running at $110bn USD this month, well below estimates partly due to rates volatility and news headline risks driving investors to the sidelines.
Notable macro releases next week are U.S. and Canadian Q4 and December GDP numbers along with the January U.S. Personal Consumption Expenditure (PCE) report. Most of the major central banks have shifted to wait-and-see mode with the European Central Bank (ECB) seen as the only central bank expected to cut rates in March.

Weekly dashboard

Inflation in Canada rises to 1.9%, with higher energy prices offsetting GST break

Canada’s annual inflation rate ticked upward last month but remained below the Bank of Canada’s target, as higher energy prices offset the lingering effects of the federal tax holiday on the price of food and other goods. According to Statistics Canada (StatCan), the Consumer Price Index (CPI) rose 1.9% in January year-over-year, up from 1.8% in December. It was the first acceleration in inflation in three months and matched analysts’ expectations.

Highlights:

Food prices decreased 0.6% year-over-year, the first annual decrease since May 2017. That was driven by a 5.1% decline in restaurant prices, triple the previous record decline. Canadians also paid 3.6% less for alcoholic beverages and 6.8% less for toys, games and hobby supplies year-over-year.
This was offset by a jump in gasoline pieces, which were up 8.6% in January year-over-year after a 3.5% increase in December.
Housing remained the biggest driver of overall inflation, although increases in home ownership and rental costs are slowing down. Mortgage interest costs were up 10.2% year-over-year in January, compared with 11.7% in December, while rent was up 6.3% year-over-year, compared with 7.1% the month before.

U.S. retail sales decline more than expected in January

U.S. retail sales dropped by the most in nearly two years in January, likely weighed down by frigid temperatures, wildfires, and motor vehicle shortages. Retail sales slipped 0.9% for the month from an upwardly revised 0.7% gain in December. The fall was steeper than the 0.2% decline estimated by consensus. The sales figures, which are seasonally adjusted but not inflation-adjusted, came as U.S. consumer prices rose 0.5% for January.

Highlights:

Sales declined across multiple U.S. retail categories in January. Sporting goods, music, and bookstore sales saw the steepest drop, down 4.6%. Online retail spending decreased by 1.9%, while spending on motor vehicles and parts fell by 2.8%.
However, gas stations and food and beverage establishments both posted 0.9% gains.
Since consumer spending accounts for about two-thirds of U.S. economic activity, the weaker retail figures indicate potential slower growth in the first quarter.

U.K. inflation reaches 10-month high, complicating Bank of England’s rate path

U.K. annual inflation in January reached its highest level since March last year, complicating the picture for the Bank of England (BoE) after it said it would cut interest rates gradually amid a weak outlook for economic growth. According to the Office for National Statistics, consumer prices were 3.0% higher in January than a year earlier, up from 2.5% in December. Economists had expected annual inflation to rise to 2.8%.

Highlights:

January’s increase in inflation was a result of a jump in airfares, as well as private school fees, which became subject to value-added tax at the start of the year.
In a separate report, wage data also showed accelerating pay growth, which will likely increase inflation, particularly in the labour-intensive services sector.
Services inflation surged to 5.0% in January, up from 4.4% in December, while core prices that exclude more volatile food and energy were up 3.7% from 3.2% in the last month of 2024.

^{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 - The Zukiwsky Group

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Market Watch: Feb. 28, 2025

Week in review

Uncertain U.S. tariff agenda leads to weakening of consumer sentiment

Bond markets supported by risk-off sentiment amid uncertainty

Weekly dashboard

Inflation in Canada rises to 1.9%, with higher energy prices offsetting GST break

U.S. retail sales decline more than expected in January

U.K. inflation reaches 10-month high, complicating Bank of England’s rate path

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