U.S. Equities Volatile Amid Trump, Inflation, and Trade News

United States

Equity indexes were mixed for the week, with small-caps and value stocks extending their year-to-date outperformance relative to large-cap and growth-oriented shares. The Russell 2000 and S&P MidCap 400 Index advanced, reaching all-time highs at the end of the week, supported by improving labour market data, with both initial and continuing jobless claims declining. With its more than 2% weekly gain, the Russell 2000 Index was up nearly 8% on a year-to-date basis versus less than 2% for a comparable large-cap index.

Banks dominated the opening of the earnings season with the release of their final 2025 quarterly results. JPMorgan Chase (JPM) narrowly beat earnings expectations, but the stock moved lower as investors focused on weaker headline profit figures. In contrast, Morgan Stanley (MS) and Goldman Sachs (GS) saw their share prices rise after delivering results that broadly exceeded analysts’ expectations. Elsewhere, Taiwan Semiconductor Manufacturing Company (TSM) reported a strong increase in fourth-quarter profits on Thursday, underpinned by robust demand for advanced chips.

A wave of political and trade-related developments from Washington, D.C., shaped market sentiment over the week. Donald Trump’s renewed rhetoric on Greenland, proposals to cap credit card interest rates at 10%, and the potential introduction of a 25% tariff on imports from countries that continue to trade with Iran added to the uncertainty. The Federal Reserve Chair, Jerome Powell, also faced heightened scrutiny following a Department of Justice investigation linked to his congressional testimony on the Federal Reserve’s headquarters renovation.

U.S. inflation eases as consumer spending remains resilient

Core consumer inflation slowed further in December, with prices rising at their weakest annual pace since March 2021, according to the Bureau of Labor Statistics. The core consumer price index, which excludes food and energy, increased 0.2% month on month and 2.6% year on year, both slightly below expectations of 0.3% and 2.7%. Headline inflation rose 0.3% on the month and 2.7% on the year.

The BLS also released its November producer price index, delayed by the government shutdown. Producer prices rose 0.2% month on month and 3.0% year on year, up from 0.1% and 2.8% previously, with higher energy prices the main driver of the increase.

Meanwhile, data from the U.S. Census Bureau showed consumer spending was stronger than expected in November. Retail sales climbed 0.6%, exceeding forecasts of around a 0.4% rise and rebounding from a modest decline in October. However, growth in control group sales, which feed into GDP calculations, slowed to 0.4% from 0.6% in the prior month.

Bond markets strengthen as yields ease and credit outperforms

In fixed income, U.S. Treasuries moved around mid-week, but delivered positive returns heading into the closing bell in anticipation of December’s industrial production data and January’s gauge of homebuilder sentiment. Short-term yields edged slightly higher, while long-term yields eased marginally, reflecting the inverse relationship between bond prices and yields. The yield spread between the 2- and 10-year U.S. Treasury notes narrowed to below 60 basis points, or 0.6 percentage points, for the first time since mid-December.

Corporate bonds also flourished, recording gains and outperforming U.S. Treasuries, supported by steady investor demand that comfortably absorbed a heavy wave of new issuance. Investment-grade spreads tightened, and activity in the high-yield market remained robust. However, energy-related bonds underperformed, weighed down by movements in oil prices and ongoing geopolitical concerns, according to our traders.

Europe

Measured in local currencies, the pan-European STOXX Europe 600 Index rose 0.77%, supported by resilient economic data and corporate earnings. Performance across major markets was mixed, with Germany’s DAX and Italy’s FTSE MIB recording modest gains, France’s CAC 40 falling 1.23%, and the UK’s FTSE 100 advancing 1.09%.

Germany

Germany’s economy recorded its first growth in three years in 2025, supported by stronger household and government spending, with GDP rising 0.2% in both the fourth quarter and across the full year. However, trade momentum weakened, as exports fell 0.3% due to higher U.S. tariffs, a stronger euro, and increased competition from China, while imports rose 3.6% in real terms after two years of decline. As a result, Germany’s trade surplus narrowed sharply to EUR 110 billion from EUR 241 billion in 2024, one of the lowest levels in over two decades. Meanwhile, inflation remained subdued, with the final December Consumer Price Index confirming a steady 1.8% year on year increase and little change month on month

United Kingdom

The UK economy returned to growth in November, with GDP rising by 0.3% month on month after two consecutive months of contraction. The outturn comfortably beat expectations for a modest 0.1% increase. Growth was driven by gains in services and production, including a rebound in manufacturing, supported by the reopening of Jaguar Land Rover plants following a cyberattack.

Japan

Japanese equities delivered a strong performance over the week, with the Nikkei 225 climbing 3.84% and the broader TOPIX advancing 4.11%. Markets hovered close to record highs amid reports that Prime Minister Sanae Takaichi is considering calling a snap general election in early February, aimed at securing a clear majority for the ruling Liberal Democratic Party.

Investors appear to welcome the prospect of a Takaichi-led victory, viewing it as a step towards reduced political uncertainty and a stronger mandate for aggressive fiscal stimulus. This optimism has helped reignite the so-called “Takaichi trade”, supporting gains in sectors linked to artificial intelligence, nuclear power and defence.

Election volatility hits yen as policy uncertainty builds

The yen initially sold off rapidly on the election news before stabilising around JPY 158 against the U.S. dollar, broadly remaining unchanged in the week. Some support came from comments by Finance Minister Satsuki Katayama, who warned that authorities could act against excessive currency moves that are not justified by fundamentals. In fixed income, the yield on the 10-year Japanese government bond climbed to 2.18% from 2.09% the previous week, reflecting investor concern that further fiscal stimulus could add pressure to Japan’s public finances.

On monetary policy, expectations had largely centred on the Bank of Japan raising interest rates in July. However, the yen’s prolonged weakness has led some investors to speculate that the next hike could be brought forward, potentially as early as April. At the BoJ’s December 2025 meeting, Governor Kazuo Ueda offered limited guidance on the pace of further policy normalisation, while reiterating that rate increases would depend on economic and inflation forecasts being met and, crucially, on evidence of sustained wage growth.

China

Chinese markets moved lower on the back of changing exchange regulations. This saw the CSI 300 Index fall 0.57%, while the Shanghai Composite Index declined 0.45%, according to FactSet. This pushed investment to local Hong Kong equities, with the Hang Seng Index climbing 2.34%. 

The new rules mean that traders must now provide margin equal to the full value of the securities they purchase on credit, up from the previous requirement of 80%. These leverage reductions apply across China’s three stock exchanges in Shenzhen, Shanghai, and Beijing. The move comes as a cautionary response to a rapid increase in A-share market turnover, which exceeded 3 trillion yuan for three consecutive days, with Tuesday’s session alone reaching 3.7 trillion yuan, approximately USD 530.4 billion. Analysts note that the adjustment underscores regulators’ intention to guide the market towards more stable and rational development, rather than allowing momentum to be driven by overheated short-term speculation. 

The regulatory move follows a strong start to the year for Chinese equities. In early January, the CSI 300 Index climbed to its highest level in four years, while outstanding margin lending rose close to record highs. Despite persistent headwinds, including a fragile property sector and ongoing deflationary pressures, equity markets have rallied sharply over the past month, driven by strong interest in artificial intelligence–related stocks and renewed confidence in domestic technology companies.

Economic data has also been more encouraging. China reported a 6.6% increase in exports in December, marking the fastest growth in three months, while the country’s trade surplus reached a record USD 1.2 trillion in 2025. Strong export demand from Southeast Asia and Europe more than offset weaker shipments to the United States, where tariffs continue to weigh on demand. While these figures highlight China’s manufacturing resilience and ability to navigate trade barriers, they also raise the risk of heightened tensions with global partners as Chinese goods continue to flow into markets across Africa, Latin America, and beyond.

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