Global Market Overview | January 2025

04 February 2025

written by the FNB Wealth and Investments Research team

Global equity markets started the year on a positive note with major regions locking in solid gains (MSCI World Index: +3.7%, MSCI Emerging Market Index: +1.7%) during January. Despite some uncertainty weaving through the markets as investors mulled the impact of President Donald Trump’s second term in office, sentiment remained generally positive on the back of persistently resilient US economic data as well as very encouraging results out of several key sectors in the United States (US). The tech sector, however, was a bit rattled after news broke that a Chinese company had developed an advanced large language model (LLM) called DeepSeek, akin to ChatGTP but at a fraction of the cost. Geopolitical risks also eased following news of a ceasefire in the Middle East, providing a further tailwind for risky assets. 

Looking more closely at the US (S&P 500 Index: +2.9%), President Trump’s second term has certainly kicked off “with a bang” and early indications are that there may be more wide sweeping changes (in quick succession) than during his first term. While he focussed on inflation and made several promises to bring down prices in the world’s largest economy – investors and economists continue to ponder how this will be affected, with some of his major policy positions (on tariffs and immigration in particular) being largely inflationary. In terms of interest rates, the Federal Reserve kept its benchmark rate steady at the 4.25% to 4.5% range during its January meeting, in line with expectations. The central bank paused its rate-cutting cycle after three consecutive reductions in 2024 that totalled 100bps. Policymakers noted that recent data has suggested that economic activity remains strong, with the unemployment rate appearing stable and labour conditions remaining solid. US Fed Chairperson, Jerome Powell, highlighted that the Fed is not in a hurry to lower interest rates, and that it paused cuts to see further progress on inflation.

Across the pond, Eurozone equities delivered a robust recovery with the Euro Stoxx 600 Index having added 6.8% at the time of writing, like what was seen in the first quarter of 2024. Generally upbeat earnings releases (spurring future earnings upgrades), another rate cut from the European Central Bank (ECB), a relatively weaker euro (which enhances export competitiveness), and a stronger-than-expected Chinese recovery aided flows into European equities. President Trump has also adopted a “less aggressive” tone with regards to blanket tariffs more recently, which has provided further support to the current wave of optimism. These factors appear to be providing a solid foundation for European equities, but volatility could resurface if macroeconomic or political risks materialise in the upcoming months.

Chinese stocks staged a late recovery, ending the month marginally in the black (MSCI China: +1.4%). The positive shift towards month end was driven by a “friendly” conversation between President Trump and President of the People's Republic of China, Xi Jinping, which supported expectations for a potentially softer approach by the US toward tariffs on Chinese goods. In terms of key economic data, the Chinese economy expanded by 5.4% y/y in 4Q24, accelerating from 3Q24 and surpassing market estimates of 5%, with growth boosted by a series of stimulus measures launched since last September.

Locally, the All Share Index (+2.2%, USD: +4.1%) also rode the recent wave of global optimism with domestic prospects remaining encouraging on the back of easing interest rates, an ongoing recovery in consumer confidence (positive trading updates from several retailers also showed that festive season trade was relatively strong), and further progress surrounding economic reforms. The South African Reserve Bank (SARB) kicked off the year by cutting rates by 25bps as expected at its first meeting for 2025. Surprisingly, the decision was not unanimous, with four members voting for the cut and two having advocated for no change. The statement noted that while inflation is currently low, the risk to inflation is to the upside – mainly due to the global environment. For the time being, we still expect a further two interest rate cuts this year, but the timing thereof is uncertain.

Economic data overview

US Fed pauses rate-cutting cycle

Flash estimates showed that the S&P Global Composite PMI eased to 52.4 in January, down from 54.4 in December. This reading signalled the weakest expansion in the country’s private sector in nine months. Retail sales increased 3.9% in December, lower than the 4.1% increase in November. The trade deficit expanded to $78.2 billion in November, the highest since March 2022, and roughly in line with the expected $78 billion, compared to a $73.6 billion shortfall in October. The unemployment rate softened to 4.1% in December from 4.2% in November and was below the expected 4.2%. The annual inflation rate accelerated to 2.9% in December, up from 2.7% in November, which was in line with market expectations. The Federal Reserve kept the fed funds rate steady at the 4.25% to 4.5% range during its January 2025 meeting, in line with expectations. Policymakers noted that recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilised at a low level in recent months, and labour market conditions remain solid. Additionally, the central bank acknowledged that inflation remains somewhat elevated and removed its previous reference to ongoing progress toward the 2% target. The Fed also said the economic outlook is uncertain and it is attentive to the risks to both sides of its dual mandate.

ECB implements another 25bps rate cut

The HCOB Flash Eurozone Composite PMI rose to 50.2 in January from 49.6 in December, ahead of the expected 49.7, marking the first expansion in the Eurozone’s private sector activity since August last year. Retail sales increased 0.1% m/m in November, below an expected 0.4%. The Eurozone posted a trade surplus of €16.4 billion in November, accelerating from a €8.6 billion surplus in October and ahead of an expected €8.5 billion. The unemployment rate remained flat at 6.3% in November, in line with market expectations. Annual inflation in the Euro area accelerated for the third consecutive month to 2.4% in December, up from 2.2% the month before, which was the highest rate since July, and in line with expectations. The ECB lowered its key interest rates by 25bps in January 2025, as expected. This move reflects the ECB’s updated inflation outlook, with price pressures easing in line with projections.

Annual inflation in the UK eases in December

The S&P Global Composite PMI expanded to 50.9 in January, rebounding from a 14-month low of 50.4 in December, beating market expectations of 50. The expansion was bolstered by the services sector, offsetting another contraction for manufacturers. Retail sales increased by 3.6% in December, following a flat reading in November, but below an expected 4.2% increase. The UK’s trade deficit contracted to £4.8 billion in November, from an upwardly revised £5.0 billion deficit in October. Imports grew 0.6% to £72.8 billion, while exports rose 1.0% to £68.0 billion. The unemployment rate increased to 4.4% from September to November, up from 4.3% in the previous two-month period and exceeding expectations. Annual inflation eased to 2.5% in December from 2.6% in November and was below an expected 2.6%. The Bank of England (BoE) left the benchmark bank rate steady at 4.75% during its December 2024 meeting, in line with expectations. The central bank reiterated that a gradual approach to removing monetary policy restraint remains appropriate and that monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.

BoJ raises short-term interest rates to its highest level in 17 years

The Jibun Bank Flash Japan Composite PMI increased to 51.1 in January, up from 50.5 in December, marking the third straight month of expansion in private sector activity. Retail sales grew 2.8% in November, up from a downwardly revised 1.3% in October and well ahead of an expected 1.7% increase. This marked the 32nd straight month of expansion in retail sales and the fastest growth since August. Japan’s trade surplus soared to ¥130.9 billion in December from a ¥110.3 billion deficit in November, beating market expectations of a deficit of ¥55 billion. This was the first trade gain since June, as exports grew faster than imports. The unemployment rate in November remained flat at 2.5%, holding steady for the second consecutive month and matching market expectations. The Japanese annual inflation rate jumped to 3.6% in December from 2.9% in the previous month, marking the highest reading since January 2023. The Bank of Japan (BoJ) raised its key short-term interest rate by 25bps to 0.5%, the highest level in 17 years, in line with market consensus. This marked the third rate hike since the central bank ended negative interest rates in March last year. The policy board also highlighted plans for further rate increases and reduced monetary support if economic and price data align with its forecasts.

Recent data out of China has surprises to the upside

The Caixin China General Composite PMI dropped to 51.4 in December compared to 52.3 in November – the lowest print since September despite it being the 14th month of expansion in private sector activity. Retail sales increased 3.7% in December, accelerating from November’s three-month low of 3.0% and exceeding market expectations of 3.5%. China’s trade surplus surged to $104.8 billion in December, up from $75.3 billion in December 2023 and surpassing market expectations of $99.8 billion. The surveyed unemployment rate edged up to 5.1% in December compared to market estimates and November’s reading of 5%. China’s annual inflation rate eased to 0.1% in December from 0.2% in the prior month, aligning with market estimates and marking the lowest print since March. The People’s Bank of China (PBoC) kept its key lending rates unchanged for the third consecutive month in January, aligning with market expectations. Rates remain at record lows following reductions in October and July. The latest decision was impacted by renewed pressure on the yuan that limited the central bank's ability to ease further monetary policy, and increasing concerns about potential US policy shifts under the incoming Trump administration.

SARB cut rates again but the number of future cuts remain uncertain

Real GDP unexpectedly declined by 0.3% q/q in 3Q24, against consensus of 0.5% growth. On an annual basis, the economy grew by a modest 0.3%, well below forecasts of 1.2%. The quarterly contraction was primarily driven by a steep 28.8% q/q decline in the volatile agriculture, forestry, and fishing sector, which deducted 0.7 percentage points (ppts) from GDP growth. The FNB/BER Consumer Confidence Index edged down to -6 in 4Q24 from -5 in 3Q24, which was the highest since 1H19. The trade surplus was R34.7 billion in November, up from a revised R14.1 billion in the prior month. This was the largest trade surplus since March 2022, driven by an increase in exports (+1.2%) alongside a steep decline in imports (-11.2%). Mining production fell by 0.9% y/y in November, following a downwardly revised 1.1% rise in October. This was the first drop in mining activity following three months of growth, largely attributed to declines in gold (-11.5%), iron ore (-3.8%), coal (-1.6%), and diamonds (-11.4%). Local manufacturing production declined by 2.6% y/y in November, following an upwardly revised 0.9% increase in the prior month. This marked the steepest contraction in manufacturing activity since June. The annual inflation rate increased marginally to 3% in December, up from 2.9% in November but below the 3.2% forecast. This remains significantly below the SARB's midpoint of its 3% to 6% target range of 4.5%. Retail sales advanced by 7.7% y/y in November, following a downwardly revised 6.2% rise in the prior month and surpassing market forecasts of a 5.5% increase. This marked the 9th consecutive month of growth in retail activity and the strongest since July 2022. The SARB cut its key interest rate by another 25bps to 7.50% on 30 January, as anticipated, marking the third successive reduction. While inflation remained well-contained, the central bank noted that the medium-term outlook was more uncertain than usual.

Outlook

Local

• The global economic outlook remains challenging but improved from the universal US tariff increases feared at the end of last year. Since taking office, President Donald Trump has scaled down to a nuanced tariff strategy. That said, the risk to labour supply, inflation, and interest rates is concerning.
• While the impact of these risks to SA is not yet clear, it will more immediately show up in rand-dollar weakness. The counterbalance will be a higher supply of oil amid weak demand, which will weigh on oil prices and contain fuel inflation. This should assist average headline inflation to remain around the target midpoint, even though this year will be a tale of two halves – below-target inflation in 1H25 and an acceleration in 2H25 as positive base effects fade, administered price inflation rises, and demand improves.
• Ultimately, monetary policy will, at best, shift to a more neutral stance, which will ensure that inflation is anchored over the medium term. We see the possibility that the cutting cycle will be paused briefly before monetary policy space is created by a resumption of rate cuts in 2H25 and slower one-year-ahead inflation. We still think that interest rates could become neutral at 7% by year-end, but the risk of less cuts is considerable.
• A softer cost-of-living and rising confidence should have supported demand going into 2025. This, coupled with improved activity in the productive sectors, should usher-in higher growth in 2025. Over the medium term, structural reform and investment growth remains key to potential and real economic growth.
• Structural reform will also be pivotal in lowering SA’s risk premium, structural inflation and interest rates, as well as securing fiscal stability over the longer term.

   

  Global

• US growth continued to show resilience as 4Q24 GDP was still above potential growth despite monetary policy remaining restrictive. Growth for 2024 was 2.8%, and consensus for 2025 growth is 2.2%. Our house view is for US growth to underperform consensus in 2025 slightly.
• This month core PCE met expectations at 2.8%, still way above the 2% target of the Fed. Shelter inflation and core services should continue to trend lower; causing overall inflation to move down towards target, but risks remain that inflation proves ‘stickier’ than expected.
• The Fed’s interest rate cutting cycle started in September 2024 with a bigger-than-expected 50bps cut. The Fed cut rates again by 0.25% at their December meeting but paused at its latest January meeting. Powell said that rate-setters “do not need to be in a hurry to adjust our policy stance”. Growth is strong and the US is close to full employment. The uncertainty of potential policy changes (like tariffs and deportations) should make them more data dependent going forward.
• In emerging markets, Chinese macroeconomic data improved slightly in January. GDP for 4Q24 surprised at 5.4% (expected 5%), taking 2024 GDP to the targeted 5% level. Most of the stimulus announcements to date have been around monetary policy (lower interest rates) and measures to stop the property market from collapsing further. Fiscal policy is what is needed to structurally get China out of their deflationary slump and to restore confidence. Fiscal policy announcements are expected over the next few weeks; the magnitude of which will dictate market movements. Expect some announcements as soon as the US introduces more trade tariffs on China.
• The US dollar had a volatile but mostly flat month. Reasons include stronger economic data from the US versus peers, interest rate differentials (as US cuts are priced out), as well as the red sweep victory of the Republican party that is expected to introduce policies that should support the currency over the short-to-medium term. Going against the dollar will mainly be a function of positioning, as most investors are overweight on the currency.
• Gold continued with its remarkable run to new highs this month. Reasons include central bank buying, geopolitical tensions, uncertainty around policies, and investor appetite growing.
• Given all the above uncertainties, we are closely aligned to our strategic asset allocation benchmarks, with a slight defensive twist. We slightly favour fixed income over equities.