The week ahead: Three things to watch

Analysts believe that American exceptionalism will persist in 2025, and the first trading week of the year would suggest that investors are also betting on another strong year for the US. American stock indices outperformed Europe in the first two trading days of 2025 last week, and S&P 500 futures are also pointing to a higher open today. The Dow rose by 0.44%, the S&P 500 was higher by 1% and the Nasdaq rose by 1.6%. This compared with a 1% drop for the Eurostoxx 50 index, a 1.8% decline for the French Cac 40, and a 0.5% decline for the German Dax. The FTSE 100 also stumbled, but not by as much as its European peers, and was lower by 0.1%.

The US stock market gains came even though there were some notable decliners in the first days of January trading. Losers include Tesla. Elon Musk’s links to the President elect can only go so far in buoying the Tesla share price. The stock declined sharply on the first trading day of the new year on the back of disappointing sales figures,  and although it staged a recovery on Friday, it is still lower by more than 3% compared to its intraday high on 31st December. The fading of the Trump trade has also weighed on Bitcoin, which remains below the key $100k mark, although it is making gains as we start a new week. The market is still happy with US equities overall, and the equal weighted S&P 500 kept pace with the market-weighted index at the start of trading in 2025, which could be a sign that cheaper value stocks could come to the fore as we enter Q1. If that happens, then it could also be a sign that cheaper European, especially UK stocks, may also start to catch up with their US peers.

Will European stocks face an equity risk premium?

Although it is too early to try and spot trends in equity market price action for 2025, the relative early performance of European and US stock indices suggests that there could be a political risk premium added to European stock indices. German elections will be held next month, while a French election is possible in the second half of the year. Elections were last year’s news for the UK and the US, so they pose less risk to investors this year, at least from a political perspective.

1, Global inflation data in focus

This theme was also visible in the bond market. There was a broad-based sell off in bonds at the start of the new year, French and German bonds underperformed US and UK 10-year sovereign debt. UK Gilt yields rose by just under 3 bps last week, this compares with a 9 bp increase in French yields and a near 6 bp rise in German yields. European yields are also rising at the start of the new week.  The French – German yield spread continued to rise at the start of January and is currently 86bps. All eyes will be on this spread as the market looks towards the new French government led by Francois Bayrou, who has pledged to have a 2025 budget by mid-February, just in time for the German elections. Thus, at this early stage in the new year, risks are mounting for Europe. Added to this, European inflation data due later this week could determine if the European bond sell off continues.

The market is expecting Eurozone inflation to tick up to 2.4% for last month, core inflation is expected to remain steady at 2.7%. This is well above the 2% inflation target set by the ECB, this data could challenge the ECB’s dovish stance. The market is still expecting more than 4 rate cuts from the ECB this year, and interest rates are expected to fall to 1.89% by December. This is significantly lower than elsewhere, which is why the euro remains unloved, especially vs GBP and USD. EUR/USD sunk more than 6% last year, and since breaking $1.05, a return to parity looks inevitable. However, a stronger than expected inflation reading could halt the euro’s slide versus the USD in the short term, especially if it leads to a scaling back of expectations for rate cuts from the ECB later this year.

The Eurozone is not the only inflation print to watch this week. China is expected to see annual inflation hover around 0%, with only 0.1% expected. In Japan, labour cash earnings are expected to tick up to 2.7% in November, from 2.2% in October. However, real cash earnings are expected to slip further to -0.6% YoY. The Bank of Japan failed to deliver an end of year rate hike in December; however, we doubt that this week’s data will cause the BOJ to recalibrate the snail’s pace expected for rate hikes in 2025. The market currently expects a 10bp rate hike from the BOJ later this month, however, the market is currently pricing in a 40% chance that this will happen, which suggests that the market isn’t convinced a rate hike will happen this month and instead the BOJ will push out a rate hike to later in Q1.

2, US labour market health check

US markets face considerable macro risk this week, with multiple jobs data and Fed minutes also due. The market will be scouring the Fed minutes to get clues about whether the Fed rate cut in December will be the last one for a while. There are currently just over 2 rate hikes priced in from the Fed for 2025. The market will be looking for clues in the minutes that more Fed members could sit on the sidelines in the coming months, after only one member dissented against December’s rate cut. A ‘hawkish’ reading of the minutes is mostly expected by the market, so the reaction in financial markets could be small.

The major market moving event for the week will be the US Non-Farm Payrolls report that is due for release on Friday at 1330 GMT. The market is expecting a 160k reading, which is a slowdown from the 227k from November. The unemployment rate is expected to remain steady at 4.2%, and average hourly earnings are expected to continue to expand at a 4% annual rate. The risk is to the upside for the December NFP figure, as the US labour market may still be impacted by the hurricanes in October. This may also have a temporary effect on wage growth. Overall, the impact of the hurricanes will likely wane in the coming months, so any uplift could be temporary. The market impact from payrolls on the S&P 500 has been positive in the last couple of months, suggesting that momentum in the US stock market has managed to withstand some strange payrolls numbers triggered by the October weather events. Thus, if we see the US market rally into this payrolls report, then payrolls may not disrupt the prevailing trend. Over the past 12 months, the average move in the S&P 500 in the 30 minutes after the release has been 0.11%. Interestingly, the impact on the dollar has been milder, and EUR/USD has barely budged after a payrolls report in the last 12 months.

3, Trading and earnings updates

In the UK the highlight will be a plethora of trading updates from the major retailers. Things will start to get interesting for the UK retail sector as they give the market updates about the strength of the Christmas trading season. On Tuesday, Next kicks things off, followed by Shell on Wednesday, there is a bumper Thursday, with M&S, Tesco and B&M all updating the market about how their Christmas sales fared. On Friday we get Sainsbury’s update.

It’s been a mixed 12 months for the retail sector in the UK. Sainsbury’s share price is down 8% in the past 12 months, Tesco is higher by 25%, M&S is higher by 38% and Next is up by 17%, so it has not been all doom and gloom for the UK retailers, even if that is what consumer sentiment suggests.

However, the next leg in their stock prices will be determined by the all-important post-Christmas trading update, so these reports matter. Strong readings could see Sainsburys play catch up and add a positive glow to the FTSE 100 at the start of this year. However, early signs suggest that footfall was weak in the Christmas period, and it will be worth watching to see if online sales made up for this. However, if weak consumer sentiment does start to translate into lower sales, then the likes of Tesco, M&S and Next have room to fall.

In the US, Delta will kickstart earnings season on Friday, with Walgreens also reporting results. However, while Delta is worth watching to gauge the strength of consumer sentiment in the US, especially for the holiday season, the market will need to wait until next week for big hitters like US banks, who will report their earnings. JP Morgan will kick off the US earnings season when they report results on 15th Jan.