Markets Blog
David Matzko, LPL Research
LPL Research provides its Weekly Market Performance for the week of February 17, 2025. Stocks held tough against the latest tariff and geopolitical headlines but were weighed down by underwhelming economic data to close the week. U.S. stocks ended the abbreviated week in the red, while their European counterparts also ended mixed due to trade and local rate-cut jitters. Meanwhile, Asian markets logged their sixth straight weekly gain. Treasury yields ended the week lower after bond prices climbed following Friday’s slate of economic data.
Index Performance
U.S. and International Equities
U.S. Equities: In a holiday-shortened week of trading, major U.S. averages ended lower following rangebound price action for the first half of the week. Securities in the Dow Jones faced the worst selling, falling 2.6%, while the tech-heavy Nasdaq shed 2.5%. The benchmark S&P 500 ended 1.5% in the red after Friday’s declines. Equities traded mostly sideways but in positive territory to start the week, enough to push the S&P 500 to fresh all-time highs. Investors refrained from making outsized bets amid the latest U.S. trade developments, in which President Donald Trump announced additional levies set to go into effect in April targeting automobiles, semiconductors and pharmaceutical products. However, markets appeared somewhat cushioned from the news due to few details and the delayed implementation. Some upside support came from news that President Trump sent U.S. officials to hold meetings to discuss a ceasefire in the war in Ukraine with President Vladamir Putin and Russian authorities. On the home front, markets awaited the release of the January Federal Open Market Committee (FOMC) meeting minutes on Wednesday afternoon. Market reaction was limited, and the minutes did little to sway rate-cut bets in either direction, but the central bank’s reiterated patient stance and inflation expectation warnings were noted.
Markets faced some downward pressure on Thursday after big box retailer Walmart (WMT) offered lackluster profit guidance, sending shares of WMT sharply lower and sparking some discussion around consumers continuing to battle elevated prices. However, Wall Street largely chalked up the move to elevated expectations. Major indexes ultimately sealed a weekly decline on Friday following an unexpected drop in consumer sentiment based on the final print of the February University of Michigan Consumer Sentiment report, and weak flash Purchasing Managers’ Index (PMI) results for February. Negative flows from monthly option expirations also weighed.
International Equities: European equities ended the week mixed, although the regional benchmark STOXX 600 ended slightly higher. Among major markets, Switzerland and Italy outperformed, while the U.K., France, and Germany lagged. Stocks continued to reach record levels on peace talks for the war in Ukraine between Russia and the U.S., although tariff concerns and rate-cut jitters weighed on the region. Markets trimmed weekly gains on Wednesday after European Central Bank (ECB) Executive Board member Isabel Schnabel stated a rate-cutting pause is approaching. Plus, in the U.K. rising jobless claims and elevated wage growth trimmed hopes of rapid policy easing by the Bank of England (BOE). Meanwhile, corporate results remained resilient.
Elsewhere, the Asia-Pacific region logged its sixth consecutive weekly gain largely on the back of Chinese-listed tech companies in Hong Kong. The Hang Seng Index gained nearly three percent following last week’s surge, lifted by ongoing artificial intelligence (AI) and technological advancement enthusiasm. Strong quarterly results from Alibaba reinforced the theme, as well as remarks from the company for plans to aggressively invest in AI over the next three years. Mainland China ended the week with a solid gain, while the tech-leaning markets of Taiwan and South Korea also closed well into positive territory. Japan ended lower as investors digested hawkish-leaning comments from Bank of Japan (BOJ) officials this week, before BOJ Governor Ueda attempted to calm markets on Friday.
Fixed Income, Currency, and Commodity Markets
Fixed Income: The Bloomberg U.S. Aggregate Index traded higher this week, after bonds climbed (yields lower) following Friday morning’s disappointing economic data. The rate-sensitive two-year Treasury yield and the 10-year yield ended six basis points (0.06%) higher.
Friday’s economic calendar raised questions about growth prospects, colliding with the Fed’s patient stance toward rate cuts. Nonetheless, despite the increase in long-term inflation expectations, bond yields remained lower on Friday. Wednesday’s release of the January FOMC meeting minutes was the other macro highlight of the week, which arrived mostly as expected. However, the minutes noted that policymakers discussed pausing or slowing the pace of balance sheet runoff, largely known as quantitative tightening (QT). The discussion arose due to the ongoing debt ceiling discussions and the possibility of “significant swings” in reserve balances over the next few months. The longer it takes Congress to either suspend, lift or eliminate the limit, the more cash from the Treasury’s General Account (TGA) will make its way back into the financial system, artificially boosting reserves and masking short-term funding market signals that could indicate when it’s time to stop QT. System Open Market Account (SOMA), the technical term for the Fed’s balance sheet holdings, manager Roberto Perli cautioned those moves could become harder to gauge as the debt-limit situation “clouds the signals” provided by money market indicators, and that extra cash banks stash at the Fed might decline quickly once a deal is struck. So far, the Fed has unwound more than $2 trillion from its balance sheet, leaving about $6.8 trillion in the SOMA — well above pre-COVID-19 levels of around $4 trillion. The market impact should be mildly bullish for Treasuries and risk assets as it decreases the risk that QT goes too far and disrupts the short-term funding markets, as was the case in 2019 when excessive QT caused repo rates to spike from 2% to 10%, which caused the Fed to immediately reverse course. In other Treasury market news, Thursday morning, Treasury Secretary Scott Bessent said that terming out the U.S. Treasury debt is still a “long way off” so the bond market doesn’t need to be overly concerned about Treasury issuing longer-maturity Treasury securities, which is also mildly bullish for Treasury markets.
Economic Weekly Roundup
Fed Minutes Gave Investors Key Insights. First, a word of warning for inflation expectations. Firms would attempt to pass on to consumers higher input costs arising from potential tariffs, according to January Fed minutes released Wednesday afternoon. Underlying that attempt to pass along higher prices assumes some level of pricing power among firms, so the magnitude of the inflationary shock from tariffs is uncertain. Second, investors need patience for the next rate cut. The committee is not on a preset course since they take time to assess the evolving outlook. Inflation reports should improve by April and May, giving investors a bit more clarity on inflation trajectory. For now, though, the next rate cut will likely be in late summer.
Consumer Sentiment and Activity Data Underwhelms. Friday’s preliminary release of composite PMI data fell short of consensus expectations, as well as prior readings. Manufacturing activity inched above estimates, moving further into expansion territory, but services activity slipped into contraction, arriving at 49.7 compared to estimates of 53.0 (50 or higher is considered expansionary). The slate of macro data to end the week also featured the final University of Michigan Consumer Sentiment report for February, which underwhelmed markets after consumer sentiment dipped and longer-term inflation expectations rose to 3.5% versus the expected 3.3%. One-year inflation expectations remained unchanged.
The Week Ahead
The following economic data is slated for the week ahead:
Monday: Chicago Fed National Activity Index (Jan), Dallas Fed Manufacturing Activity (Feb)
Tuesday: Philadelphia Fed Non-Manufacturing Activity (Feb), FHFA House Price Index (Dec), House Price Purchase Index (4Q), S&P Case-Shiller 20-City and U.S. House Price Indexes (Dec), Conference Board Consumer Confidence Report (Feb), Richmond Fed Manufacturing Index and Business Conditions (Feb), Dallas Fed Services Activity (Feb)
Wednesday: MBA Mortgage Applications (Feb 21), New Home Sales (Jan), Building Permits (Jan final)
Thursday: GDP Annualized (4Q second reading), Personal Consumption (4Q second reading), GDP Price Index (4Q second reading), Core PCE Price Index (4Q second reading), Durable Goods Orders (Jan preliminary), Captial Goods Orders and Shipments (Jan preliminary), Initial Jobless Claims (Feb 22), Continuing Claims (Feb 15), Pending Home Sales (Jan), Kansas City Fed Manufacturing Activity (Feb)
Friday: Advance Goods Trade Balance (Jan), Retail Inventories (Jan), Personal Income (Jan), Personal Spending (Jan), Wholesale Inventories (Jan preliminary), PCE Price Index (Jan), Core PCE Price Index (Jan), MNI Chicago PMI (Feb), Kansas City Fed Services Activity (Feb)
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