Markets Drift in Low Gear

February 17, 2025

6 min read

Elias Haddad

Markets Drift in Low Gear

US stock and bond markets are closed today in observance of the Presidents Day holiday.
Japan real GDP overshot expectations in Q4 but details were unimpressive.
ECB Panetta argued for looser monetary policy over the weekend.

USD is mixed near last week’s low. Fed funds futures have started to reprice odds of 50bps of easing over 2025 following Friday’s poor US January retail sales report. Still, we don’t want to hit the panic button with just one bad data point. The US consumer spending outlook remains encouraging supported by positive real wage growth, healthy labor market and strong household balance sheet. USD may not see any relief until Friday, when global February PMI readings should underscore the divergence theme.

Today, Fed speakers will have an opportunity today to discuss the latest batch of US data that showed inflation running hot and retail sales activity contracting sharply. Philadelphia Fed President Patrick Harker (2026 voter) (2:30pm London), Fed Governor Michelle Bowman (3:20pm London), and Fed Governor Christopher Waller (11:00pm London). On Friday, Fed President Lorie Logan (2026 FOMC voter) cautioned that lower inflation wouldn’t necessarily prompt further interest-rate reductions.

Meanwhile, financial markets continue to brush-off US tariff noise. US President Donald Trump said Friday that levies on automobiles would come as soon as April 2. Country-by-country reciprocal tariffs could also start at the same time. So far, expectations for a targeted and graduate implementation of tariffs have minimized financial market volatility.

EUROZONE

EUR/USD is consolidating just under 1.0500. Over the weekend, ECB Governing Council member Fabio Panetta argued for looser monetary policy. Panetta said “monetary policy continues to exert downward pressure on economic activity and on inflation, an effect that is less and less necessary with near-target inflation and persistently weak domestic demand. A less decisive easing of monetary policy could lead to excessively low inflation in the medium term.”

Markets imply another 75bps of ECB cuts in the next 12 months which would see the policy rate bottom at 2.00%. Unlike the Fed, the ECB has scope to deliver on rate cut expectations which can pull EUR/USD lower. ECB Governing Council member Joachim Nagel speaks today (11:00am London). Contrary to Panetta, Nagel has cautioned against easing aggressively.

JAPAN

JPY is outperforming. Japan’s preliminary real GDP increased four ticks more than expected by 0.7% q/q in Q4 vs. 0.3% in Q3. But the details were unimpressive. Net exports added 0.7pts to growth on slumping imports. The growth contributions from household spending and non-residential business investment were subdued at 0.1pts each while inventory destocking shaved -0.2pts from growth. Japan rate expectations adjusted higher to imply higher odds of a 1.25% Bank of Japan (BOJ) terminal rate over next two years vs. 1.00% previously. Japan’s January CPI print on Thursday will either reinforce a more aggressive BOJ normalization cycle or curtail current rate hike expectations.

Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2024. All rights reserved.