The Davy Digest - 17th February 2025

A stronger-than-expected US inflation figure pushed yields higher in the middle of the week and caused a sell-off in stocks, but most major indices soon recovered these losses. Inflation surprised markets to the upside in the US, with CPR and PPI both bolstering the case for the Federal Reserve to proceed slowly with interest rate cuts. However, below the surface, the shelter component, which has been higher and stickier, showed signs of continued disinflation. US retail sales fell in January by the most in almost two years, falling sharply by 0.9%, partially weakened from weather effects and Californian fires. In Europe, German inflation was unchanged in January. Elsewhere, UK GDP for Q4 2024 unexpectedly grew by 0.1%, beating forecasts. The quarter was lifted by stronger-than-expected growth of 0.4% in December. Inflation picked up in China last month as the Lunar New Year holiday boosted January spending. China’s CPI rose 0.5% in January year-on-year, its fastest growth rate since August last year.

Last week's highlights

	US Inflation (CPI) (12/02) - Unexpectedly increased to 3.0% vs 2.9% expected. Producer Price Index (13/02) – Rose to 3.5% in January vs. 3.2% expected. Retail Sales (14/02) – Fell sharply in January by 0.9% vs previous 0.7%.
	Germany Core Harmonised Index of Consumer Prices (13/02) – Unchanged year-on-year at 2.8% in January.
	Preliminary Q4 GDP (13/02) - Grows by 0.1% in Q4, beating forecasts.
	China Consumer Price Index (09/02) - 0.5% year-on-year vs 0.4% forecast. China Producer Price Index (09/02) – Fell by 2.3% year-on-year vs -2.2% forecast.

Looking ahead to this week, the US will see data on its residential building activity with figures on housing starts and building permits being released on Wednesday. The Federal Open Market Committee will also release its minutes, while investors will receive flash PMIs for manufacturing and services. Elsewhere, the Euro area will see a consumer confidence figure, while Germany will release its HCOB Manufacturing PMI ahead of the German Federal Election on Sunday. Elsewhere in Europe, the UK will also release flash PMIs for manufacturing and services, as well as consumer confidence and retail sales releasing on Friday. Investors will also receive an inflation figure for the UK this week. Finally for this week, Japan will see a Q4 GDP figure along with an inflation rate for January.

What's on the radar

	Housing Starts (19/02) FOMC Minutes (19/02) S&P Global Manufacturing PMI (21/02)
	Consumer Confidence (20/02) Germany HCOB Manufacturing PMI (21/02) 2025 German Federal Election (23/02)
	UK Inflation (CPI) (19/02) S&P Global Manufacturing PMI (21/02) Retail Sales (21/02)
	Q4 Japan GDP (16/02) Japan Inflation Rate (20/02) Central Bank meetings – Reserve Bank of Australia (18/02), Bank Indonesia (19/02), Reserve Bank of New Zealand (19/02)

Chart of the moment

Keeping an eye on CPI

Source: Bloomberg, 17/02/2025

• Thursday’s Consumer Price Index (CPI) report in the US came in hotter than expected, with the headline figure rising by 0.5% month-on-month.
• Since the beginning of the summer, the rate of inflation has been trending higher, bringing the headline year-on-year figure back to 3.0%.
• Seasonal effects as well as elevated energy and food prices have been the primary drivers of this higher rate, while shelter costs – which had previously been lagging the broader disinflationary trend – experienced their smallest annual increase since 2021.
• This will further encourage the Federal Reserve to adopt a “wait and see” approach to future rate cuts, particularly as uncertainty around tariffs remains a threat.