Market overview
Soft labour market data and sticky inflation have been two of the prevailing themes surrounding the US economy in recent months. With both sides of the equation largely offsetting each other, the consensus view has, for the most part, been that any interest rate cuts from the Federal Reserve (Fed) in 2026 would likely fall in the second half of the year. Narratives eventually change of course, and last week’s economic data releases in the US pointed towards a possible shift taking place.
On the labour market front, the January non-farm payrolls report came in better than expected at 130,000. The number of jobs added was not just ahead of expectations but was also the highest monthly increase seen in over 12 months. For good measure, there was also a tick lower in the US unemployment rate to 4.3% from December’s 4.4%. The stronger-than-expected data led to an immediate drop in the chances of an interest rate cut taking place in the first half of the year.
Next up inflation. Friday 13th saw the release of January’s consumer price index (CPI) print— not the best day to publish widely followed datasets perhaps. In the event, not a fright was in sight, with a slower-than-expected 2.4% year-on-year increase in prices seen in January, down from 2.7% in December. It was a similar story with the monthly figure, with a 0.2% month-on-month increase compared to 0.3% in December. And with food and energy prices stripped out, core inflation fell to 2.5% in January — its lowest level in almost five years. Cue a reversal of the drop in chances for a rate cut that followed the labour market data with a slightly higher likelihood of a rate cut by June now priced in. All in all, though, no Friday 13th horror show for markets from the latest CPI numbers!
Firmer labour market data and softer inflation numbers meant a reversal of the recent narrative. But we should be wary of reading too much into one month’s data, especially as doubts remain over the accuracy of the inflation readings—last year’s government shutdown led to an interruption in data-gathering efforts which is still working its way out of the numbers. All eyes then on next month’s releases to see if January’s flip flop was a one-off or the start of something more meaningful. At least February’s numbers are not scheduled to be released on another Friday 13th…
Weekly market moves and economic news:
The MSCI All Country World Index (MSCI ACWI) ended the week unchanged, leaving the year-to-date (YTD) gain of 2.9% intact.
United States:
A 1.3% fall on the week saw the US main stock market give up all the gains it had made in 2026 (flat YTD). In a spillover from the previous week, the move lower was largely driven by growing concerns over how artificial intelligence (AI) could disrupt a wide range of companies and sectors. With new AI-tools being unveiled on an almost daily basis, market attention has been switching swiftly from one sector to another. Last week it was the turn of insurers, wealth managers and even trucking companies to come under the spotlight.
Once again, value (-0.4%) outperformed growth (-2.1%), extending the YTD gap— value is now up 6.4% YTD, while growth is down 5.4% YTD. Small caps continue to lead the way with a YTD gain of 6.8%, despite nursing a 0.9% fall for the week.
Volatile stock markets and softer US inflation data lifted US Treasuries. The 10-year US Treasury yield moved 16 basis points lower to 4.05% (down 12bps YTD), while the 2-year Treasury yield fell nine basis points to 3.41% (down 7bps YTD).
United Kingdom:
Neither a burst of political turmoil in the form of calls from within Prime Minister Sir Keir Starmer’s own party for him to resign nor weaker than expected GDP growth (+0.1%) for Q4 2025, were enough to stop London’s stock markets from adding to their YTD gains. Large caps tacked on another 0.7% (+5.2% YTD), while the FTSE 250 Index moved 1.0% higher (+4.6% YTD). Sterling followed suit with the pound finishing the week at US$1.37 compared to US$1.36 previously. As for the yield on 10-year gilts, they ended the week nine basis points lower at 4.42% (down six basis points YTD).
Europe ex UK:
European stocks finished in positive territory too, albeit by a smaller margin than London. The MSCI Europe ex-UK Index closed up 0.2% (+3.9% YTD). At the national level, Germany’s main stock market added 0.8% (+1.7% YTD); France’s 0.5% (+2.0% YTD); and Switzerland’s 0.7% (+2.5% YTD). Italy was the outlier, finishing the week off 1.0% (+1.4% YTD). The region’s stock markets were given a boost thanks to encouraging economic data—the eurozone economy grew 1.5% in 2025 after growing 0.3% in the final quarter of the year, while the number of those employed in the euro area rose by a better-than-expected 0.2% in Q4 2025.
As with sterling, the euro strengthened against the dollar, rising to US$1.19 from US$1.18 previously. Finally, the yield on the 10-year German bund declined nine basis points to 2.75% (down 10 basis points YTD).
