Weekly Commentary

Last week, U.S. stock indices showed negative dynamics: the S&P 500 declined by 1.0%, while the Nasdaq fell by 1.4%. In contrast, the European EUR STOXX 50 index rose by 1.3%. Brent crude oil prices dropped by $1.7, closing at $76.8.

The corporate earnings season continues in the U.S. Among the companies that have reported, 77% exceeded EPS expectations, aligning with the five-year average (77%) and surpassing the ten-year average (75%). Meanwhile, 63% of companies beat revenue expectations, which is below the five-year average (69%) and the ten-year average (64%).

Chinese AI startup DeepSeek introduced its R1 model, which ranked among the top 10 AI models globally by performance, outperforming solutions from OpenAI, Meta, and Anthropic. A key feature of the model is its low cost—DeepSeek reduced training expenses by 20 times and cut GPU requirements from 100,000 to just 2,000. The model’s usage costs are also significantly lower than competitors: OpenAI’s o1 pricing is $7.50 per million tokens, while DeepSeek charges only $0.14. OpenAI accused Chinese startups of leveraging Western developments and announced plans to collaborate with U.S. authorities to protect its technology. Experts note that DeepSeek’s success stems from its efficient use of AI model "distillation"; however, questions remain regarding the company’s internal economics and the sustainability of its competitive advantages in the long run.

The Federal Reserve maintained its interest rate at 4.5%, in line with market expectations. However, the Fed removed a statement about progress in reducing inflation from its announcement, signaling the need for further monitoring of economic conditions. Powell emphasized that the economy remains strong, inflation is elevated, and the labor market does not exert additional inflationary pressure. He reiterated that the Fed is in no rush to cut rates and will base its decisions on actual inflation data. Additionally, the regulator stated that further labor market softening is not necessary to achieve its inflation target. The Fed will continue reducing its balance sheet by $25 billion per month while closely monitoring the effects of Trump’s tariffs and stock market volatility, particularly in the AI sector. Notably, the Fed does not rule out rate cuts even before inflation reaches the 2% target. Powell refrained from commenting on Trump’s calls for immediate rate cuts, implying that the Fed remains in a wait-and-see mode, assessing macroeconomic conditions. The market does not anticipate rate cuts before summer but does not entirely rule out a potential hike if inflation worsens.

The U.S. Personal Consumption Expenditures (PCE) Price Index data for December aligned with expectations: +0.3% MoM (in line with forecasts), +2.6% YoY (in line with forecasts), and core PCE at +2.8% YoY (in line with forecasts). Meanwhile, consumer spending in December increased by +0.7% MoM and +5.7% YoY, accompanied by a decline in the savings rate to 3.8%. The primary driver of spending growth was durable goods purchases, likely influenced by expectations of Trump’s tariffs. The data indicate a slowdown in disinflation, particularly in the services sector (+0.3% MoM, +3.8% YoY), adding uncertainty about the Fed’s future policy. Market expectations for the first rate cut may be pushed further back, as the Fed will rely on actual inflation data.

U.S. GDP growth in Q4 2024 slowed to 2.3% QoQ (expected: 2.7%, previous: 3.1%), signaling a deceleration in economic growth. The main contributor was consumer spending (+2.9 pp), likely driven by increased durable goods purchases amid potential Trump tariffs. Government spending also made a positive contribution (+0.4 pp), whereas investment activity declined (-1.1 pp), mainly due to a slowdown in inventory growth (-0.9 pp). Net exports remained largely unchanged. The labor market remains stable, with initial jobless claims at 207K (expected: 224K, previous: 223K), indicating continued strong demand for labor. Overall, GDP growth is supported by consumer spending and government expenditures, while future trends depend on the impact of Trump’s trade policies.

The European Central Bank (ECB) cut interest rates by 0.25% to 2.9%, continuing its monetary easing cycle. The regulator provided no clear guidance on future policy, stating that decisions will depend on incoming data. Inflation is declining as expected and is projected to reach the 2% target by 2025. However, core inflation remains above 2%, with persistent price pressures in the services sector (4%). The eurozone economy is stagnant, with quarterly GDP growth at 0.0% QoQ and 0.9% YoY. Germany (-0.2% QoQ) and France (-0.1% QoQ) showed negative growth, while Spain (+0.8% QoQ) and Portugal (+1.5% QoQ) demonstrated resilience. Given weak growth and persistent inflation, the ECB will likely pause after the Fed, as further monetary easing depends on inflation trends and macroeconomic stability. Rising political uncertainty also makes ECB decisions increasingly dependent on external factors.

Key events for this week:

• 04.02.2025: U.S. Labor Market Data (JOLTs)
• 05.02.2025: PMI Data (U.S., UK, EU)
• 06.02.2025: Bank of England Meeting
• 07.02.2025: U.S. Labor Market Data (NFP & Unemployment Rate)

Companies reporting this week:

• 04.02.2025: UBS, PepsiCo, Spotify, Merck, Pfizer, PayPal, Alphabet, AMD, Amgen, Snap;
• 05.02.2025: Novo Nordisk, Uber, Toyota, Yum! Brands, Disney, Arm, QUALCOMM, MicroStrategy, Ford;
• 06.02.2025: Astrazeneca, Eli Lilly, ConocoPhillips, Philip Morris, Roblox, Take-Two, Amazon, Pinterest;
• 07.02.2025: CBOE, Fortive.