Market Volatility Rises Amid Inflation Data and Tech Sector Turmoil

February 3, 2025 — FXRK Weekly Market Recap

FXRK
5 min readFeb 3, 2025

This week saw significant movements across financial markets, driven by inflation reports, shifting monetary policy expectations, and tech sector disruptions. While U.S. inflation showed signs of cooling, investors remained cautious about the Federal Reserve’s next steps. Meanwhile, China’s AI breakthrough shook the Nasdaq, and global trade tensions intensified with looming tariff discussions. With key earnings reports and economic data ahead, markets are navigating a complex landscape of risks and opportunities

U.S.: Inflation Cooling but Market Uncertainty Remains

The U.S. inflation report for December provided a mixed picture, showing a 2.9% year-over-year increase, which met expectations. However, core inflation, which excludes volatile food and energy components, declined to 3.2%, defying economists’ forecasts of an unchanged reading​.

This slight cooling of inflation has shifted investor expectations for Federal Reserve rate cuts, with the anticipated first cut moving to July from September based on futures market pricing. As a result, 10-year Treasury yields dropped, and the U.S. dollar weakened, indicating a shift in sentiment towards potential monetary easing​.

Despite this positive signal for markets, traders remain highly cautious. The inflation data, though slightly better than expected, still indicates persistent price pressures. Many investors had braced for worse numbers, which explains the initial market rally following the report. However, the focus remains on whether inflation will continue its downward trend or if lingering pressures — especially in services and wages — will keep the Fed from cutting rates sooner​.

Adding to market uncertainty, Donald Trump’s proposed tariff policies have raised concerns about a possible resurgence in inflation. The former president has suggested imposing a 10% tariff on all U.S. imports and a 60% tax on Chinese goods, which Barclays estimates would bring the average weighted U.S. tariff to 17%, a level not seen since 1935​.

Although reports suggest Trump’s administration may implement tariffs gradually to avoid an immediate shock to consumer prices, the potential for retaliatory trade measures from Canada, Mexico, China, and Europe could lead to increased market volatility. Canada, for instance, has already hinted at potential countermeasures, and similar responses from other trade partners could escalate into a global trade conflict​.

Technology: Nasdaq Sell-Off Amid AI Disruptions

This week saw a significant decline in the technology sector, primarily driven by the introduction of China’s DeepSeek AI model, a low-cost, highly efficient AI system that sparked fears of increased competition for U.S. tech giants.

  • Semiconductor stocks tumbled 7.8%, while the broader technology sector fell 5.6% in response to the announcement.
  • The Nasdaq 100 dropped 1.63%, and the S&P 500 followed suit, declining 1.5%, despite 70% of its constituent stocks closing in positive territory​.

The sell-off reflects a growing concern about the sustainability of tech valuations, particularly in the “Magnificent 7” stocks, which have driven a significant portion of the market’s gains in recent years. Despite strong earnings reports, even slight misses on AI growth expectations triggered sell-offs, demonstrating how high valuations leave little room for disappointment​.

While DeepSeek’s advancements could lead to cost efficiencies in AI computing, experts believe that overall compute demand will remain high, offsetting potential savings. Investors are now reassessing the risks associated with tech sector concentration, particularly in companies heavily reliant on AI expansion​.

United Kingdom: Inflation Eases, But Growth Remains Sluggish

The UK economy received a mixed set of economic reports this week:

  • Inflation cooled unexpectedly for the first time in three months, with consumer prices rising 2.5% year-over-year in December, down from 2.6% in November and below economists’ forecasts​.
  • Core inflation declined from 3.5% to 3.2%, reinforcing expectations for Bank of England rate cuts this year.
  • The services inflation rate — closely watched by policymakers — fell from 5% to 4.4%, its lowest level since March 2022, further strengthening the case for rate cuts​.

However, growth remains a concern. The UK’s economy expanded just 0.1% in November, failing to meet the 0.2% growth forecast. If GDP does not exceed 0.07% growth in December, the UK will enter its second consecutive quarter of stagnation, increasing fears of stagflation — a scenario of low growth with persistent inflation​.

With weaker-than-expected economic expansion alongside cooling inflation, the Bank of England may move sooner rather than later in cutting rates to stimulate economic activity​.

China: Trade Surplus and Economic Growth

China posted a record trade surplus of $992 billion in 2024, marking a 21% increase from 2023. This surplus was driven by record-breaking exports, alongside weak domestic consumption and falling commodity prices, which curbed imports​.

  • The sheer volume of exported goods offset declining prices, showcasing China’s growing dominance in global trade.
  • China now exports more goods to 170 countries than it imports, its highest trade imbalance since 2021​.

Despite the strength in trade, China continues to face internal economic challenges, including weak consumer spending, low confidence, and an ongoing real estate crisis. In response, authorities have ramped up manufacturing production, boosting exports but also leading to accusations of overproduction and dumping from key trade partners​.

Regarding economic growth, China’s GDP expanded by 5.4% in Q4 2024, surpassing expectations thanks to a broad stimulus package launched in September. This brought total 2024 GDP growth to 5%, in line with official government targets, but still the slowest non-pandemic-related growth since 1990​.

However, upcoming U.S. tariff hikes — potentially reaching 60% — could cut China’s GDP growth by up to 2 percentage points, posing a serious risk to its economic outlook​.

Market Performance: Key Figures

  • S&P 500: -1.5% weekly, dragged down by tech sector losses.
  • Nasdaq 100: -1.63%, affected by AI-driven sell-offs.
  • Dow Jones: +0.27%, showing relative strength.
  • Russell 2000: -0.86%, reflecting uncertainty in small-cap stocks​.

Commodities and Currencies

  • Gold: $2,812 per ounce, rising amid market uncertainty.
  • WTI Crude Oil: $72.75 per barrel, slightly lower due to demand concerns.
  • USD/JPY: 154.85, reflecting stronger dollar positioning​.

Looking Ahead: Key Events Next Week

Investors will be closely watching several major events in the coming days:

  • U.S. Employment Data: JOLTs report, Nonfarm Payrolls.
  • Global PMI Indices: Assessing economic activity across key markets.
  • Bank of Japan Interest Rate Decision: Will Japan adjust its monetary policy stance?
  • Earnings Reports: Key updates from Netflix, 3M, Procter & Gamble, Johnson & Johnson, and more​.

With high volatility still dominating markets, the interplay between monetary policy, inflation trends, and tech sector performance will be the key focus for traders and investors.

Disclaimer

The information and data published in this report were prepared by the market research department of FXRK. Publications and reports of our research department are provided for informational purposes only. Market data and figures are indicative, and FXRK does not trade any financial instrument or offer investment recommendations and decisions of any type. The information and analysis contained in this report have been prepared from sources that our research department believes to be objective, transparent, and robust.

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FXRK
FXRK

Written by FXRK

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