LONDON (Reuters)

The first full trading week of 2025 brings key U.S. jobs data alongside Chinese and euro zone inflation figures. These occurrences come amid concerns about the U.S. interest rate outlook and potential policy surprises from U.S. President-elect Donald Trump, which have already weakened the euro and the Chinese yuan at the start of the year.

1. JOB DONE

Markets have somewhat adjusted to the expectation of rising inflation under Trump due to his proposals on tariffs, taxes, and immigration. Traders are not anticipating two Federal Reserve rate cuts in 2025; however, stock indices remain close to record highs, hinting at continuity this year. Market stability hinges on evidence supporting the resilience of the U.S. economy as the January 10 December non-farm payrolls report is projected to show a 150,000 rise, a notable decline from November’s increase of 227,000.

2. MORE CHINA GLOOM

China is entering 2025 under a cloud of uncertainty as it faces Trump’s threats of tariffs exceeding 60% on Chinese imports, with Chinese stocks at three-month lows marking their weakest New Year start since 2016. Economists predict Trump will impose nearly 40% tariffs this time around, potentially reducing Chinese growth by up to 1 percentage point. Amid these concerns, December data on trade and inflation will offer insights into China’s economic completion of 2024.

3. INFLATION TEST

Upcoming euro zone inflation data will be a crucial indicator for European Central Bank (ECB) policy amid expectations of 100 basis points in easing during the first half of 2025. The inflation reports from Germany and France are anticipated to provide key insights. If inflation shows signs of easing, the ECB may have leeway to adjust policy to support the fledgling economy. However, analysts caution against potential energy price surprises, particularly from Spain’s earlier-than-expected reports.

4. LAGGARD AGAIN

The year 2024 presented challenges for European equity investors, trailing global peers once more. Despite this, there were effective performers such as banks and aerospace & defense stocks. Investors remain hopeful for a turnaround in 2025, particularly as the STOXX 600 index is trading at a significant discount relative to the U.S. S&P 500. This relative cheapness may provide opportunities for growth.

5. WHICH WAY NEXT?

The S&P 500 demonstrated a notable 20% surge in 2024, marking the strongest consecutive performance since 1998. Nevertheless, apprehension looms regarding potential Fed actions amid persistent inflation or Trump’s tariffs, which is negatively impacting sentiment. Data indicates that global equity funds saw their fastest rate of liquidation in 15 years by mid-December. The upcoming days will determine whether the cautious sentiment observed in December is a trend or merely a temporary phase, with particular focus on U.S. Treasury yields, which rose by 40 bps in December—as another surge might catalyze further stock sell-offs.