Prospects for Fewer Rate Cuts Dampened the US Market, While China’s Disinflation Raised Concerns about 2025’s Growth

 

 

The US stock market was closed on Thursday (Jan. 9), after it closed flat on the previous day. Fed signals hawkish rate cut over inflation fears sparked investor caution, pulling down enthusiasm in stock trading. Meanwhile, China has given a worrying disinflation message.

 

As of Wednesday's close, the S&P 500 index rose 0.16% to 5,918.25 points. The NASDAQ Composite index fell 0.055% to 19,478.88 points. The Dow Jones index rose 0.25% to 42,635.20 points.

 

The market was muted on Wednesday, as investors assessed the economic impact of labor market data and President-elect Donald Trump's sweeping tariff plan. Traders also learned from the Fed's minutes that Fed officials will be more cautious about cutting interest rates in 2025.

 

Trump's plans for broad tariffs and mass expellings contributed to the uncertain inflation outlook, according to the minutes of the Fed's December meeting. Fed officials are concerned that Trump's plan could prolong the time it takes for the inflation rate to move down to the Fed's 2% target. Trump was also reportedly pondering using emergency economic powers to justify his proposal to impose universal tariffs on US trading partners, even though such a move could pull slowing price increases up.

 

Therefore, some officials have opted for cautious rate cuts in 2025. Spurred by the report, benchmark U.S. Treasury yields once rose to their highest level since April.

 

With the news spreading, the market has bet that the Fed will leave borrowing costs unchanged for a longer time, expecting the first rate cut to happen in May. Currently, the market focuses on the monthly US jobs data due on Friday (January 10th). This data is the basis for the Fed to adjust interest rates.

 

 

Other than the US, China's inflation rate is also concerning. Despite Beijing's massive stimulus measures, China's consumer price index (CPI) for 2024, released this week, rose only slightly.

 

The CPI rose just 0.2% in 2024, well below the official target of 3%. The CPI grew 0.1% YoY in December, meeting expectations but down from November's 0.2% increase. On the production side, the producer price index fell 2.3% in December, slightly lower than the expected 2.4% and better than November's 2.5% drop. However, industrial factory prices have been in deflation for 27 months.

 

While Beijing unveiled several policies to support growth in late 2024, problems in China's real estate market, debt, and trades with the US curbed consumption. Analysts at ING expected the upcoming Chinese New Year to elevate January's inflation but 2025's overall price growth to stay low.

 

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