Thursday's Markets Update (February 6, 2025)

07 Feb 2025 by rate3

On Thursday, major indices ended mixed, with the S&P and Nasdaq rising and the Dow falling, following job reports that showed both job cuts and layoffs increasing. Ford and Honeywell dropped, while Philip Morris and Eli Lilly surged. Bank stocks gained. The dollar rose after a remark by Bessent prioritizing the lowering of Treasury yields over cutting Fed rates. The Bank of England and the Bank of Mexico reduced rates in response to slowing economies. Chinese markets continued their rally, driven by DeepSeek, with tech stocks rising on enthusiasm for local AI advantages. Meanwhile, BTC, SOL, and ETH, with the latter testing a critical support level, remained in the red as bearish sentiments persisted after the recent flash crash.

Details

Job cuts rose to 49,795 in January, up from December's 38,792 but down 40% YoY, marking the lowest January total since 2022. Tech led with 7,488 cuts, while the West saw the most layoffs. 1Y trend: "Down" (Challenger)
Initial jobless claims rose to 219K in late January, exceeding forecasts of 213K, while recurring claims climbed to 1.886M. The data suggests a slight softening in the labor market, with notable increases in New York and California. 1Y trend: "Up" (DOL)

World Markets

The Bank of England cut its benchmark rate by 25bps to 4.5% in February, the third cut since August 2024. All nine MPC members voted for the cut, with two favoring a 50bps reduction. Growth concerns outweighed persistent inflation, prompting a dovish shift. 1Y trend: "Down" (BoE)
The Eurozone Construction PMI rose to 45.4 in January, the slowest decline since February 2023. Germany and France saw softer drops, while Italy grew slightly. Housing activity fell most, input costs hit a 12-month high, and firms remained pessimistic. 1Y trend: "Side" (SP)
Chinese stocks surged, with the Shanghai Composite up 1.3% and Shenzhen Component rising 2.26%, hitting one-month highs. AI and robotics stocks led gains, driven by DeepSeek’s breakthrough and easing trade war concerns. Tech firms like 360 Security and BY Company soared. 1Y trend: "Up"

Currencies

The dollar index rose to 108, ending a three-day decline, as traders assessed economic and trade policies. Treasury Secretary Bessent emphasized 10-year yields over Fed rates, while the Fed held rates steady. Markets expect two 2025 rate cuts. 1Y trend: "Up"

Comment: What's Up With the New Mercantilism?

The shift from market liberalism to "new mercantilism" became obvious to everyone after Trump's tariff shock. The fact is that the era of geopolitical confrontation we have been slowly entering over the past decade does, indeed, require new economic strategies from governments. However, no one knows what that new, "patriotic economics" must be.

History shows that highly centralized governments often prefer the simplest—and often the most misguided— economic "strategies" in times of war, as illustrated by Napoleon's continental blockade or England's attempts to close international trade for the U.S. after the Revolution. These economic measures are inherently mercantilist, where local manufacturers are granted every possible advantage while 'bad, spying foreigners' are excluded from the domestic markets. Classically, it limits competition, increases governments controls and feeds inflation while "patriotic" industrialists and bankers which are positioned close to ruling political elites thrive.

From the perspective of the Treasury, mercantilism seeks to 'bring gold into the coffers' by ensuring positive trade balances. This is a playbook that has existed for 300 years among both royal and democratically elected autocrats. In the post-gold standard era, when fiat money became dominant, the strategy evolved to include devaluing local currencies to boost exports, ostensibly giving local producers a price advantage when selling their products abroad.

But will this approach work in contemporary markets, where services—rather than manufacturing—prevail, and carry-trades as well as foreign direct investment (FDI) play a far more significant role in defining 'winners' than mere trade balances? I doubt it. Yes, you can lower borrowing costs by issuing more Treasuries, but this method won't attract the investments that are largely influenced by interest rates and corporate profits, not to mention the economic growth that is impossible to accelerate in "closed" markets beyond the rate of population growth without drastically increasing government spending and triggering inflation. This ultimately leads to the 'Impossible Trio'—economic growth, government spending, and exchange rate stability—which cannot coexist harmoniously.

We have already seen how the pursuit of economic 'self-sufficiency' has played out in China, which has teetered on the edge of stagnation for the past three years as Xi prioritized politics over economic well-being. It's clear that when you initiate a trade war, you cannot expect your goods to be welcomed by adversaries, many of whom you have alienated through your actions. This was the case during the Napoleonic and American Revolutionary Wars, when most trade shifted underground and growth relied heavily on government war efforts. A similar pattern emerged during WWI and WWII, when industries were forcibly militarized, with growth occurring in direct proportion to government investments in tanks and bombers.

In short, wartime is ideal for mercantilism, but it falters under other geopolitical regimes. So, are we heading toward the global war? Hopefully not, given the enormous stockpiles of nuclear weapons. It may be that the dangerous games autocrats have recently begun playing worldwide will lead to numerous localized, 'decentralized' conflicts without resulting in total disruptions of trade and travel. Almost everyone who follows politics and economics seems to expect this outcome. But is this realistic? Looks like we are playing a high-stakes game of poker.