The week that was …
Economic round-up
UK inflation
The rate of inflation in the UK rose to 3.4% in the year to December, driven by higher prices for tobacco and airfares. Core inflation, which strips out volatile elements such as food and energy, rose 3.2%. Read more from the BBC here
US economy
The US economy grew a little faster than initially thought over the third quarter of 2025, with GDP rising at an annualised rate of 4.4%. This is the fastest pace of growth since the third quarter of 2023. Read more from Reuters here
China GDP
The Chinese economy shrugged off the tariff war with the US, as GDP grew 5% over 2025. Booming exports offset anaemic domestic growth, posing a challenge for policymakers at a time of uncertain global trade. Read more from the FT here
Japan interest rates
The Bank of Japan raised its economic growth forecasts last week but held its key policy rate at 0.75%. This followed a slowing of the core consumer inflation rate in the year to December, although it remained above the central bank’s 2% target. Read more from CNBC here
UK employment
The number of employed people in the UK has fallen, while private-sector wages grew at the slowest rate in five years. ONS data showed the number of employees on payrolls in December fell by 43,000 compared with the previous month, to 30.2 million, while UK wage growth excluding bonuses weakened to 4.5% from 4.6%. Read more from the Guardian here
UK retail sales
Helped by strong online shopping levels, UK retail sales rose unexpectedly in December, adding to signs of a pick-up in the economy after chancellor Rachel Reeves’s Budget. Sales volumes rose by 0.4% in December from November. Read more from Reuters here
UK business sentiment
UK private sector companies have indicated their fastest rate of expansion for almost two years, led by a robust and accelerated upturn in service-sector activity. The adjusted S&P Global Flash UK PMI came in at 53.9 in January, up from 51.4 in December, and the highest since April 2024. Read more from Standard & Poor’s here
US inflation
The PCE price index, the US Federal Reserve’s preferred inflation gauge, rose 0.2% in both October and November, according to the Bureau of Economic Analysis. Prices for goods rose 0.2% in November – as did services prices, though that was down from 0.3% in October. Food prices were flat. Read more from Share Cast here
US business sentiment
The headline S&P Global US PMI signalled ongoing growth in US business activity at the start of 2026. Output has now grown continually for 36 months. January’s flash reading of 52.8 was marginally higher than the 52.7 in December, but the rate of expansion was the second-lowest seen over the past nine months. Read more from Standard & Poor’s here
Markets round-up
Japan’s PM aims to address yen spike
Japan’s prime minister Sanae Takaichi said her government would work to address the fluctuating value of the yen, putting traders on alert over a potential currency intervention. Japanese government bonds and the yen have sold off in recent weeks on concerns around Takaichi’s expansionary fiscal policy and the slow pace of interest rate hikes. Read more in ‘In focus’ below and from CNBC here
Trump warns Canada over China deal
Donald Trump warned Canada the US would impose a 100% tariff on goods sold in the US if the country strikes a trade deal with China. The US president argued China would try to use Canada to try to avoid paying US tariffs. Read more from CNBC here
Dow Jones ends week on low note
The Dow Jones Industrial Average finished the week down on Friday, while the S&P 500 ended largely unchanged. Investors’ risk appetite was dented by weakness from Intel. Markets had rebounded in the previous two sessions as president Trump rowed back on his tariff threats. Read more from Reuters here
Euro governments skew to short-dated bonds
European governments are curbing their sales of long-term sovereign bonds in response to rising yields. The average maturity of debt sold across big Eurozone markets including France, Germany and Italy is expected to dip below 10 years this year for the first time since 2015, according to a Barclays forecast. Read more from the FT here
Vanguard cuts UK exposure
Vanguard is cutting exposure to UK stocks and bonds in its £52bn LifeStrategy fund range. The group said it would reduce the funds’ UK equity allocation from 25% to 20%, while cutting UK bond exposure from 35% to 20%. Vanguard said domestic investors had “become more comfortable with global diversification”. Read more from the FT here
Silver jumps higher
Silver prices leapt above $100 (£73.14) an ounce, driven by retail investor and momentum-driven buying. Silver has benefited from the ongoing strength of gold and defied recent fears of a sell-off. Read more from Reuters here
Trump’s memecoin slumps
Donald Trump’s memecoin has dropped more than 90% from its peak a year ago. Launched ahead of Trump’s inauguration in January last year, the $TRUMP memecoin briefly surged from $1.20 to a high of $75.35, but is now trading at $4.86. Read more from the FT here
“The ferocity of the recent sell-off has the potential to spill over into other government bond markets, with the medium/long term potential for offshore investments to return ‘home’ to Japan increasing with each move higher in yields.
Selected equity and bond markets: 16/01/26 to 23/01/26
| Market | 16/01/26 (Close) |
23/01/26 (Close) |
Gain/loss |
|---|---|---|---|
| FTSE All-Share | 5518 | 5475 | -0.8% |
| S&P500 | 6940 | 6916 | -0.4% |
| MSCI World | 4515 | 4505 | -0.2% |
| CNBC Magnificent Seven | 418 | 422 | +1.04% |
| US 10-year treasury (yield) | 4.23% | 4.23% | |
| UK 10-year gilt (yield) | 4.4% | 4.53% |
Investment round-up
Baillie Gifford launches cautious offering
Baillie Gifford has launched a new Cautious Managed portfolio, which will sit alongside the existing Managed fund but with lower volatility through greater exposure to fixed income. The new fund will use a benchmark of 50% equities, 45% bonds and 5% cash.
GCP trust a new target for Saba
Activist investor Saba Capital Management has taken a 5.3% position in GCP Infrastructure Investments. The investment trust is currently trading at a 28.6% discount, although it has been as wide as 33.7% within the last year.
Smithson reveals open-ended plans
Smithson has outlined how it plans to turn the £1.6bn investment trust into an open-ended fund. The group is responding to shareholder pressure, including from Saba Capital, which has questioned why the discounted vehicle did not make more use of its closed-ended structure.
AJ Bell platform hits £108bn in AUA
Platform assets under administration at AJ Bell reached £108bn, up 21% in the last year and 5% in the three months to the end of December 2025. Platform customer numbers increased by 29,000 to 673,000, up 20% in the last year.
2025’s equity income flows
Among equity income funds, Artemis Global Income, Fidelity Global Dividend and TM Redwheel UK Equity Income saw the highest inflows in 2025, while BNY Mellon Global Income, Baillie Gifford Global Income Growth and CT UK Equity Income struggled to retain investor assets.
Final step for crypto-asset regulation
The Financial Conduct Authority has reached the final step of its consultation on the regulation of crypto-asset firms. It will now look at how Consumer Duty could apply and is asking firms for feedback.
… and the week that will be
US interest rates
The Federal Reserve is expected to leave US interest rates unchanged at a target range of 3.5% to 3.75% when it meets this week. Most forecasts now point to the next rate cut coming in June or July, after a new Fed chair has taken the reins. Current chair Jerome Powell is due to step down in May after he completes his second term in the role. Read more from CMC Markets here
Corporate profits
With around one-fifth of the S&P 500 due to report quarterly numbers this week, investors will likely turn their attention to the outlook for US corporate profits. Earnings are expected to rise significantly yet valuations increasingly reflect those expectations, with the S&P 500 currently trading at 22x expected earnings. “The earnings bar had better be met,” observed Chris Galipeau, senior market strategist at Franklin Templeton. Read more from Reuters here
The week in numbers
US interest rates: Consensus forecasts have the Federal Reserve leaving US interest rates unchanged at 3.75% on Wednesday, as the central bank waits to see if the economic outlook continues to weaken.
Germany economic growth: Consensus expectations ahead of the flash reading of German GDP for the last three months of 2025 are for a rise to 0.2%, quarter on quarter, and a year-on-year rise to 0.5%, from 0.3%.
Germany business sentiment: Consensus forecasts have Germany’s IFO business climate index rising to 88.4 in January, from 87.6 the previous month.
Japan consumer confidence: Consensus expectations have Japan’s consumer confidence index rising to 37.6 in January, from 37.2 the previous month.
In focus: If and yen
In a week that saw the threat of US tariffs on Europe over Greenland, some market wobbles and a mercurial speech at Davos from the leader of the free world, Schroder chief investment officer Johanna Kyrklund told the company’s investment conference the thing that had troubled her most was … the change in Japanese government bond yields. Is it really possible political dramas in Japan could be the source of global instability?
“The reason why markets have done well is that populist politics have led to more proactive fiscal policy – particularly in the US,” Kyrklund argued. “This has boosted nominal growth, which in turn has hidden a multitude of sins. The ultimate constraint on those populist policies is when bond markets revolt – so the thing I am watching most closely every single day is the bond markets.”
In Japan, meanwhile, prime minister Sanae Takaichi announced she would dissolve parliament, paving the way for a snap election in February. She has enjoyed high public support and this election could see her cement her position. It would be an endorsement of her public spending plans yet comes with a potential sting in the tail for Japanese government bond markets – and for wider financial markets.
For more on Japan, read: Four catalysts for Japanese equities in the year ahead
The problem is that Takaichi is promising government spending when Japan already has vast structural debt. At 252%, the country’s debt-to-GDP ratio makes even the UK look frugal. It also has a huge demographic crisis, with the over-65s expected to make up one-third of the population by 2036, putting further pressure on tax revenues and welfare spending. Pilling more spending on top in a revival of ‘Abenomics’ threatens to lift borrowing costs.
Japan has been moving out of a period of long-term deflation. Indeed, post-Covid, it has seen higher inflation, which has now been above the Bank of Japan’s target 2% rate since April 2022. This has prompted the central bank to take action – it started moving away from negative interest rates in 2024 and has subsequently lifted rates to 0.75%.
Combined with the expectation of higher spending, this environment has pushed yields on Japanese government bond (JGBs) higher and higher. The 10-year government bond yield has moved from 1% at the start of 2025 to new highs of 2.26% today. Long bond yields have moved even more, with the 30-year JGB yield at 3.65%.
Trump beware – that multi-trillion-dollar US deficit relies on bond investor largesse just as much as Japan does.”
“JGB yields have been rising in response to the prospect of further rate hikes from the Bank of Japan and this was accelerated after prime minister Takaichi’s surprise victory last year to become the leader of the ruling LDP party,” says Colin Finlayson, investment manager at Aegon Asset Management.
“Her pro-growth stance, and willingness to use fiscal spending to achieve this, has spooked the JGB market and has seen 40-year yields hit their highest level since 2007. This election could increase her grip on power and the chances of her mandate being delivered.”
There are a number of potential issues here. Some are Japan-focused – can the country continue to fund its borrowing? And, if it cannot, will its already anaemic GDP growth suffer? – but there is a problem for the world too. As Finlayson says: “The ferocity of the recent sell-off has the potential to spill over into other government bond markets, with the medium/long term potential for offshore investments to return ‘home’ to Japan increasing with each move higher in yields.”
This brings us to the so-called ‘yen carry trade’ where, for years, global investors have performed the neat trick of borrowing in yen to invest in other government bond markets with a higher yield. This has supported the Japanese currency and also supported other government bond markets – particularly US treasuries. Now the yen has been selling off against other global currencies and, says Kyrklund: “If we were to see Japanese bonds sell off further, it could up the pressure and unhinge the US yield curve.”
There is also the ‘canary in the coal mine’ issue – investors have been waiting for the bond vigilantes to take on US treasuries. As Finlayson puts it: “Trump beware – that multi-trillion-dollar US deficit relies on bond investor largesse just as much as Japan does.”
There are caveats to all of this – not least the considerable debate over the actual size of the yen carry trade. Estimates tend to vary between $250bn and $1tn – although some have suggested it could be as high as $14tn.”
Donald Trump has already been testing the limits of bond investors’ patience – posing threats to Federal Reserve independence, while the tax cuts contained in the One Big Beautiful Bill will likely lift the US deficit further.
At the same time the ‘DOGE’ cost-cutting initiative failed to make the planned dent on spending and, while tariff revenues have closed the annual deficit a little, it is not enough to make a difference to the US’s ballooning debt. There is also the ongoing risk the US president irritates his European allies so much they start a coordinated sale of US debt. Europe remains the US’s largest creditor.
Each of these issues risks triggering the US bond market, prompting a sell-off and thus a sharp increase in yields. That said, history suggests the problems may not be seen in US treasuries first but could be felt in other markets before spreading to the world’s largest market. Could Japan be the canary in the coalmine– that early indicator of instability?
There are caveats to all of this – not least the considerable debate over the actual size of the yen carry trade. Estimates tend to vary between $250bn and $1tn – although some have suggested it could be as high as $14tn. Equally, Japan’s prime minister may recognise the risks and rein in spending. “It would be misguided to assume Abe’s no-holds-barred deflation-fighting policy will be revived,” suggests Naomi Fink, chief global strategist at Amova Asset Management.
“Today’s reflationary macroeconomic conditions are fundamentally different from those that shaped “Abenomics”. In this context, the traditionally supportive role of yen weakness for Japanese stocks is likely to be less popular with households. Real purchasing power matters to households and a prolonged period of yen weakness may amplify imported inflation.”
Overall, it may not be the single determining factor yet any sustained issues with Japanese bonds have real potential to be another destabilising force for an already-fragile US treasury market. It may be that the carry trade can unwind in an orderly way but, if Trump keeps toying with the bond market, it could put an end to the stockmarket’s levity.
Read more on this from the BBC here, from Reuters here and from Yahoo Finance here
In focus: The visibler hand
Ronald Reagan once said the most frightening nine words in the world were: “I’m from the government and I’m here to help.” Yet, from heavy-handed industrial policy to direct interference in company workings, government intervention has become increasingly normalised. Invesco has defined this as the ‘rise of the visible hand’, as governments back away from free markets.
“We are not seeing as much in terms of free markets in developed countries as we did,” argues Invesco’s chief investment officer Kristina Hooper. “It used to be that industrial policy was the province of emerging market countries but that has changed recently.
“We have seen it in the US with the Chips Act, with greater direction for the economy and greater incentive for particular industries, but in the last six or nine months, we have seen an incredible amount of involvement on the part of the government in terms of trying to shape companies to do certain things.”
Hooper cites a raft of initiatives coming out of the US, including a proposed ban on large institutional investors buying family homes. She also highlights interventions in Fannie Mae and Freddie Mac – “encouraging them to bypass the Fed and create quasi-QE” – as well as a ban on defence contractors doing stock buybacks and paying dividends. “Again, we will see if that comes to fruition,” she adds.
More recently, the US administration sought to encourage US oil companies to move into Venezuela, prompting the ExxonMobil CEO Darren Woods to publish a letter to shareholders on the group’s website. “If we look at the legal and commercial constructs – frameworks – in place today in Venezuela, today it’s uninvestable,” he wrote.
“And so significant changes have to be made to those commercial frameworks, the legal system, there has to be durable investment protections, and there has to be a change to the hydrocarbon laws in the country.”
There have also been moves to cap credit cards at 10%. This would see many people with low credit scores losing access to credit cards – a significant source of consumer spending in the US. JP Morgan Chase CEO Jamie Dimon has said the move would be a “disaster” – which may or may not have been the reason behind a $5bn law suit being filed against him for an alleged ‘debanking’ of the Trump family.
That now appears to have been dropped. This is an issue for all investors, who increasingly need to take account of such political machinations in their analysis of companies. Usually share price movements are temporary – but there is now on ongoing risk of more permanent impacts.
