Financial markets edged higher this week after breaking out of the holding pattern leading up to President Donald Trump’s inauguration. President Trump wasted no time putting his stamp on policy, unleashing a flurry of executive orders in his first days in office.

Markets initially breathed a sigh of relief as the much-feared universal tariffs failed to materialise. However, the respite was short-lived, with Trump later suggesting 25% duties on Canada and Mexico could be in the offing. The energy sector found itself in the crosshairs, with the new administration promising a return to "drill, baby, drill" and abandoning electric vehicle mandates. Renewable energy stocks were hit hard. Still, the broader market took things in stride, with the major indices posting modest gains on Trump's first full day in office. The muted reaction reflects the fact that the incoming administration made a lot of noise while largely avoiding anything economically consequential and haven’t overtly targeted China.

The U.S. dollar rally stalled mid-week after gaining significant ground in recent weeks. However, most other currencies struggled to make headway against the greenback. Bond yields continued to rise globally amid inflation concerns and uncertainty around fiscal and monetary policy under the incoming administration. Equity markets were volatile but ended the week mostly lower. Reports emerged that the Trump administration may take a more gradual approach to implementing tariffs, rather than imposing steep duties immediately. This tempered the dollar's rise and provided some relief to trade-sensitive assets. However, lack of clarity on the eventual scope of tariffs kept markets on edge.

Strong U.S. economic data, including robust retail sales and industrial production, reinforced the narrative of U.S. exceptionalism compared to other major economies. This supported the case for a patient Fed despite some overtly dovish commentary from FOMC member Christopher Waller.

Inflation readings were mixed. U.S. PPI and CPI both came in softer than expected, alleviating some concerns about runaway inflation. UK CPI also moderated. However, inflation is still running well above central bank targets, complicating the monetary policy outlook.

The UK economy showed further signs of weakness with GDP growth almost stalling in November, industrial production also contracted. This exacerbated worries about the UK's twin deficits and sent Gilt yields to their highest levels since 2008.

In Asia, the Bank of Japan surprised markets by strongly hinting at a rate hike at its January meeting amid rising inflation. This propelled the yen higher and Japanese yields upward. China's economy expanded 5.4% in 2024, beating the official target, though helped by some curious data revisions. December indicators painted a mixed picture of the recovery.

Overall, markets head into a momentous week buffeted by shifting growth and policy expectations. While the moderation in U.S. inflation offered some reassurance, uncertainty reigns supreme as investors await concrete signals from the new U.S. administration. The diverging fortunes of the U.S. versus other economies also remains a key theme. Amid this backdrop, volatility looks set to continue in the near-term.