Unadorned Notes: January 29 – February 1, 2025
Federal Reserve Holds Interest Rates; U.S. Inflation Rises in December; U.S. Economic Growth Slows Slightly; Microsoft, OpenAI Investigates DeepSeek Data; Trump Imposes Tariffs on Imports
Economics, Finance, and Business
Federal Reserve Holds Interest Rates: The Federal Reserve maintained its target federal funds rate at 4.25% to 4.5%, breaking a three-meeting streak of cuts since September 2024. The decision, widely expected by markets, reflects concerns over persistent inflation and a stable labor market, despite pressure from President Donald Trump to lower rates. Fed Chairman Jerome Powell reiterated the central bank’s independence, stating he had “no contact” with Trump and would focus on policy objectives. Investors anticipate only one additional quarter-point rate cut this year, as economic growth remains resilient.1
U.S. Inflation Rises in December: The personal consumption expenditures (PCE) price index increased by 0.3% in December 2024, bringing the annual inflation rate to 2.6%, above the Federal Reserve’s 2% target. Core PCE inflation, which excludes food and energy, remained at 2.8% year-over-year, suggesting inflationary pressures persist. Consumer spending rose 0.7%, signaling strong demand but leading to a decline in the personal saving rate to 3.8%, the lowest in two years. Economists suggest the data will support the Fed’s decision to keep interest rates on hold for the first half of 2025.2
U.S. Labor Costs Increase Modestly: The employment cost index (ECI) rose 0.9% in the fourth quarter of 2024, bringing the annual increase in labor costs to 3.8%, slightly lower than the previous quarter’s 3.9% gain. Wages and salaries, which comprise most labor costs, also increased 0.9% in the quarter, while benefits rose 0.8%, both maintaining a steady pace. Inflation-adjusted wages grew 0.9% year-over-year, supporting consumer spending despite broader inflationary pressures. Policymakers view labor costs as a key inflation indicator, with wage growth slowing but still contributing to price pressures.3
U.S. Economic Growth Slows Slightly: The U.S. economy grew at a 2.3% annualized rate in the fourth quarter of 2024, down from 3.1% in the previous quarter, as business investment declined amid a Boeing strike. Consumer spending surged 4.2%, the fastest pace since early 2023, driven by strong demand and preemptive purchases ahead of proposed tariffs. Imports unexpectedly declined, narrowing the trade deficit, while inventory accumulation slowed, subtracting from GDP growth. Economists warn that upcoming fiscal and trade policies could create further economic uncertainty in the months ahead.4
ECB Cuts Rates Amid Weak Growth: The European Central Bank lowered its deposit rate by 25 basis points to 2.75%, marking its fifth consecutive cut as the Eurozone economy stagnated in the fourth quarter of 2024. ECB President Christine Lagarde warned of economic “headwinds”, citing weak consumer confidence, manufacturing contraction, and potential risks from global trade frictions. Inflation has declined from a peak of 10.6% in 2022 to 2.4% in December 2024, but policymakers maintained that monetary policy remains restrictive. Market expectations suggest further rate cuts, with some economists predicting reductions at every meeting until the deposit rate reaches 1.5%. The euro remained stable after the widely anticipated decision, while rising Eurozone bond yields reflected lingering investor uncertainty.5
Bond Investors Brace for Uncertainty: U.S. bond investors remain cautious amid uncertainty over Federal Reserve policy and the economic impact of the Trump administration’s fiscal and trade plans. Investors have reduced exposure to long-term Treasuries due to rising yields and concerns over the growing U.S. fiscal deficit, which now exceeds 6% of GDP. However, a JPMorgan survey indicates the largest net long position in U.S. government debt since 2009, as investors seek stability. Analysts warn that higher Treasury issuance, coupled with the Fed’s reduced bond purchases, could drive yields even higher.6
ESG Funds Face Record Outflows: Investors withdrew $7.6 billion from EU Article 9 ESG funds in the fourth quarter of 2024, marking the fifth consecutive quarter of net outflows. Morningstar attributed the trend to weaker returns compared to conventional equity strategies, which outperformed in the year’s bull market. Globally, sustainable funds saw quarterly inflows rise to $16 billion, but annual inflows declined sharply. In the U.S., sustainable funds faced $19.6 billion in outflows, driven by poor performance and increasing political scrutiny. Meanwhile, conventional funds attracted $740 billion in inflows, benefiting from expectations of rate cuts and AI-driven stock gains.7
U.S. Stocks Decline Amid Uncertainty: Tesla’s stock dropped after missing revenue estimates but recovered in after-hours trading, while Nvidia declined amid concerns over rising AI competition from China’s DeepSeek. Microsoft and Meta reported strong earnings but faced stock pressure due to slower cloud growth, while IBM shares rose after slightly exceeding revenue expectations. Investors remain focused on AI-driven growth, with major tech firms investing heavily, yet scrutiny over high valuations persists. Market volatility has increased, particularly in the technology sector, as investors reassess growth expectations and the impact of emerging competition.8
Microsoft, OpenAI Investigates DeepSeek Data: Microsoft and OpenAI are investigating whether a group linked to the Chinese AI startup DeepSeek improperly accessed OpenAI’s data through its API. Microsoft flagged unusual data extraction activity, prompting an internal review, while U.S. officials, including White House adviser David Sacks, cited “substantial evidence” of knowledge extraction. The Biden and Trump administrations have emphasized safeguarding U.S. AI technology, with the National Security Council conducting a security assessment of DeepSeek. Meanwhile, Italy’s data regulator has requested details on DeepSeek’s data collection and storage practices amid concerns over user privacy. OpenAI has accused unnamed Chinese firms of using “distillation” to replicate its models but has not explicitly alleged a security breach.910
QZ’s Comment: So, it could be “taking your knowledge without explicitly taking your model weights”, which is exactly how an experienced ChatGPT user might feel after playing with DeepSeek for just a few minutes. The “logic”, “sequence”, and “flow” in its responses is just too eerily similar to ChatGPT’s. Still, even if the report is true, it is world-class “reverse engineering” work.
Mistral AI Faces Growing Competition: French AI startup Mistral, once hailed as Europe’s leading challenger in generative AI, faces increasing pressure from U.S. and Chinese rivals, particularly China’s DeepSeek. Despite raising $1.2 billion and securing partnerships with Microsoft and major European firms, concerns remain over its ability to compete with better-funded competitors. Mistral’s focus on efficiency and open-source AI has attracted government and corporate clients, including the French defense ministry and BNP Paribas. European leaders view the company as vital for technological sovereignty, especially amid growing U.S.-EU tensions over AI regulation and trade policies. While CEO Arthur Mensch insists Mistral will remain independent, investors speculate that it may eventually need to merge with a larger tech company to survive.11
Chinese Investors Turn to Gold: China’s ongoing real estate crisis has led investors to shift from property to gold, as falling home prices and economic uncertainties erode confidence in traditional assets. In 2024, gold consumption in China declined by 9.58%, with jewelry sales dropping sharply, while demand for gold bars and coins surged by 27% to 282.3 tons. The Chinese government also increased its gold reserves for the second consecutive month, using the metal to stabilize financial markets amid a weakening yuan and geopolitical tensions. China remains the world’s largest gold producer, strategically controlling supply and demand to strengthen its economic position. The rising preference for gold reflects broader public skepticism toward the country’s economic policies and concerns over financial stability, per
.12U.S. Politics, Policies, and Geopolitics
Trump Imposes Tariffs on Imports: President Donald Trump enacted tariffs of 25% on imports from Canada and Mexico and 10% on Chinese goods, citing border security and drug trafficking concerns. The measures, which override USMCA trade agreements, drew opposition from business and labor groups, with economists warning of higher consumer costs and economic disruption. Retaliatory tariffs from affected nations are expected, potentially escalating trade tensions and reducing GDP growth in Canada and Mexico. The automotive, energy, and manufacturing sectors face significant risks, while analysts suggest the tariffs may be a negotiation tactic for stricter border policies. Critics argue the move undermines North American trade stability, while supporters view it as necessary to protect U.S. industries and sovereignty.13
DOJ Sues to Block HPE Deal: The U.S. Department of Justice filed an antitrust lawsuit to block Hewlett Packard Enterprise’s $14 billion acquisition of Juniper Networks, arguing it would reduce competition in the networking equipment market. The DOJ claimed the merger would leave Cisco and HPE controlling over 70% of the U.S. market, potentially leading to higher prices and less innovation. HPE and Juniper defended the deal, stating their offerings are complementary and would enhance competition against global players. The lawsuit marks the first major antitrust action under President Donald Trump’s new administration. While UK and EU regulators approved the acquisition, the legal battle in the U.S. is expected to extend into October 2025.14
Syria’s New Leader Consolidates Power: Ahmed al-Sharaa, leader of Hayat Tahrir al-Sham (HTS), declared himself president of Syria’s transitional government after leading the offensive that ousted Bashar al-Assad in December 2024. He has filled key government positions with loyalists, disbanded political parties and armed factions, and postponed a national dialogue conference intended to shape Syria’s future. Western governments have conditioned the lifting of sanctions on the formation of an inclusive government, but concerns persist over HTS’s authoritarian rule and Islamist ideology. While many Syrians celebrate Assad’s downfall, uncertainty remains over Sharaa’s commitment to political inclusion and his ability to govern beyond Idlib. The opposition coalition, long recognized internationally but lacking influence within Syria, continues negotiations with the new administration amid fears of political exclusion.15
