In a striking turn of events last Friday, the American economy faced unexpected setbacks, as retail sales figures for January showed a significant contraction of 0.9%. This decline was far worse than the anticipated drop of only 0.2%, and it starkly contrasted with December’s revised growth figure of 0.7%. Such disappointing retail data raises concerns about the state of consumer spending, suggesting a potential cooling-off that could alleviate some of the ongoing inflationary pressures.

Although there was a slight uptick in U.S. industrial output by 0.5% in January, it was overshadowed by the minor decline of 0.1% in the manufacturing sector, which constitutes approximately three-quarters of total industrial production. Investors, understandably jittery about these economic signals, reacted by driving down U.S. Treasury yields and weakening the dollar, while currencies such as the Australian and New Zealand dollars displayed strength ahead of upcoming monetary policy meetings by their respective central banks.

Despite the troubling retail sales report, the inflation landscape appears to remain stubbornly persistent. Earlier data releases indicated that both Producer Price Index (PPI) and Consumer Price Index (CPI) readings were above expectations. However, the softer components of the PPI, particularly regarding the Personal Consumption Expenditures (PCE) index, have analysts weighing the likelihood of a soft landing versus a hard landing for the U.S. economy.

Furthermore, markets are bracing for an array of tariff announcements from U.S. authorities. However, Goldman Sachs notes that these tariffs may not represent a significant escalation, suggesting that they may be more of a bargaining tactic than an imminent policy change.

In light of the lack of immediate tariff implementation and the steady trend of mild PCE inflation, investor sentiment took a positive turn, resulting in all three major U.S. stock indices closing the week higher. Over the week, sectors such as technology, energy, and materials showed considerable strength, while the healthcare sector retreated. The dismal retail sales figures particularly impacted retail-focused companies like Walmart and Procter & Gamble, leading to noticeable declines in their stock prices.

After a tumultuous week, the three primary U.S. stock indices exhibited mixed outcomes. The S&P 500 index saw a minor decline of just 0.01% or 0.44 points, concluding the week at 6114.63 points, but still managing a week-over-week improvement of 1.47%. On the other hand, the Dow Jones Industrial Average dipped by 0.37%, losing 165.35 points to finish at 44546.08 points, yet posting a weekly gain of 0.55%. In contrast, the tech-heavy Nasdaq Composite saw a positive turn, gaining 81.13 points or 0.41%, closing at 20026.77 points, with an impressive week-on-week uptick of 2.58%.

The performance of sector-specific exchange-traded funds (ETFs) was also varied. The global airline ETF experienced a 1.33% rise, while other technology and energy ETFs saw gains ranging from 0.26% to 0.59%. Conversely, consumer discretionary ETFs displayed minimal reductions, while the biotechnology index ETF retreated by 0.36%. Among the 11 sectors within the S&P 500, the information technology and telecommunications sectors saw gains of 0.6% and 0.41%, respectively, while most others dipped modestly.

The "Magnificent Seven" technology stocks had a mixed performance. Nvidia surged by 2.57% while Apple climbed 1.27%, following reports of their plan to launch the Apple Intelligence feature in China as early as May. This initiative, developed in collaboration with Alibaba, aims to enhance Apple’s AI capabilities for users of its devices in China. Meanwhile, Meta Platforms, owned by Mark Zuckerberg, continued its upward trend, gaining 1.11% for the twentieth consecutive trading day as it gears up for a substantial investment in AI humanoid robots. In contrast, Tesla saw a marginal drop of 0.03%, while Google’s parent company Alphabet, Microsoft, and Amazon experienced minor declines.

In semiconductor stocks, the Philadelphia Semiconductor Index edged up by 0.09% over the week. Notably, Nvidia’s twice-leveraged ETF shot up by 5.12%, with companies like Wolfspeed and Micron Technology rising significantly as well. However, Arm Holdings, in which Nvidia holds a considerable stake, plummeted 3.21% amid Nvidia’s decision to curtail its shareholding drastically.

A compelling development in the artificial intelligence (AI) sector featured AMD plummeting even as Dell Technologies surged by 3.74% due to reports of nearing a significant deal with Elon Musk’s xAI for a $5 billion server order, which could potentially double their revenue from AI servers in Q3. Although Oracle saw a slight rise of 0.17%, some AI-related stocks such as BullFrog AI and SoundHound AI faced sharp declines.

The Nasdaq Golden Dragon China Index also performed admirably, rising by 2.27%. Among other noteworthy stocks, Berkshire Hathaway, helmed by investor Warren Buffett, dropped by 0.19% as it ramped up its holdings in companies such as Constellation Brands and Occidental Petroleum during the fourth quarter—while reducing its positions in others like Bank of America and Charter Communications.

Over in Europe, optimism began to emerge amid a somewhat soothing atmosphere, with European stocks hitting new highs—though the momentum slightly waned last Friday. The pan-European indices closed down 0.24%, ending a streak of four consecutive days of gain, yet still showcasing an impressive eight-week rally with an approximately 10% increase year-to-date. Notably, the French luxury brand Hermes defied the sluggish luxury market, revealing a remarkable 18% increase in Q4 sales, prompting a 0.82% rise in its stock price.

The STOXX 600 index ended the week at 552.41 points, down 0.24%, but still up 1.78% for the week. The DAX 30 in Germany saw a slight decline of 0.44%, distancing itself from its record high, yet ended the week with an increase of 3.33%. The French CAC 40 index, on the other hand, edged up by 0.18%, closing the week with a gain of 2.58%, reflecting a contrasting trend. The UK’s FTSE 100 index dipped 0.37%, still up for the week by 0.37%.

Amid the backdrop of poor retail sales data impacting U.S. Treasury yields, the 2-year and 10-year Treasury yields both fell by at least 4 basis points last Friday, wiping out any gains influenced by the CPI. The yields on U.S. Treasuries experienced minor decreases throughout the week, with the benchmark 10-year yield settling at 4.4782%. This week also revealed drops in the dollar index, which correlated directly with the declining economic indicators, decreasing approximately 1.2% as it lost momentum for the fourth consecutive week.

Gold, despite a decline under circumstances that might typically favor it, retraced sharply after touching record highs earlier in the week. On COMEX, gold futures closed at $2893.70 per ounce, down 1.76%, though this still accounts for a 0.21% increase over the week.

Turning attention to the commodities market, West Texas Intermediate (WTI) crude oil futures saw a decline of 0.77%, settling at $70.74 per barrel. While natural gas futures surged over the week by an impressive 12.57%, reaching 3.7250 dollars per million British thermal units.

These market dynamics encapsulate a complex economic narrative: while indicators suggest a potential cooling in consumer activity, inflation remains a significant concern. Investors are left to navigate these turbulent waters, balancing short-term reactions against broader economic trends. As the dust settles from these mixed indicators, the outlook for future market behaviors remains uncertain yet filled with possibilities for both risk and reward.