A slightly different US aspect to start the week as we were back on interest rate watch, with the first policy announcement of the New Year from the US Federal reserve (Fed). On Wednesday, the Fed chair Jerome Powell signalled that the US central bank had reached pause mode by leaving interest rates unchanged. “We do not need to be in a hurry to adjust our policy stance,” he said at Wednesday’s press conference. This was the opposite of what newly returned president Donald Trump had been hoping for.

Powell said he thought the central bank’s policy stance was “very well calibrated” to balance the achievement of its two goals of maximum employment and price stability. It came as no surprise that Donald Trump criticised the Fed for failing to control inflation just hours after the US central bank defied the president’s calls for deep reductions in borrowing costs. In a customary subtle way, he accused the US central bank of failing to stop inflation. “If the Fed had spent less time on gender ideology, ‘green’ energy, and fake climate change, inflation would never have been a problem,” the president said on Truth Social. “Instead, we suffered from the worst inflation in the history of our country!”

Powell continued to play with a straight bat in response to questions from reporters at his press conference about challenges to the Federal Reserve’s independence in the current political climate. “This is who we are, this is what we do. We study the data, we analyse how it will affect the outlook and the balance of risks, and we use our tools to try — given our best understanding, our best thinking — to achieve our goals. That's what we do, that’s always what we do. Don’t look for us to do anything else,” he said. This is a story that will build from here, I am sure. However, for now, Fed policy is not bending to the new president.

Away from rates, this week has been very interesting from a markets point of view, as we saw the first real punch thrown against the market dominance of Nvidia as China unveiled a challenger to current Artificial Intelligence (AI) systems, at a fraction of the development cost – welcome “Deepseek.”

DeepSeek has claimed it took just two months and cost under $6 million to build an AI model using Nvidia's less-advanced H800 chips. An app powered by the model became the top iPhone download in the U.S. on Monday, leading a to a rapid sell off in technology stocks that until now had been priced highly due to the money they would make from their own high-cost chips everyone assumed were needed in the AI development race.

The Chinese company’s sudden release of a chatbot, that it says was radically cheaper to develop, was a wakeup call for an industry that for the past two years has operated under the assumption that the only way forward in AI was to have more computing firepower. Its arrival is a reminder that tech hype can make for a very volatile investment. When OpenAI introduced the world to generative AI with its ChatGPT chatbot, it kicked off a years-long rally in tech shares and turned Nvidia, a chipmaker known mostly among gamers, into a multitrillion dollar industry.

This time around, new innovation is threatening to puncture the bubble — if powerful AI models can be developed without Nvidia’s pricey hardware, the bullish case for AI spending suddenly looks a lot shakier. “If” being the operative word. DeepSeek puts its achievements down to innovation and clever use of less powerful chips. More sceptical observers say it may be piggybacking on western technologies or relying on more advanced US hardware than it claims. China’s DeepSeek has been threatened with ‘aggressive countermeasures’ by US rival OpenAI amid claims that the AI company ‘sucked knowledge’ from ChatGPT to develop its system.

These semiconductor chips are a small piece of silicon containing electronic circuitry that performs various functions. These chips are made up of a variety of tiny electronic components, such as transistors, diodes, and resistors, all interconnected meticulously to perform specific tasks. The share price of the companies that make these key chips are very volatile and highly cyclical, and this volatility has been seen before, however I am not sure that the sector’s tremendous outperformance over the past 10 years is a fluke. The world is becoming more silicon intensive. And nothing about the DeepSeek news changes that.

Whilst we await the Bank of England’s (BoE) rate decision next week, the Governor of the BoE has told MPs he is ‘very supportive’ of the government’s efforts to boost economic growth this week, but warned that ‘very big decisions’ will be needed to stop Britain’s public debt pile rising (cue me nervously watching BBC news for an announcement of a March budget and more tax rises!).

This week we heard the chancellor announce a commitment to an Oxford and Cambridge Growth Corridor that "could add up to £78bn to the UK economy by 2035". This corridor is a resurrection of the previous government's plans to join Oxford and Cambridge with new transport links and allow those two university and research hubs to expand. In support of the chancellor's figure, the Treasury has cited research by an industry group called the Oxford-Cambridge Supercluster. This research shows that this £78bn is a "cumulative figure" over 10 years, not the boost in a given year. The analysis suggests the project could add £25bn in Gross Value Added (GVA) a year to the UK economy by 2035. That would constitute roughly a permanent 1% boost to UK GDP by that date.

Rachel Reeves also reignited the debate about a third runway at Heathrow, stating this would "create 100,000 jobs", boost investment and exports and "unlock further growth". She cited a new report by the consultancy Frontier Economics which found it could increase the UK's potential GDP by 2050 by 0.43%, around £17bn. This sounds quite a long way off given how long political parties get to stay in power these days. That is, though, broadly in line with Sir Howard Davies report in 2015, which concluded a third runway at Heathrow would support UK trade and enhance productivity.

This “excitement” is tempered by the fact it would take many years before shovels went into the ground to start building a new runway, even with new reforms to speed up the planning process. And the government will have a difficult balancing act to both expand Heathrow and meet its climate goals, alongside the small point they may not be in power when the shovels are ready.

As seems to always be the case, there is a lot going on in the marketplace that we are keeping on top of, however, if you should have any queries please do not hesitate to be in touch. Do have a good weekend.