Markets
The ECB lowered the policy rate to 2.75% (-25 bps) yesterday. While president Lagarde as usual refrained from giving guidance going forward, some subtle statement tweaks and not-so-subtle comments suggest Frankfurt is moving towards a fine-tuning phase. Among the most striking ones was Lagarde explicitly stressing the cumulative amount of cuts the ECB already delivered (purposely followed by a short moment of silence). She also flagged an upcoming staff report about the revision of the neutral rate, due February 7. The timing, ahead of the March 6 meeting when another rate cut brings the deposit rate to the upper bound of the current neutral rate estimates, is not a coincidence. Bloomberg citing officials reported afterwards that the ECB as soon as March may stop labeling its policy stance as “restrictive”. Long story short: after the 25 bps cut in March, we expect the ECB to start skipping meetings from time to time with only one or two additional moves afterwards. German rates eased 6-7 bps but those losses were related to earlier weaker-than-expected GDP readings in France, Germany and, as a result, the euro area (stagnation). US yields finished less than 2 bps lower across the curve. Q4 GDP growth was once again strongly consumer-powered and jobless claims remain low. Q4 PCE deflators missed the bar on a headline level. The dollar ended a tad higher thanks to a late-session sprint after president Trump stuck to his Feb 1 (as in: tomorrow) deadline for tariffs on Mexico and Canada. The Canadian dollar and Mexican peso took a hit intraday. EUR/USD finished sub 1.04. Sterling continues to grind higher. A six-day GBP winning streak brought EUR/GBP from +0.845 to around 0.836. The pound may soon be taking a breather ahead of next week’s (Fed 7) looming Bank of England meeting (including new forecasts) though. Today’s economic calendar features interesting data in the US, including the Q4 Employment Cost Index (expected to pick up from 0.8% to 0.9%) and the December PCE deflators. The latter, however, can be derived from yesterday’s Q4 print. Germany and France release inflation figures for January. The European figure is due on Monday (2.5% y/y). It could trigger some intraday volatility but we don’t expect any huge moves. From a broader perspective, we think both the ECB and Fed have supported the bottom below yields. The dollar could hold the upper hand, especially ahead of a weekend in which we will see whether Trump’s verbal show of force translates into actions as well. We’re particularly interested whether countermeasures will follow swiftly. Canada threatened to cut off oil exports to the US altogether, even as Trump considered excluding this sector from tariffs.
News & Views
CPI inflation (ex-fresh food) in the Tokyo area in January rose 0.3% M/M lifting the Y/Y measure to 2.5% (was 2.4% in December). A such, the Y/Y measure is reaching the highest level in a year’s time. The overall headline CPI even accelerated 0.5% M/M and 3.5% y/y, driven by a sharp rise in food prices (2.1% M/M, 7.7% Y/Y). Core inflation ex fresh food and energy rose slightly further from 1.8% to 1.9%. The Tokyo data are seen as a good pointer for the overall national figures that will be published on Feb 21. The further rise in inflation comes after the BOJ last week raised its policy rate by 25 bps to 0.50%, the highest level since 2008. Today’s data at least support the case for the BOJ to continue policy normalization later this year even as further interest rate hikes are in particular conditional to higher wages supporting domestic demand. In this respect, other Japanese eco data published this morning were mixed. Labour market date suggest ongoing strength with the unemployment rate declining to 2.4% from 2.5% and the job-to-applications ratio holding at 1.25. Preliminary January industrial production was reported at 0.3% M/M and -1.1% Y/Y. Retail sales declined 0.7% in December, but were 3.7% Y/Y. Both series are highly volatile.
The Norwegian government coalition between the Labour Party of Prime Minster Jonas Gahr Store and the Center Party collapsed as both groups failed to reach an agreement on approving a series of new EU energy laws. The euro-skeptic Center party rejected approving new regulation from the EU. The rejection is part of a broader debate in Norway on relationship with the EU with respect to energy, including the impact of the interconnection with the EU in exchanging providing/electricity and its impact on local prices. Parliamentary elections in Norway are scheduled for September 8. Until then, the Labour Party will continue with a minority government.
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