The bond market sell-off stabilised ahead of Donald Trump’s inauguration on Monday, as the December core inflation data from the US came out on the soft side (+0.2% m/m SA, Nov. +0.3%). Easing hotel, core goods and health care inflation contributed to the cooling but importantly, broader housing and non-housing services inflation remain at moderating trends as well. The move gained further momentum on Thursday, when the Fed’s influential Chistopher Waller flagged that three or four rate cuts could be possible this year if ‘data cooperates’. While Trump’s election win has brought inflation fears firmly back to markets’ agenda, we find little reason for concern in the hard data received so far, and still think the Fed will continue cutting rates in March. Read more from Global Inflation Watch – Hard data signals continuing disinflation, 16 January.
Most of our central bank views remain on the dovish side of market pricing even after this week’s rally. This also implies further downside potential to bond yields on both sides of the Atlantic. In our updated forecasts, we now see 10y Bund yield at 2.25% in 12M horizon and maintain 10y UST yield view at 4.20%, read more from Yield Outlook – The pendulum has swung too far, 13 January. We also tweaked our call for Riksbank, and now see the next cut already at the upcoming January meeting, see RtM Sweden, 17 January.
On the geopolitical front, the fear of Trump allowing ‘all hell to break out‘ motivated Israel and Hamas to finally agree on a ceasefire set to begin on Sunday. The actual content of the deal has not changed much from preliminary plans, and the implementation remains uncertain. Importantly, the future governance of Gaza remains an open question.
Next week, all eyes will be on which executive orders Trump enacts once he enters the White House. Rumoured topics of up to 100 separate orders include everything from tariffs to immigration to regulation and more. For the near-term macro-outlook and markets, any new announcements on tariffs will be the key to follow. The mixed signals heard from news sources and Trump himself over the past weeks suggest there is at least some level of internal disagreement within the Republican party over the topic. Our best guess is that any announcements made next week would be limited to targeted tariffs against specific countries and/or goods. We would expect any broader universal tariffs to be announced only at a later stage.
The upcoming week will be a relatively quiet one in terms of macro data. The most important release will be the January Flash PMIs on Friday, where we expect the euro area composite index to recover back to the neutral level of 50.0 (Dec. 49.6). We expect some improvement to both manufacturing and services indices. The former will still likely remain well below 50, which means production continues to contract, but just at a slower pace.
Early Friday morning, we expect the Bank of Japan to hike rates by 25bp. Analysts are divided between no change and a hike while markets price in nearly 80% probability of a hike at the time of writing. The latest December CPI data is due for release just before the monetary policy decision. This week, we recommended a short USD/JPY position as part of our annual FX Top Trades 2025, 14 January.
. Easing hotel, core goods and health care inflation contributed to the cooling but importantly, broader housing and non-housing services inflation remain at moderating trends as well. The move gained further momentum on Thursday, when the Fed's influential Chistopher Waller flagged that three or four rate cuts could be possible this year if 'data cooperates'. While Trump's election win has brought inflation fears firmly back to markets' agenda, we find little reason for concern in the hard data received so far, and still think the Fed will continue cutting rates in March. Read more from Global Inflation Watch - Hard data signals continuing disinflation, 16 January.){kind=link}