Weekly Focus – Sell the Rumour, Buy the Fact?

It was a sell the rumour, buy the fact kind of week, apparently. The fears of Donald Trump imposing massive tariffs on his first day in office did not materialise, and markets cheered. With previous week’s US inflation data also still providing solace, equity markets gained, S&P 500 made a new record-high, and the dollar retreated. Tech stocks got a fresh boost from Trump’s announced Stargate AI venture, a USD 500 billion private-funded investment program aiming to ensure “the future of technology” in the US. A bit paradoxically, considering the massive number of components the projects will need, the program will further underpin US reliance on Taiwan for chips and other critical inputs.

With regards to Trump’s economic policies – tariffs or taxes – we did not get much wiser this week. Thus far, Trump has announced a likely 10% increase to tariffs against China but added he would “rather not use it”, and 25% tariffs for Canada and Mexico, in line with his campaign promises. We believe more tariff hikes are in the pipeline, but in the absence of tax cuts, we think the inflationary impact from tariffs alone in the US would be short-lived. Higher prices would dampen consumption, while structural growth is set to slow down in sync with lower immigration and decelerating labour force growth.

With this in mind and considering that lending data points to US interest rates being above neutral, we think the Fed can afford to resume cutting rates in March. However, next week we expect them to pause. As this is also what the market expects, and we expect no strong forward guidance from Powell, we think market reaction will be limited. All eyes remain on Trump, read more on Research US: Fed preview – Not stealing the spotlight, 23 January.

If December rate moves by the Fed and the ECB were essentially a coin-toss, this time around markets have a strong conviction on both. For the ECB meeting next week, we and the consensus expect a 25bp cut. But similar to our Fed call, our expected ECB rate path diverges from market expectations. Markets expect ECB policy rate to land at 2%, we expect two more cuts, and policy rate to reach 1.5% by September. Euro area PMIs provided some relief in December, and hard data from the labour market remains strong. However, soft indicators paint a weaker picture, and we expect wage growth to moderate further, leaving room for the ECB to adjust rates significantly lower. Read more on Flash: ECB preview – No new signals, 23 January.

This week’s central bank meetings provided no surprises. Norges Bank kept rates unchanged at 4.5% and firmly guided towards a March cut. The Bank of Japan hiked its policy rate by 0.25% to 0.50% as expected. Recent USD depreciation has been a relief for Japanese authorities and enabled a long-anticipated cut.

Next week, central bank meetings aside, we get a flurry of interesting data releases from the euro area: German Ifo index on Monday, and GDP country data on Thursday. On Thursday, we get euro area Q4 flash GDP data and January flash inflation from Spain (ahead of German and French figures on Friday, and the EA release the week after). In the US, Tuesday brings January durable goods orders ahead of Q4 GDP release on Thursday and PCE inflation on Friday.

Full report in PDF.