Markets
UK Chancellor Reeves in a keynote speech today failed to persuade sterling of her growth-reviving plans. It’s her first high-profile appearance since delivering the October Budget. A series of tax increases caused consumer and business confidence to have plummeted while her spending plans co-triggered sharply higher UK bond yields. Reeves defended the measures as taking on responsibility for repairing public finances while her pledge for going “further and faster” mostly relies on infrastructure projects. UK gilt yields ease a few basis points (up to 3 bps in the 10-yr) in a move shared by peers. German rates are down between 0.5-1.8 bps in a bull steepener. US rates barely budged with net daily changes of less than 1.5 bp. An early-morning attempt by the pound to eke out some gains ran into resistance pretty soon. EUR/GBP is now marginally lower for the day to change hands in the 0.838 region. The US dollar extends yesterday’s comeback with gains against every major currency but JPY. EUR/USD dives back sub 1.04. The trade-weighted greenback takes out the 108 lever. The Aussie dollar underperforms. This morning’s Q4 inflation print all but paved the way for the central bank to kick off its easing cycle at its February policy meeting. Stock optimism is back. If the EuroStoxx50 holds on to its 0.6% gain it will close at the highest level since 2000. Wall Street opens mixed ahead of tonight’s Fed policy meeting.
The Fed will hold rates steady at 4.25-4.5% against the backdrop of a healthy economy and still-above target inflation. Economic data since the Fed’s and chair Powell’s hawkish pivot in December has been outright strong and offered no reason to scale down the rhetoric. That should place a bottom below US yields and the dollar. Trump is a wildcard. Powell will probably keep his cards close to his chest in terms of what the central bank expects of his (yet-to-be-announced) policies going forward. Given the state of the economy the Fed has and will use the time to be at the sidelines. US money markets currently discount the first reduction not before June – a reasonable assumption for now. But POTUS will surely have a say on the Fed’s decision not to cut rates after doing so three times straight. Trump pressed for lower (global) policy rates during his virtual appearance in Davos last week. He might well trigger more market volatility than the decision itself.
News & Views
The Swedish Riksbank (RB) today as expected reduced its policy rate by 25 bps to 2.25%. This brings the cumulative amount of interest rate cuts since the start of the easing cycle in May last year at 175 bps. The Riksbank sees the outlook for inflation and growth broadly in line with the forecasts from December. Inflationary pressures are deemed to be consistent with inflation around two% (CPIF inflation was 0.3% M/M and 1.5% Y/Y in December). There are signs that an economic rebound is on the way, but activity remain weak for now. Interest rate cuts have yet to reach their full positive impact on households’ and companies’ finances. The RB didn’t change guidance from December that today’s rate cut might be the end of the easing cycle, but remains prepared to act if the outlook for inflation and economic activity changes. Amongst a long list of factors of uncertainty, the RB mentions the risks related to the recovery of the Swedish economy and the krona exchange rate. Markets are still pondering the chances of an additional RB rate cut later this year, e.g. if growth would turn out weaker than expected. The krone today gains marginally but the EUR/SEK cross rate remains blocked in a very tight range near 11.50 (currently 11.456).
The National Bank of Belgium’s flash estimate of 2024 Q4 GDP growth amounted to 0.2% Q/Q. Activity was 1.1% higher compared the final quarter of 2023. An initial analysis shows that, in comparison to the previous quarter, value added was down by 0.1% in industry. Value added rose by 0.7% in the construction industry. The services sector continued to report positive growth of 0.2%. For 2024 as a whole, GDP grew by 1.0%. Value added fell by 1.0% in industry. Value added was up by 1.0% in construction and 1.3% in services.
