Soft US and euro area data weighed slightly on rates, which largely did not move much through the week, at least until German inflation unexpectedly declined significantly in several of the big Bundesländer, which drove 2Y Bund yields 10bpslower. This puts the spotlight on the euro area total released Monday. January is always a special month setting the stage for the year, because many prices are adjusted only at new year.
After a long period of some serious zigzagging the dollar has been steadier this week. The fallout of US tariff plans will continue to be a key driver of volatility in FX markets, though. European equities outperformed US in a week when the Chinese AI start-up DeepSeek took the spotlight as it poses a challenge to US AI developers to compete without relying on the most advanced chips.
The ECB cut its key interest rates by 25bp in a unanimous decision as widely expected. Despite several attempts from journalists, we did not get much colour on the final destination for this cutting cycle.
The decision followed data showing that the euro area stalled in Q4 with shrinking French and German economies still weighing down. The new year has started off a bit stronger as the current situation index from the IFO data supported the better-than-expected German PMI data for January. Expectations declined further to the lowest level in a year though, and we continue to expect the economy to stagnate in the first half of this year.
The FOMC meeting was as uneventful as the one in Frankfurt. The Fed kept rates unchanged, and Powell delivered a balanced message to markets while steering clear of toxic political questions. He noted that the committee is in no hurry to adjust the policy stance. Data out of the US ticked in a bit weaker than expected, with q/q Q4 GDP growth of 0.6%, slightly below expectations and softer vibes from the labour market with the “jobs plentiful”-index declining to the lowest level since September.
The calendar is packed with interesting highlights next week. Besides inflation data, on Monday French lawmakers will discuss the 2025 budget, and likely adopt it without a majority. Later in the week, we will see if PM Bayrou survives a no-confidence vote. On Friday, the ECB publishes a new paper on the neutral rate of interest, which might give us some further insight into where we should expect the cutting cycle to end up.
In the US, the first tariffs should take effect over the weekend. On the data front, we have a packed schedule with ISM data, JOLTs and jobs report as the key highlights. After a long period of solid job market data, it will be interesting to see if it continues. We expect nonfarm payrolls growth to slow down to +150k. We expect the Bank of England to cut the policy rate by 25bp to 4.50% on Thursday. We expect a cautious message, focusing on a gradual cutting cycle.
