BoE Meeting Takes Centre Stage Today

In focus today

Today, we expect the Bank of England to cut the Bank Rate by 25bp to 4.50% in line with consensus and market pricing. We anticipate the vote split to be 8-1 with the majority voting for a cut and hawk Catherine Mann voting for an unchanged decision. We expect the BoE to stick to its previous guidance noting that “a gradual approach to removing monetary policy restraint remains appropriate”. On balance, we tilt towards a dovish twist during the press conference with downside risks to growth tentatively materialising. See more in our preview Research UK – Budget skies are clearing for GBP; BoE to cut, 3 February.

From the US, preliminary US Q4 productivity data is released. Solid productivity gains have helped moderate growth in firms’ unit labour costs despite relatively large increases in nominal wages. SF Fed’s Daly is scheduled to give a speech in the evening.

In the euro area, retail sales data for December is released. This print has been rising during the past six months showing signs of recovering private consumption.

The focus in Sweden today will be on the January flash inflation print. We expect CPIF at 1.54% (Riksbank: 1.79%, cons: 1.6%) and CPIF excluding energy at 1.94% (Riksbank: 2.41%, cons: 2.1%). We see a clear downside risk to the Riksbank’s forecast, and this print will be important for future policy considerations from the Riksbank. The flash estimate today will not provide any information about the components or the weights.

Economic and market news

What happened yesterday

In the euro area, the final composite PMI for January confirmed the initial reading of 50.2, with services PMI almost unchanged at 51.3. There were some revisions beneath the aggregate data, as German PMIs were revised upwards due to improvement in the manufacturing sector. In contrast, Spain and France showed lower figures in the final release. As Spain has been the main growth driver of the euro area, the weakening PMIs are noteworthy. Yet, Spain remains comfortably in growth territory, with a composite PMI of 54.0, a level it has maintained for the past six months, whereas French PMIs are lower signalling weaker activity.

In France, French Prime Minister survived the no-confidence vote and pushed through a delayed 2025 budget aimed at reducing France’s deficits. Bayrou succeeded by negotiating budget compromise with the Socialist party.

In the US, the ISM non-manufacturing figure was lower than expected at 52.8 (prior: 54.1, cons: 54.3). The weak ISM pushed EUR/USD higher and confirmed earlier signals of weakness from PMI. Indices for business activity, new orders, and prices all declined. Leading data for January showed an unusual pattern, with manufacturing growth improving while the services sector lost stream. Meanwhile, ADP employment exceeded expectations with 183K jobs created in January (prior: 176K, cons: 150K), highlighting a surge in private sector employment and strengthening the case for a stable labour market.

In Norway, housing data showed great strength with seasonally adjusted housing prices increasing by 1.4% m/m in January, significantly surpassing Norges Bank’s estimate of 0.5% from the December MPR. This may lead the market to question the necessity or possibility of rate cuts in Norway. However, at the press conference following the January monetary policy meeting, Governor Bache conveyed that there are no concerns in the housing economy that would impact rate cut decisions soon.

Equities: Global equities rose yesterday due to a variety of factors. Firstly, earnings on both sides of the Atlantic from some of the mega-cap companies impacted sector performance, resulting in a noticeably different outcome in Europe and the US. Secondly, defensive sectors outperformed on both sides of the Atlantic. While this aligns badly with the strong markets and with indices ending at daily highs, some of this can also be attributed to earnings and partly to the fact that yields took a nosedive. Adding complexity, despite what we might call mixed macroeconomic conditions and a significant drop in yields with a flatter curve, banks performed well yesterday.

This can also be ascribed to earnings from banks, especially on our side of the Atlantic. Finally, positive sentiment combined with lower yields aligns well with support for small caps, which outperformed large caps by 0.4% yesterday. In the US yesterday, the Dow rose by 0.7%, the S&P 500 by 0.4%, the Nasdaq by 0.2%, and the Russell 2000 by 1.1%. Markets in Asia are mostly positive this morning. Futures in Europe and the US are higher across the board this morning.

FI: European yield curves bear flattened yesterday as the short end went higher in yields following cautious comments from Lane on the speed of rate cuts while at the same time the 30y was supported by soft ISM services as well as the QRA being in line with their previous communications and expectations, thus the US Treasury saying that they expect to keep auction sizes steady for a least next several quarters. As for the front end, Lane said that it might take longer than expected to get inflation to the target amid he also said that the miss ground, where one is not to overweighing the upside risks nor the downside risks.

FX: EUR/USD has fully erased the tariff-induced losses earlier this week with the cross at 1.04. USD/JPY continues to slide, now just above 152. GBP/USD scale back some of yesterday’s gains ahead of the BOE meeting where a cut is expected. The SEK has had a good run this week. EUR/SEK pauses at 11.35 and NOK/SEK at 0.97 ahead of the Swedish set of inflation data at 08:00 CET, where we and the market expect core and headline prints below the Riksbank’s forecast. The zloty has re-found its groove with EUR/PLN back at the 4.20 support area.