In focus today
Today, markets eagerly await US and Russian officials meeting in Saudi Arabia for peace talks initiated by US President Donald Trump last week. The negotiation does not include Ukraine and Ukrainian President Zelensky has stated that any negotiations about Ukraine without its participation would be invalid.
On the data front, the German ZEW index for February is released. In January, we got a positive surprise as the assessment of the current economic situation increased after six months of decline. It will be interesting to see if this rebound, which was also reflected in the PMI and Ifo, persisted into February.
This morning in the UK, we get the labour market report for December/January. Wage growth remains a key input factor for the BoE and private sector wage growth showed a pick-up last month. On the other hand, the labour market continues its gradual loosening with labour demand cooling.
Meanwhile in Sweden, today’s focus is on the detailed CPI report for January (08.00 CET). The flash inflation reading turned out much higher than we, the market and the Riksbank had expected. The big surprise was on underlying inflation (CPIF ex energy), which could be a worrying sign of a broader inflation pressure. The details will bring important information on the implications for inflation throughout 2025 as well as the implications for the Riksbank.
Economic and market news
What happened overnight
In Australia, the Reserve Bank of Australia lowered the cash rate target by 25bp to 4.1% as expected. This was the first rate cut since 2020 with the Board remaining cautious on further policy easing. Inflation is moderating and outlook remains uncertain.
What happened yesterday
In Europe, crisis talks in Paris among European leaders underscored the commitment to increase security and a peace through strength approach to safeguarding Ukraine. However, cooperation with Washington remains crucial for securing peace. NATO Chief Mark Rutte expressed Europe’s readiness to lead in providing security guarantees for Ukraine, while Dutch Prime Minister Dick Schoof emphasized the urgency of supporting Ukraine. Despite the U.S. decision to engage Russia in negotiation without European allies, British Prime Minister Keir Starmer indicated readiness to send peace-keeping troops, contingent on a U.S. security commitment. Meanwhile European defence shares hit new highs amid expectations of increased defence spending and Denmark is considering a DKK 50bn fund to scale up Danish defence this and next year.
In Sweden, the monthly labour force survey is due at 08.00 CET. We expect to see a stabilization of the current weak labour market, but without any marked improvement in the unemployment figure. Such an outcome would be in line with last week’s PES report that showed an unchanged unemployment rate and a return of layoffs to their historical average after being at elevated levels in early autumn.
Equities: Equities inched higher yesterday, but in thin volumes as US was closed for holiday. European markets added another 0.5%, thereby reaching the eighth all-time high this year. Defence stocks surged for a second day with Swedish SAAB jumping a full 16% (30% in a week!). A defence rally but not a defensive one, as cyclicals generally beat defensives, growth/quality beating value but small caps lagging. VIX however worth noting, snapping the improvement from last week by rising this morning. Nonetheless, US futures are slightly higher this morning.
FI: The main story in the European fixed income market is the increase public spending on defence and aid to Ukraine. EU is looking into various options to fund the increased spending through either joint financing or suspending the EU fiscal rules like we saw during the Covid-19 crisis. The response in the bond market was higher yields across the EGBs, but with tighter spreads between periphery and semi-core EGBs relative to core EGBs. Hence, we are not seeing much flight-to-quality despite the higher rates and the pressure on fiscal policy, which would normally result in a wider BTPS-Bund spread and OAT-Bund spread.
FX: The JPY was the clear outperformer in the G10 space in a relatively quiet start to the week, as Japan’s economy grew much stronger than expected in Q4 2024. With US markets closed for Presidents Day, EUR/USD remained steady just below 1.05. USD/CAD has stabilized just below 1.42 over the past couple of sessions – today, the focus in CAD FX turns to the January inflation figures at 14:30 CET. EUR/GBP declined toward the 0.8300 mark during yesterday’s session. The Riksbank’s announcement that it will smooth an EU payment of SEK 7.9bn over two months should have a negligible market impact. EUR/SEK dropped below 11.22, while EUR/NOK fell below 11.64.
