Market Commentary

The main currencies pairs traded in relatively narrow ranges with the dollar slightly firmer. Softer than expected German inflation data for December weighed on the euro, which is trading at around $1.1680 against the US currency this morning and so not far off Monday’s low of $1.1660. Sterling is off its best levels against the dollar (of circa $1.3570), trading just under $1.35. EURGBP is little changed from yesterday morning’s levels as it continues to hover around the £0.8650 mark. Meanwhile, following developments in Venezuela over the weekend, Donald Trump says the country will be ‘turning over’ up to 50m barrels of oil to the US, which will be sold at ‘its market price’. The US administration also says it is discussing a range of options for ‘acquiring’ Greenland, including using the US military (an ominous but probably not immediate threat).

Yesterday’s Events

Euro area government bond yields edged down on the back of the German inflation data, falling by around 3bps or so. UK yields were also slightly lower on the day, while US yields ended flat to marginally higher. In equity markets, US stocks advanced further with the Dow Jones again leading the way, up around 1%, while the Stoxx Europe 600 closed higher for a third consecutive session, adding about 0.6%. However, with the recent rally in Asian stocks running out of steam overnight, European indices are slightly lower at the open today. Meanwhile, in the oil market, prices have been jumping around a bit, albeit within fairly narrow ranges, with Brent crude back down at around $60 per barrel this morning.

Ahead of this morning’s inflation data for the Euro area, inflation in Germany came in a good deal lower than expected in December according to yesterday’s flash readings. Headline inflation fell to 2% last month based on the EU-harmonised measure, down from 2.6% in November, and to 1.8% from 2.3% based on the national measure. A breakdown of the latter shows energy and food inflation both fell in December, while core inflation (i.e. excluding food and energy) was also lower, driven by a decline in goods inflation with services inflation unchanged (at 3.5%) for a second month in a row.

The Day Ahead

For today, as well as the Euro area inflation data for December, US releases include the ISM services index for December and the ADP employment (December) and JOLTS (November) reports, the latter covering job openings, hiring and layoffs.

Market Commentary

Markets largely shrugged off the weekend’s developments in Venezuela. Stocks in particular chalked up solid gains notwithstanding some softer than expected US economic data. The dollar has given up yesterday morning’s gains, slipping back against the main currencies. EURUSD is  trading at around $1.1730 this morning, off lows yesterday of circa $1.1660, while GBPUSD has rebounded strongly to just over $1.3550, from lows of about $1.3415. The pound continues its gradual but steady ascent (recovery) against the euro that’s been in place really since the November budget in the UK, trading at about £0.8650 this morning (up from over £0.88 in late November).

Yesterday’s Events

Government bond yields were generally lower yesterday on the back of weaker than forecast US manufacturing data. US, German and UK 10-year yields fell by around 3-4 bps, reversing most of the increase that occurred at the end of last week. Equity markets had a strong session. The main US indices recorded solid gains with the Dow Jones leading the way, up more than 1% to close at a new all-time high. European stocks extended their recent strong performance with the Stoxx Europe 600 up another 1% or so (to a new record high also), bringing its gains since the start of December to almost 5%. Meanwhile, in the oil market, Brent crude has more than reversed yesterday morning’s modest fall, back up around $61.5 per barrel this morning.

Manufacturing activity in the US contracted again in December according to the latest ISM (Institute of Supply Management) survey, with the headline index dipping to 47.9 last month and remaining below the key 50 level for a 10th consecutive month. New orders shrank for a fourth month in a row, while employment also contracted again (the latter suggests Friday’s official jobs report will also show another fall in the numbers employed in this sector of the economy in December).

Fed member Kashkari says the central bank needs more data “to see which is the bigger risk – inflation or the labour market.” While he has some concerns that above-target inflation could prove persistent, he seems to think the greater risk is that the “unemployment rate could pop higher from here.”

The Day Ahead

For the day ahead, economic data scheduled include final PMI services readings for December in the main economies. A flash inflation reading for December is due in Germany (ahead of tomorrow’s data for the Euro area), with the consensus expecting headline inflation to have fallen to 2.2% last month from 2.6% in November. Equivalent data for France published a short while ago showed inflation running at 0.7% in December, in line with expectations and down a touch from 0.8% the previous month.

Market Commentary

Only a few days into the New Year and it’s already proving eventful. Not surprisingly perhaps, given the experience of the past year, Donald Trump is central to developments as the US takes over the ‘running’ of Venezuela. The market reaction is relatively muted so far with oil prices just a little lower and the dollar a touch firmer, though the weekend’s events are a reminder that geopolitical uncertainties remain ever present. Meanwhile, the coming week will be important in shaping expectations for Fed interest rates, and hence the direction for markets for the next while, with a heavy schedule of economic data due culminating in the US jobs report for December on Friday. In FX, the euro kicks off the week trading at $1.1690, off its best levels in December but within the range of $1.15 to $1.18 that has prevailed for the majority of the time since the middle of 2025, while sterling is also a touch lower against the US currency this morning, trading at around $1.3430. EURGBP is hovering around the £0.87 level, having drifted gradually lower during the course of December.

Yesterday’s Events

The main central banks held their final monetary policy meetings of 2025 in December, with the ECB staying on hold again (at 2%) and the Fed and Bank of England (BoE) both cutting their respective policy rates by 25bps (to 3.5-3.75% and 3.75%). Current market expectations at the start of this year envisage the ECB remaining firmly on hold in 2026 and the Fed and BoE lowering rates further, by a bit more than 50bps in the case of the Fed and by a bit less than 50bps in the case of the BoE, though the next cut from both is not fully priced in until early in the second quarter of the year.

Notwithstanding the Fed rate cut, US government 10-year bond yields backed up during December, increasing by around 15bps, though they remained with the range of circa 4%-4.25% in place since September. Equivalent German yields increased by almost 20bps last month to a 2025 high of 2.90%,  while UK 10-year bonds outperformed with yields rising by 5bps to just under 4.5%. Yields generally continued to edged higher on Friday and are only marginally lower this morning notwithstanding the weekend’s developments in Venezuela.

Fed member Paulson says she sees “inflation moderating, the labour market stabilizing and GDP growth coming in around 2 percent this year,” adding that “if all of that happens, then some modest further downward adjustments (to interest rates) would likely be appropriate later in the year.”

The Day Ahead

Looking to the week ahead, there’s a heavy schedule of US economic data due. As well as Friday’s jobs report, the ISM manufacturing and services surveys are published today and Wednesday respectively, while the ADP employment report (December) and job openings data (November) are published on Wednesday. In the Euro area, a flash reading for December inflation is due on Wednesday also.

Market Commentary

The Bank of England’s “cautious” rate cut helped sterling chalk up modest gains against the dollar and euro last week, with the pound trading just north of $1.34 and just under £0.8750 respectively  at the start of play today. The single currency lost some ground to the dollar on the week, notwithstanding the ECB keeping rates on hold again at its latest meeting, though at around $1.1725 it is still more than a cent ahead in December to date. The yen was very much on the back foot, despite the Bank of Japan hiking rates, shedding more than 1% against the dollar. There are a number of US  economic data releases due over the next few days, including the government-shutdown delayed GDP report for Q3 tomorrow.

Yesterday’s Events

Softer than forecast employment and inflation data contributed to a fall in US government bond yields last week with 2- and 10-year both about 4bps lower. German 2-yields were flat but 10-year yields rose by around 4bps, while UK yields were largely unchanged across the curve. In equity markets, US stocks had another positive session on Friday, with the S&P 500 gaining almost 1% to end flat on the week overall, while the Stoxx Europe 600 added almost 0.5% on Friday to end 1.5% higher on the week.

Fed member Williams says he doesn’t “have a sense of urgency to act further on monetary policy right now, because the (interest rate) cuts we’ve made have positioned us really well”, adding that he’d like to see inflation come down some more before lowering rates again. The market isn’t fully pricing in the next cut in rates until the second quarter of next year.

The Day Ahead

Tomorrow’s GDP report in the US is expected to show the economy grew by 0.8% q-o-q in Q3, according to the consensus forecast, only slightly less than the 0.9% growth in the second quarter of the year. This would leave the annual (y-o-y) rate of growth in Q3 at 2%, a moderation from the 2.7% pace of growth recorded over the year to Q3 2024. Other US data due over the next few days include consumer confidence (December) and industrial production (November) tomorrow and weekly jobless claims on Wednesday.

Market Commentary

The ECB left interest rates unchanged yesterday, as expected, and seems set to remain on hold for an extended period. The Bank of England cut rates by 25bps but expressed caution about further reductions. Inflation in the US came in much lower than expected in November but may have been biased down because of issues stemming from the recent government shutdown. Overnight,  the Bank of Japan raised rates by 25bps but further hikes may be slow to come about. The dollar has popped higher against the yen, to just shy of Y157, and is also a touch firmer against the euro and sterling at around $1.1710 and $1.3370 respectively. The pound has gained a little ground against the single currency, trading at around £0.8750.

Yesterday’s Events

In government bond markets, UK short-dated yields moved up by around 4bps following the Bank of England’s ‘cautious cut’ but were unchanged further out the curve. US yields ended slightly lower (down 2-3bps), while German yields were largely unchanged. Equity markets rebounded, with the lower than expected US inflation readings seemingly the excuse to rally, with US and European stock gaining in and around 1% on the day.

The Bank of England MPC voted 5/4 to lower the policy rate by 25bps to 3.75%, bringing the cumulative reduction in the cutting cycle to date to 150bps. It said disinflation was likely to continue and, hence, the policy rate is likely to “continue on a gradual downward path”, but noted that further policy easing from here “will become a closer call.”. The markets sees another 25bps cut coming around next April.

The ECB left the deposit rate unchanged at 2% for a fourth consecutive meeting, as widely expected, while raising its forecasts for both growth and inflation. The latter is seen running close to the 2% target in 2026-2028, which points to the ECB remaining on hold for an extended period.

Taken at face value, yesterday’s inflation data in the US were very benign with headline and core inflation coming in at 2.7% and 2.6% respectively in November versus 3% for both in September. Within core, goods inflation was 1.4% (versus 1.5% in September), while services inflation was running at a circa four-year low of 3%.

The Day Ahead

For today, we’ve already had retail sales in the UK, which were softer than expected with volumes down 0.1% in November after falling by 0.9% in October. Data is light for the rest of the day, with consumer confidence due in the US and Euro area.