Market Commentary

The dollar dropped quite sharply yesterday after the Wall Street Journal reported that Donald Trump would not sign an executive order announcing tariffs in his first day as President, but would “instruct federal agencies to study tariff policies and the US’s trade relationship with China, Canada and Mexico”, though Trump subsequently said he would impose a 25% tariff on Mexico and Canada on February 1st. The euro and sterling rose to intra-day highs of $1.0435 and $1.2345 against the US currency respectively, but they have since come back to around $1.0370 and $1.2260 (both still up about a cent from last week’s close), while EURGBP is little changed through all of this as it continues to hover around the £0.8450 mark. The latest labour market report in the UK, released a short while ago, was something of a mixed bag and hasn’t had much impact on the pound.

Yesterday’s Events

US bond and equity markets were closed yesterday. Elsewhere, German and UK bond yields were little changed but they are lower at the open this morning in line with a drop in US yields in overnight trading in Asia. European equities chalked up modest gains yesterday, adding to last week’s strong rally, while equity futures point to a positive open for US stocks later today.

In the UK, employment rose by a modest 36k, or +0.1%, in September-November (from June-August) according to the latest Labour Force Survey (LFS), but separate data (based on HM Revenue tax records) shows the number of payroll employees fell for a second month running in December. The LFS also reported an increase in the unemployment rate to 4.4% in the three months to September, while the annual rate of growth in whole-economy and private sector weekly earnings accelerated further to 5.6% and 6% respectively over the same period. The latter will be of concern to the Bank of England, though it did not after its December monetary policy meeting that its intelligence suggests “average pay settlements in 2025 will be within a range of 3 to 4%.”

ECB member Vujcic says “the risk of an overshooting or undershooting” the 2% inflation target appears “balanced,” adding that he’s “not uncomfortable” with current market pricing for interest rates (which sees the deposit rare being lowered by 100bps to 2% by the end of this year).

The Day Ahead

Looking to the day ahead, it is very quiet in terms of economic data with the Zew index of investor sentiment in Germany/Euro area the only release of note.

Market Commentary

The euro closed out last week at $1.0270 against the dollar, up slightly from the previous Friday’s close, while sterling shed a half a cent to finish at $1.2170, with EURGBP about half a penny stronger on the week just shy of £0.8450. They are both a little firmer against the US currency this morning, at $1.0310 and $1.2205 respectively, amid reports of a positive phone call between Donald Trump and China’s President over the weekend and ahead of the former’s inauguration later today. Trump’s first days in office will command market attention, while the economic data calendar is relatively light for week ahead.

Yesterday’s Events

Bond yields fell last week amid softer than expected inflation data and some firming of central bank rate cut expectations. UK 2- and 10-year yields fell by about 15bps and 20bps respectively and equivalent US yields were  around 10 and 15bps lower, while German 2- and 10-years both fell by 6bps.

Equity markets ended the week on a positive note. The S&P 500 added 1% on Friday and almost 3% on the week (its first weekly gain since early December), while European stocks also rose by around 1% on Friday for a weekly gain of almost 3.5%.

ECB member Schnabel says “we currently see no major risks that could prevent us from reaching our 2% inflation target (therefore) we will probably be able to lower interest rates further,” but cautions that “after the steep rate cuts over the last few months, we are getting closer and closer to the point where we have to take a closer look at whether and to what extent we can still reduce rates.”

The Day Ahead

In terms of economic data scheduled for the week ahead, the main releases are the labour market report for September-November in the UK tomorrow (Tuesday) and flash PMIs for January in the main economies on Friday. The Fed is in its “quiet period” ahead of next week’s monetary policy meeting, as will the ECB from this Thursday.

Market Commentary

The euro and sterling have been essentially moving sideways against the dollar since bouncing off their lows earlier in the week. The single currency is trading at around $1.0290 this morning, little changed for yesterday morning, while the pound has slipped to around $1.2190 (from over $1.22) on the back of weaker than expected UK retail sales for December released a short while ago. This leaves EURGBP a touch firmer at about £0.8440, within the £0.84 to £0.8450 range that has prevailed over the past few trading sessions.

Yesterday’s Events

Bonds rallied again yesterday helped by dovish Fed commentary. US 2- and 10-year yields both fell by around 5bps, the latter now down around 15bps since last week’s close, while equivalent UK yields fell by around 8bps and 5bps respectively, bringing the decline in 10-year yields since Tuesday’s highs to 20bps. German yields saw more modest declines, of around 2-3bps. Meanwhile, in equity markets, European stocks had another very positive session, advancing by 1.5%, but US indices finished in the red.

Fed Governor Waller said “the inflation data we got (on Wednesday) was very good (and) if we continue getting numbers like that, it’s reasonable to think rate cuts could happen in the first half of the year,” adding that he wouldn’t entirely rule out a cut at the Fed’s next but one meeting in March. The market has brought forward the expected timing of a rate cut though not to as soon as March, but is toying with the idea of a possible June move.

Yesterday’s retail sales in the US were a little softer than expected, but spending still rose by 0.4% in December following an upwardly revised increase of 0.8% in November. The Atlanta Fed’s latest estimate of the run rate for GDP growth in Q4 is now 3% (annualised rate), the same as the Q3 outturn, with consumer spending the main driver.

In the UK, retail sales fell by 0.3% in December according to this morning’s data, much weaker than the 0.4% increase expected, and followed a downward revised gain of just 0.1% in November. Sales volumes over the three months to December fell by 0.8% from the three months to September, which will have weighed on overall GDP growth in the final quarter of last year.

The Day Ahead

Looking to the day ahead, economic data scheduled include industrial production and housing starts in the US and a final reading of Euro area inflation in December (the flash reading showed headline inflation nudged up to 2.4% from 2.2% in November, while core inflation remained at 2.7%),  while the IMF publishes its interim World Economic Outlook.

Market Commentary

Yesterday’s softer than expected inflation data in the US and the UK prompted a re-pricing of central bank rate cut expectations, most notably for the Bank of England (BoE), a large fall in bond yields, and a rally in equity markets. In the currency markets, the euro and sterling rose to highs for the day of about $1.0350 and $1.23 against the dollar following the US inflation numbers, but they have since come back to around $1.0290 and $1.22, leaving EURGBP trading at around £0.8435 this morning. UK GDP data for November released a short while ago were a touch weaker than expected, weighing on the pound a little, while retail sales due in the US later today could be market-moving release.

Yesterday’s Events

The market is pricing in an additional 25bps reduction in UK interest rates this year on the back of the latest UK inflation numbers, with just over 50bps worth of cuts now expected for the year as a whole, and sees about a 90% chance of the BoE cutting by 25bps next month. Fed and ECB rate cut expectations both firmed by around 10bps, with about 37bps priced in for 2025 in the case of the former and about 95bps in the case of the latter. The next cut from the Fed has been brought forward to around September, while the market fully expects the ECB to lower rates by 25bps at the end of this month.

In government bond markets, UK 2-year yields fell by around 15bps yesterday while 10-year yields, which had risen sharply since the start of the year, fell by around 17bps. Equivalent US yields were 10bps and 15bps lower respectively, while German 2- and 10-year yields fell by 6bps and 10bps. In equity markets, the S&P 500 in the US rallied by almost 2% and the FTSE 250 in the UK gained about 3%, while European stocks added just over 1%.

Regarding the US inflation data, headline consumer prices rose by 0.4% in December, pushing the annual rate up to 2.9% from 2.7% in November, but core consumer prices (while excludes energy and food prices) rose by a smaller than expected 0.2% last month, pushing the annual inflation rate on this measure down to 3.2% (from 3.3%), the lowest reading since August last year.

The UK economy expanded by 0.1% in November according to this morning’s GDP data, having contracted by 0.1% in October, with increases in output in services and construction offsetting a decline in output in manufacturing. GDP over the three months to November was flat on the three months to August, suggesting the economy will see little or no growth in Q4 after stagnating in Q3.

The Day Ahead

Looking to the day ahead, as mentioned, retail sales are due in the US, along with weekly jobless claims, import prices, and the housing market index, while the trade balance is due in the Euro area. The ECB publishes the minutes of its December meeting today as well.

Market Commentary

The respite for the euro continued yesterday with the single currency getting back to above $1.03 to the dollar. The European currency was under sustained pressure for much of last week but has rebounded somewhat at the start of this week, now up a cent on Monday’s low of just under $1.02. There is still plenty of potential for volatility in the coming week or so with President Trump set to take office next Monday. The euro has also edged up against sterling, moving back to above 84p with the result that the GBPUSD cross is only little changed, remaining around $1.22.

Yesterday’s Events

It was a positive day for equites, with gains in the US and Europe. The S&P 500 moved up marginally for a second day in a row although it must be said the index has been fairly volatile from day to day since Christmas but has generally been trending down, with the index closing at 5,842 yesterday from over 6,000 on the 26th of December. The Eurostoxx gained 0.5% yesterday but the FTSE lost out, down 0.3%. In bond markets, not a whole lot of movement yesterday . German 10-year yields were up by 4bps to 2.65%, underperforming US 10-years which were up 1bps to just under 4.8% and UK ten-years which were flat at just under 4.9%. However, yields are falling on the open this morning, with UK 10-years outperforming and down by 7bps to close to 4.8% following the release of weaker than expected UK inflation.

In the US, PPI inflation came in a little softer than expected in December. The year-on-year change was 3.3%, up from 3.0% in November, but lower than the consensus forecast of 3.5% while the annual rate of core PPI was 3.5%, below the 3.8% consensus. While the headline rate of PPI or ‘wholesale’ inflation did pick up the components suggest that price pressures in food and services are more muted than thought. The PPI comes ahead of December’s consumer price index release later today and the measure used by the Fed to measure price chances, the PCE, which is due at the end of the month.

Also in the US, small business optimism index rose again in December, this time to a 6-year high of 105.1. The index had jumped in November, to 101.7 from 93.7 in October, following the election of President Trump, with firms expecting favourable business policies and less regulation from the new administration. The index showed across the board improvement last month with businesses more confident about the future condition of the economy, have higher sales expectations and more signaled their intent to expand.

The annual rate of UK CPI inflation slowed to 2.5% in December, from 2.6% in November. This is the first time since September that the annual pace of inflation has slowed from the previous month and beating the consensus expectation of inflation remaining at 2.6%. The underlying data is more positive with core inflation slowing to 3.2% from 3.5% while services inflation came in at 4.4%, from 5.0% in November, the weakest it’s been since March of 2022. The data is in line with BoE forecasts and gives them room to ease monetary policy at their stated ‘gradual’ pace while, in the short term, it may take some pressure off UK bonds where concerns about the outlook for the public finances have seen yields move higher in recent weeks.

The Day Ahead

On the agenda today, Euro Area industrial production and an estimate of full year 2024 German GDP. In the US, we get the CPI and the Fed’s latest beige book. Among a very full slate of speakers are Guindos and Villeroy from the ECB, Taylor from the BoE and Barkin, Kashkari and Williams from the Fed.