BoE meeting, employment data from the US, Canada and New Zealand as well as preliminary January CPI data for the Eurozone will highlight the week ahead of us.
USD
President Trump put a 25% tariffs on Colombian imports which will be rising to 50% in a week. Additionally, he has revoked Visas for Colombian officials and imposed financial restrictions. The cause for this outburst was that Colombia did not want to accept US military deportation flights carrying migrants. In a retaliatory move President of Colombia ordered increase of tariffs on US imported goods to 25% but later on backtracked and accepted migrants.
Financial Times article stated that Treasury Secretary Bessent wants US to start with universal tariffs on imports to the US of 2.5%. His reasoning is that this would give companies more time to adjust. Additionally, tariffs would go up by 2.5% each month and they could reach as high as 20%. President Trump stated that he wants much bigger tariffs than 2.5% and added that he is not yet set on the exact number.
Monday saw a huge sell off in the markets as S&P dropped almost 2% with NASDAQ dropping almost 4%. The main culprit, as stated by many market participants, was release of Chinese AI DeepSeek which managed to generate same results as ChatGPT by using older version of Nvidia chips and much less funds. NVIDIA shares were down over 11% only to rebound tomorrow by 5%. Alibaba has released its AI model and it claims that model has shown better performance compared to DeepSeek and ChatGPT 4.0 on key metrics.
Fed has left rates unchanged in 4.25-4.50% range as was expected by entire market. Risks to inflation and employment are seen as “roughly in balance”. The part about inflation making progress towards 2% target has been removed. Fed remains data dependent. The statement concludes with “The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
During the press conference chairman Powell stated that labour market is not a source of inflation. Inflation is coming down, but is still elevated while long-term inflation expectations remain well-anchored. He clarified the removal of “progress towards 2%” was due to editing of the sentence and that they are satisfied with process on inflation. With economy staying strong Fed is not in a hurry to lower interest rates. Policy in good place to achieve both mandates. When asked about Trumps remarks that he wishes interest rates down immediately Powell stated that he did not have any contact with president and that Fed will continue to conduct policy in the best interest of public. Labor market has been characterized as going strong and QT will continue as planned, no need for changes as there are still ample excess reserves in the system. Powell sounded balanced with Fed keeping bias towards rate cuts.
Advanced Q4 GDP at 2.3% annualised vs 2.6% annualised and down from 3.1% annualised seen in Q3. Consumer spending surged 4.2% compared to 2.8% seen in the previous quarter and contributed with 2.82pp vs 2.48pp in Q3. Business investment plunged and declined 2.2% after rising 4% in the previous quarter. Inventories were also a big drag on the reading. GDP deflator declined to 2.2% from 2.4% in Q3 indicating lower inflation. It is a case of disappointing headline number but good details under the hood.
December PCE report saw headline number print 2.6% y/y as expected with a 0.3% m/m growth or 0.255% when taken to the third decimal. Core PCE printed 2.8% y/y for the third month straight with a 0.2% m/m and 0.156% unrounded. Unrounded numbers make headline rising at almost 0.2% m/m while core rises at 0.1% m/m which will make Fed happy with progress on bringing down inflation and USD gained some strength on the back of the report considering that personal spending rose 0.7% m/m and November reading being revised up to show a 0.6% m/m increase.
President Trump signed executive order hitting Mexico with 25% tariffs, Canada with 25% tariffs, with 10% tariffs on energy exports and China with 10% tariffs. Tariffs will be effective from Tuesday February 4. Markets have reacted by punishing MXN and CAD on the market open while rewarding USD, JPY and CHF, effectively risk off mode.
The yield on a 10y Treasury started the week at 4.63%, rose to 4.64% and finished the week at around 4.58%. The yield on 2y Treasury started the week at 4.28% and reached the high of 4.29%. Spread between 2y and 10y Treasuries started the week at 33bp and finished the week at 36bp as curve steepened further. The 2y10y was inverted for over two years. FedWatchTool sees the probability of a 25bp rate cut at March meeting at around 12%, while probability of a no cut is around 82%. June is now the first meeting that sees above 50% probability of a rate cut. Gold reached a new all time high, rising above $2800 but finish week below it.
This week we will have ISM PMI data as well as NFP on Friday. Headline number is seen around 205k while the unemployment rate is expected to remain steady at 4.1%.
Important news for USD:
Monday:
ISM Manufacturing PMI
Wednesday:
ISM Services PMI
Friday:
NFP
Unemployment Rate
EUR
ECB has cut key policy rates by 25bp as was widely expected by markets so the new deposit rate is 2.75%. The decision made by the Governing Council “is based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission“. The statement shows that disinflation process is continuing to develop as projected with inflation expected to fall to 2% target during this year. Members expect that lower borrowing costs and rising real wages contribute to increase in demand. The Governing Council continues to be data-dependent and maintains meeting-by-meeting approach.
ECB president Lagarde stated in the press conference that decision to cut by 25bp was unanimous and there was no debate about 50bp rate cut. She emphasized the staff report, to be published on February 7, which will contain more information regarding neutral rate. Additionally, she mentioned exports as main driver of economic recovery and reiterated stance that monetary policy remains restrictive.
Preliminary Eurozone Q4 GDP came in flat q/q while markets were expecting a 0.1% q/q increase. German Q4 GDP declined by 0.2% y/y while a 0.1% q/q decline was expected. French Q4 GDP declined by 0.1% q/q while a flat reading was expected. Household consumption was strong but was overshadowed by drops in net trade, inventories and investment. Growth was coming from Portugal and Lithuania. Preliminary January inflation numbers saw both Germany and France undershoot expectations with 2.3% y/y and 1.4% y/y vs 2.6% y/y and 1.5% y/y respectively. Disappointing growth numbers combined with declining inflation just add more certainty to another rate cut coming in March.
This week we will have preliminary CPI for the month of January with expectations for further ticks up in both headline and core number.
Important news for EUR:
Monday:
CPI
GBP
UK Chancellor of the Exchequer Reeves stated that things have started to turn around in the economy. She added that barriers and regulations are having stifling effect on the economy and that solution is systematic removal of those barriers by the government. She also expressed that she is looking forward to work and deepen relationships with US Treasury Secretary.
This week we will have a BoE meeting where a 25bp rate cut is almost certain.
Important news for GBP:
Thursday:
BoE Interest Rate Decision
AUD
Q4 inflation data printed 0.2% q/q, unchanged from Q3 with 2.4% y/y compared to 2.5% y/y as expected and 2.8% y/y in the previous quarter. Additionally, trimmed mean, core inflation measure, printed 0.5% q/q and 3.2% y/y both numbers lower than expected and lower than 0.8% q/q and 3.5% y/y seen in the Q3. RBA sees inflation as the most important factor influencing their decisions on monetary policy so with inflation coming down markets are pricing in higher probability of a rate cut at their February meeting.
Official PMI data from China for the month of January showed economy that is slowing down upon entering the new year. Manufacturing printed 49.1 while expectations were for it to come in unchanged from December reading of 50.1. Services dropped to 50.2 from 52.2 the previous month and composite barely hang in expansion with a 50.1 reading.
NZD
RBNZ chief economist Conway stated that committee has a high degree of confidence that inflation will abate which will help lead Official Cash Rate down to the neutral level. Long-term neutral rate is seen somewhere in the range from 2.5 to 3.5%. Business confidence declined in January to 54.4 from 62.3 in December. The number is still very high indicating overall positive confidence in the economy as employment conditions and wage expectations are improving according to the survey. On the other hand, drops in profit expectations and increases in pricing intentions and inflation expectations are a cause for concern.
This week we will have employment data.
Important news for NZD:
Tuesday:
Employment Change
Unemployment Rate
CAD
BoC has delivered a 25bp rate cut as expected and brought the rate down to 3%. This totals 200bp of rate cuts since middle of 2024 and according to BoC it has started to boost the economy through consumption and housing activity. Business investment and labour market, however, remain week. The statement shows that bank will stop its QT program and restart asset purchases in early March. New projections see GDP at 1.8% for both 2025 and 2026, previously it was 2.1% for 2025, while CPI will be around 2% for that same period, 2.3% for 2025. The main push for GDP is expected to come from consumer as consumption growth is projected at 1.3% vs 0.7% previously. Risks to the outlook are seen as “reasonably balanced”. BoC Governor warned that tariff threats are putting downward pressure on CAD. He proudly stated that low inflation has been restored and focused on dealing with threat of tariffs.
This week we will have employment data.
Important news for CAD:
Friday:
Employment Change
Unemployment Rate
JPY
January inflation data for the Tokyo area saw headline number jump to 3.4% y/y from 3% y/y in December. Both core measures, ex fresh food and ex fresh food, energy, ticked up to 2.5% y/y from 2.4% y/y the previous month. All three data points are well above 2% target thus increasing chances of another rate hike in March, however, governor Ueda downplayed that stating that underlying inflation is still below 2% and that this inflation increase is driven by cost-push factors.
CHF
SNB total sight deposits for the week ending January 24 came in at CHF441.3bn vs CHF445.3bn the previous week. Another leg down as funds are moving out of the Swissy. SNB Chairman reiterated bank’s reluctance to go for negative interest rates, but stated that they are prepared to go down that path if need arises.
