In focus today
In Germany, the ZEW indicator for January is released today. The assessment of the current situation remains low while expectations for future growth have improved slightly in recent months. The German economy started growing again in the final quarter of 2025 as fiscal spending is now finally kicking in. Therefore, we also see scope for an improvement in ZEW in January.
In the UK, the jobs report is released. Labour market data has been soft recently with job losses and unemployment edging higher. PMIs suggest the trend continues.
Economic and market news
What happened overnight
In China, the People’s Bank of China kept the one-year and five-year loan prime rates unchanged at 3% and 3.5%, respectively. This was fully anticipated due to the stability of the 7-day reverse repo rate, which serves as a key policy benchmark. However, this could change soon, as the central bank has signalled further easing in 2026.
What happened yesterday
In the euro area, the EU finance ministers picked Boris Vujcic, Croatia’s central bank chief, as the new ECB vice president succeeding Luis de Guindos on 1 June. While the European Parliament and ECB Governing Council must still be consulted before formal appointment, Vujcic is likely to secure the role, as finance ministers’ decisions has historically been backed by the council. Competition for the six-member ECB executive board is highly political, with four positions, including the presidency, opening over the next two years. We anticipate that eurozone leaders will aim for a balanced composition of doves and hawks, similar to the current board. Vujcic, seen as a moderate hawk, may temporarily tilt the ECB’s balance, allowing for a minor hawkish market reaction. However, given the consensus to keep the policy rate steady, we do not expect significant market impact.
In France, PM Lecornu confirmed plans to use article 49.3 to pass the 2026 budget without a majority in parliament. By passing the budget with article 49.3 the budget deficit in 2026 will likely be smaller than what would have been the result of a negotiation in parliament. After passing it with article 49.3, the government is going to face a no-confidence vote where the Socialist party will hold the pivotal votes in deciding the future of the government. All attention will thus be on comments from the Socialists leader regarding their voting intentions in the no-confidence vote. All else equal, a budget pass points to a tightening of the 10-year French-German government bond spread. However, this comes with the risk of a government collapse through a no-confidence vote.
In Japan, PM Takaichi called a snap election, pledging to suspend the 8% food levy for two years to ease rising living costs. Parliament will be dissolved on 23 January, and the election, set for 8 February, will decide all 465 lower house seats. Calling an early election may help Takaichi leverage public support and address the LDP coalition’s narrow majority in the House of Representatives. The announcement sent the yield on the 10-year Japanese government bond to a 27-year high of 2.275%, as markets prepare for Takaichi to expand her fiscal policies if she secures victory.
In Sweden, surveyed money market CPIF inflation expectations for January dropped to 1.5% (prior: 1.6%) in one year according to Origo Group, reflecting the one-off impact from reduced food VAT tax. Two- and five-year expectations were roughly stable at 2.1%, which suggests that the drop in inflation this year is not expected to de-anchor longer-term expectations. In all, a good report for the Riksbank.
Equities traded lower yesterday, broadly in line with expectations. One notable exception was Asia, where markets ended higher despite the ongoing geopolitical escalation. Europe sold off, led by Denmark, which is fully consistent with Denmark being perceived as closer to the core of the current conflict. Importantly, this was not accompanied by a pronounced defensive rotation. The sell-off was broad-based. Yes, there was a marginal relative outperformance of defensives versus cyclicals, but nothing outside what could easily occur on any given trading day. Implied volatility measures moved higher, with both VIX and V2X. This is entirely textbook behaviour and underlines that investors are not necessarily pricing in a materially weaker economic outlook, but rather a more uncertain one. With VIX around 19, volatility is somewhat elevated relative to where we are in the economic cycle, yet still far from levels that would signal market stress. This morning, several Asian markets are again trading higher. European equity futures are marginally lower, while US futures are down around 1 percent, largely reflecting a catch-up to yesterday’s move, as US markets were closed.
FI and FX: Market sentiment remains shaky amid the reignited EU/US trade war and the annual World Economic Forum in Davos. While aggregate market moves across asset classes all else equal have been relatively modest for a risk-off event, the “sell America” narrative is seeing a revival with a weaker USD, higher treasury yields (US cash market opening after yesterday’s US holiday) and lower US equities. While long-dated government bond yields in Europe have been more stable or even risen slightly, European curves have generally bull steepened since the weekend as markets price in a larger potential impact on growth than inflation from the renewed trade war/Greenland concerns. Overall, Scandie FI has outperformed peers with especially short-end spreads moving lower.
