After a long period of softness, the US labour market finally responded to the stronger growth seen in the second half of 2025, where GDP growth averaged 4.1% annualised. The labour market report showed a gain of 130k jobs in January, the strongest monthly rise in more than a year and the unemployment rate dropped from 4.4% to 4.3%. It lowers the probability of a rate cut from the Fed already in March.
It was not all good news in the US the past week, though. Benchmark revisions to the employment level showed a downward revision of around 900k in 2025 and although it was expected, it underlines that job growth has been much weaker in 2025 compared to previous years. It highlights the rising structural headwind from labour supply but also indicates that productivity growth has been strengthening. Retail sales for December showed a decline of 0.1% m/m in the core measure vs expectations of a 0.4% m/m increase and November was revised lower as well pointing a slower trend in consumption. We do see ebbs and flows in consumption growth, so it is too early to get concerned. We do expect some slowdown in consumption growth on the back of lower wage gains and softer employment growth, which lowers household income growth and thus spending power.
It was a quiet week in the Euro zone but a small lift to the Sentix survey added to signs that manufacturing growth is recovering again after a short soft patch. A sharp rise in German factory orders and rising metal prices also point to stronger manufacturing.
The Japanese election last weekend gave a landslide victory to LDP’s prime minister Sanae Takaichi. She pursues a more expansionary fiscal agenda, and her win has driven new gains in Japanese stocks. The reaction has been more muted in the JPY and the bond market, partly because her win was widely anticipated and some profit taking took place in short JPY and bond positions.
In China, the main story was reports saying the financial regulator had told banks to reduce US treasury holdings. It was not confirmed officially, though, and we doubt China is about to sell US treasuries on a wider scale. However, they may lower purchases of long bonds and not refinance existing debt leading to a lower share of treasuries on their balance sheets. Chinese CPI inflation was lower than expected falling from 0.8%y/y to 0.2% y/y However, the data is distorted by timing of the Chinese New Year, which falls in February this year instead of January. More interesting was PPI data, which showed the fourth m/m increase in a row indicating that deflationary pressures are easing.
Financial markets were pretty quiet the past week with stock markets treading water, while bond yields have moved slightly lower despite the stronger US employment report. In oil markets, all eyes are on US-Iran talks and whether they will be able to make a deal to avert a US military intervention. As of today, Polymarket puts a 43% probability on a strike by June.
Next week focus turns to Flash PMIs in the US, euro zone and Japan. German ZEW, euro wage growth and Japanese CPI will also be scrutinized.
