In focus today
Today, we receive US private sector employment data from ADP, which will provide markets with the first sense of what to expect from Friday’s nonfarm payrolls. ISM Services data is also due for release today, the flash services PMI released earlier surprised to the downside. The Fed’s Barkin and Goolsbee will give speeches in the evening.
In the euro area, the final January services and composite PMI will be released. Earlier this week, the final manufacturing PMI was released, showing an increase to 46.6 from the preliminary 46.1, indicating more positive sentiment compared to previous months.
Economic and market news
What happened overnight
Update on the Middle East, during a talk with Israel’s Prime Minister, Trump stated that the US will “take over” the Gaza Strip and suggested resettling its 2.2m residents in Egypt and Jordan, despite their previous rejection. This proposal could disrupt decades of US policy and provoke outrage across the Arab world. Trump did not clarify how the US would take control of Gaza. In addition, he signed a memorandum aimed to impose “maximum pressure” on Iran and reduce its oil exports to zero. Following this announcement, Brent crude futures traded around USD 76 a barrel, well above Tuesday’s low of USD 74.15.
What happened yesterday
In the US, the JOLTs report showed a weaker-than-expected 7.6M job openings (cons: 8.0M, prior 8.09M), indicating a softened labour demand in December following a strong rebound in November. This could serve as a dovish signal for the Fed, suggesting the economy is not overheating and may face reduced inflationary pressures. However, involuntary layoffs decreased and remain at historically low levels, while hiring was slightly higher than the previous months. Overall, conditions remain solid, keeping the Fed on the sidelines.
China’s package of retaliation measures against tariffs includes export controls on five metals used in defence, clean energy and other industries. This is an area where China can significantly impact the US, indicating a readiness to engage in conflict if Trump is inclined to do so. On 13 February, we are holding a webinar where we will attempt to shed light on this situation.
In Sweden, the January decision to cut was unanimous, with all members agreeing that the December rate path and forecasts largely hold. However, a majority wants to see evidence of an accelerating economic recovery and more balanced inflation risks in the coming months. Overall, the minutes support our view that more cuts are likely, with a cut expected in May. We also see potential downside risks to the Riksbank’s growth and inflation forecasts in the coming months.
Equities: Global equities were higher yesterday, ending close to the day’s high and reversing most of the losses from Monday related to the trade war tensions between the US, Canada, and Mexico. What is slightly interesting here is that we saw a massive cyclical outperformance, with most defensives being lower. This also demonstrates a rather strong “buy the dip” mentality still present in the market. “Buy the dip” has been a profitable strategy for the last two and a half years, and we argue that trade tensions are not enough to turn this around. We would need weaker macroeconomic data to see a stop to the “buy the dip” mentality.
In the US yesterday, Dow +0.3%, S&P 500 +0.7%, Nasdaq +1.4% and Russell 2000 +1.4%. Asian markets are mixed this morning. Chinese mainland markets are lower as they reopen after the Lunar New Year, and Trump and Xi did not have the expected talks that could bring a last-minute halt to tariffs. That said, it appears very much like consensus believes the Chinese retaliatory tariffs hitting “just” USD 14bn worth of imports from the US (just 5.8% of China’s total imports from the US) is next to nothing. This should also be seen in relation to the 10%, not 60%, tariffs from the US side. Hence, consensus is now starting to adjust down their estimates for the US/China tariffs. US and European futures are lower this morning, negatively affected by some big earnings reports that came out in the US after the closing bell yesterday.
FI: There were modest movements in European government bond yields yesterday with 10Y Bunds trading around the 2.4%-level. The Bund ASW-spread is once again tightening and is trading around -2bp. We have a target of -10bp to -15bp for the Bund ASW-spread in Q1. In the US, yields dropped late in the afternoon in US trading hours after an initial rise. Today, the US Treasury will publish more on their funding plans for Q2, and markets will be looking for the split between bonds and bills.
FX: EUR/USD has seen a modest relief rally following a barrage of tariff headlines over the weekend and at the start of this week, now trading above 1.0350. The SEK has picked up momentum and is having its best week so far this year. That goes for the NOK as well. Both EUR/SEK and EUR/NOK have made a new year low at 11.38 and 11.66, respectively. The CAD continues to recover after the tariff postponement, whereas MXN has stayed flat overnight. Talking about year lows, let us also mention USD/JPY that has dropped 2.5% this year and was on the verge to break below 153 yesterday.