Markets
(European) yields are extending a corrective decline that (re)accelerated at the start of the year. EMU short-term rates touched the highest levels since March early December, after comments from ECB’s Schnabel made markets fully embracing the idea that the case for further easing had become extremely thin. The debate even tentatively turned toward the timing of a potential first rate hike. For long-term yields, this upward momentum stretched further into December as markets understood that fiscal policy/deficit spending would have to do the heavy lifting as Germany/Europe has to address structural reforms and modernize its military capacities. However, the move ran into resistance in the final days of last year. Technical considerations and mild EMU data now even provide the perfect excuse to reduce bond short positions. Today’s EMU January inflation data perfectly fitted this pattern. EMU headline inflation at 2% J/J (0.2% M/M) returned to the ECB target. Core inflation softened slightly more than expected to 2.3% Y/Y (from 2.4%). Favorable energy base effects also are boding well for more sub-target EMU inflation data in the early months of 2026. Ongoing sticky services inflation (0.7% M/M and 3.4% Y/Y) in this mindset was easily put aside. We don’t see any reason for the ECB to change its firm wait-and-see stance due to this ‘technically-inspired’ inflation pattern. Even so, EMU swap yields are declining between 1.7 bps (2-y) and 4 bps (30-y). It’s too early to elaborate on the timing of a potential first rate hike. Joining this momentum trade, UK bonds even outperformed core EMU bonds with yields easing between 1.5 bps (2-y) and 7 bps (30-y). US yields initially followed this trend from some distance as investors awaited a set of US data that had/still has potential to amend expectations on the timing of further Fed easing. ADP reported December private job growth at a slightly softer than expected 41k. JOLTS (job openings) data and the US Services ISM still will be published after finishing this report. US yields currently are converging toward the EU pattern, declining between 1.5 bps (2-y) and 5 bps (30-y). The overall more benign mood on inflation probably is also supported by weak oil prices with Brent oil holding near $ 60 p/b. Equities are taking a breather after a solid start of the year (Eurostoxx 50 -0.1%, S&P 500 +0.1% still testing the all-time record).
On FX, moves in the major USD-cross rates are limited. The dollar basically holds its recent ‘gains’. DXY is changing hands near to 98.55. EUR/USD us going nowhere at 1.169. The yen for now hardly suffers from the rising tensions between Japan and China (USD/JPY 156.45). Sterling enters calmer waters after a strong start to the new year (EUR/GBP 0.8665).
News & Views
Czech inflation dropped a more than expected 0.3% m/m in December, keeping the annual figure at 2.1% instead of the anticipated uptick to 2.3%. Sharply declining food prices (-1.2% m/m) together with easing energy prices (-0.6% m/m, -4.2% y/y) explain most of the surprise CPI drop. They offset amongst others accelerating services inflation (0.2% m/m, 4.8% y/y). The December CPI outcome fell short of the central bank’s 2.3% expectation and as such remains close to the 2% midpoint target (+/- 1 ppt tolerance range). In the coming months inflation is likely to drop below 2% due to base effects and lower electricity prices (waiver of renewable energy surcharge). That could fuel speculation for a resumption of the rate cutting cycle, in particular because the CNB adopted a less hawkish tone at the latest policy meeting. The jury remains out on the matter because core inflation (services in particular) gauges appear more stubborn. In any case, after today’s inflation numbers and since the CNB December meeting, bets for a 2026 rate hike earlier last year now seem totally premature and made way for speculation on a tentative cut. The Czech crown lost ground, pushing EUR/CZK from 24.17 to 24.30.
Hungary’s debt management agency (AKK) kickstarted its 2026 financing plan today with a dual tranche EUR benchmark deal. The syndicated launch consists of a 7-yr regular bond and a 12-yr green bond, yet to be priced and determined in size. AKK’s in its 2026 funding plan has penciled in a total HUF 5445 bn net issuance, dropping from HUF 6258 bn in 2025. FX denominated net issuance is planned at HUF 2541 bn, with the bulk carried by FX bonds (HUF 1482 bn) and loans from the EU’s SAFE facility (HUF 781 bn). Its share relative to total debt should stay around the optimally deemed 30% by end-2026. A newly introduced +/- 3%pt tolerance band allows for some flexibility.
 yields are extending a corrective decline that (re)accelerated at the start of the year. EMU short-term rates touched the highest levels since March early December, after comments from ECB’s Schnabel made markets fully embracing the idea that the case for further easing had become extremely thin. The debate even tentatively turned toward the timing of a potential first rate hike.){kind=link}