Markets
“Zero. Zip. Nada.” An overlooked speech by Fed governor Waller gets more attention. Last week he explained why he dissented against the most recent Fed decision, arguing in favor of a 25 bps rate cut. His main argument is continued weakness on the labour market: “Despite ticking down in its most recent reading, the unemployment rate has risen since the middle of last year. Payroll gains in 2025 were very weak. Compared to the prior ten-year average of about 1.9 million jobs created per year, payrolls increased just under 600,000 for 2025. And, last year’s data will be revised downward soon to likely show that there was virtually no growth in payroll employment in 2025. Zero. Zip. Nada.” The argument gained traction yesterday following disappointing (second tier) US labour market data. Weekly claims ticked up more than expected (231k from 209k), January Challenger job cuts showed the worst January layoffs since January 2009 (108k job cuts, up from 36k in December) and downwardly revised JOLTS job openings declined further in January to their lowest level since September 2020 (6542k). In hindsight, the weak US labour data probably weren’t given the proper weight in explaining yesterday’s risk-off correction. The numbers came amidst the BoE & ECB policy decisions, the AI spending & valuation debate, the potentially disrupting impact from agentic AI and the highly volatile situation on other hyped assets like several commodities or crypto. It’s probably wise to keep yesterday’s reaction (function) in mind when delayed January payrolls (including revisions) will be published next week on Wednesday. Compared to the end of last week, a next Fed rate cut is now fully discounted by the June instead of the July policy meeting. Risks of a further repositioning are rising, especially when the market smells something like a job recession. On Friday, January US inflation number will highlight progress on the other part of the Fed’s dual mandate. Overall, risk markets try to get their nerves back today after a panicky week with dip-buyers showing up. The EuroStoxx50 rebounds 0.9% with US equity markets opening about 1.0% stronger. Crypto and (precious) metals also trade off the sell-off lows amid an empty eco calendar. Daily changes on US and European yield curves are limited to 1 bp with EUR/USD holding around 1.18 and EUR/GBP around 0.87. JPY holds near this week’s weakest levels going into parliamentary elections. A strong LDP-victory might cause jitters on Monday morning and test the Ministry of Finance’s resolve to enter the FX market if needed. All eyes will in such scenario also be on the NY Fed which was rate checking to support the Japanese MoF mid-January when USD/JPY came dangerously close to the 160-handle.
News & Views
The ECB’s quarterly survey of professional forecasters (SPF) showed few changes in Q1 2026 compared to Q4 2025. Respondents see HICP inflation at 1.8% this year, 2% in 2027. The first estimate for 2028 is set at 2.1%. 2026 growth is seen slightly stronger at 1.2% and is expected to improve to 1.4% and 1.3% in 2027 & 2028. Forecasters expect unemployment to gradually ease over the 2026/28 horizon (6.3%, 6.2%, 6.1% respectively). A summary of recent contacts between the ECB staff and non-financial companies pointed at gradually increasing business momentum and confidence, with growth still primarily driven by services. Reports from industry activity were mixed. Growth in consumer spending on services continued to outpace growth in spending on goods, but retailers reported disappointing spending in late 2025. The investment outlook improved. Manufacturers point to order books for projects related to electrification, data centers, energy and defense. Digital services also see strong demand growth. Global trade was proving resilient to US tariffs, but EMU net trade suffered from trade diversion. The employment outlook remained lackluster amid a strong focus on cost-cutting and the AI threat. Growth in selling prices had remained moderate as also wage growth is expected to slow (2.7%this year from 3.2% last year).
Canadian employment declined by 24 800 in January while a small rise was expected. However, the decline was only due to part-time work (-69.7k). Full-time employment rose 44.9k. In a broader perspective, overall employment still was up 134k compared to the same month last year. Despite lower monthly employment, also the unemployment rate declined from 6.8% to 6.5% (lowest since September 2024) The Labour force participation rate declined 0.4% to 65% as fewer people were looking for work. Hourly wage growth of permanent workers slowed to 3.3% from 3.7%. Today’s data won’t change Bank of Canada’s neutral policy bias.
