Sunset Market Commentary

Markets

UK gilts outperform global peers with yields pushing between 1.2 and 3.5 bps lower, accompanied by GBP weakness. EUR/GBP reaches for the YtD high just south of 0.875, up from a sub 0.87 reading in early European hours. GBP/USD (cable) loses the 1.36 big figure to revisit the February troughs. The moves follow this morning’s UK labour market report that surprised to the downside. Employment grew by 52k in the three months through December 2025 from the previous three-month (Jul-Sep) period. That was less than halve the 108k expected. A preliminary estimate for January printed at -11k. The unemployment rate in the same period rose to 5.2% with only the 5.3% pandemic peak standing in the way of a decade high. And wage growth (ex. bonus) decelerated to the slowest in five years. Barring a huge upward surprise in tomorrow’s CPI, the numbers all but cement a rate cut by the Bank of England in March. Governor Bailey had been the swing vote in an otherwise evenly split committee the last couple of times. He wanted – and just got – more evidence of wage pressures easing before supporting a further rate reduction. Money market pricing rose from 60% after the BoE February meeting to <75% yesterday before rising to more than 80% today.

US Treasuries’ gains in Asian and European dealings evaporated throughout the day. The front end first, following the ADP weekly employment change indicator. Longer tenors (almost) returned earlier gains when US investors joined. The four-month weekly MA in the week through January 30 rose from an upwardly revised 7.75k to 10.25k, printing higher readings for a third week straight now and suggesting improving hiring momentum. The 2-yr yield on a net daily basis adds 2.5 bp with the intraday movement spanning 6 bps. Bund yields drop 0.5-2 bps. The 2-yr tenor (flat) for now found support at the lower bound of a downward sloping trend channel with origins dating back from ECB Schnabel’s December speech (on markets pricing in rate hikes). Longer-term yields, both in Germany and in swap, recouped some of the intraday losses despite the fragile risk sentiment that reigned for most of the day. European equities whipsawed between gains and losses all day and currently are up 0.4%. Wall Street defied negative futures (up to -1%) with a flat open. Both the dollar and the Japanese yen return invigorated from the long weekend. USD/JPY balances out but a strong JGB performance this morning (yields down almost 10 bps at the long end) reveals appetite for Japanese assets. DXY rises to 97.4, EUR/USD drops to 1.182.

News & Views

German ZEW investor sentiment (current situation) improved from -72.7 to -65.9 in February, the second best level since July 2023. The export-oriented sectors showed moderate to strong improvements. Prospects have particularly improved for the chemical and pharmaceutical industries (+7.5 ), steel and metal production (+8.6) and mechanical engineering (+10.9). This likely reflects better than expected incoming orders at the end of 2025. Despite continuing uncertainty, prospects for private consumption are improving (+6). In contrast, banks and insurances and the information technology industry are facing some headwinds. The forward looking ZEW expectations index stabilized at 58.3 (from 59.6), but that’s still the second best level since July 2021.

The overall Canadian price level was unchanged in January (0% M/M) while consensus expected a modest increase (+0.1%). Details were a mixed bag with declining transportation costs being a significant drag in January. On an annual basis, inflation slowed from 2.4% to 2.3%. Gasoline prices had the biggest downward impact, mainly because of a base effect (+0.5% M/M vs +4% M/M last year). The temporary tax break on certain items from mid December 2024 to mid-February 2025 continued to put upward pressure. Underlying core inflation gauges slowed as well though, like for example the Bank of Canada’s preferred trimmed mean: 2.7% Y/Y to 2.4% Y/Y. The latter is the lowest level since April 2021 and is a welcome development as the Bank of Canada holds a steady course with a 2.25% policy rate. Growth in shelter costs continued to decelerate, rising by 1.7% Y/Y in what was the first sub-2% outcome in nearly five years.