Markets
Core bond and FX trading yesterday mostly was captured in technical trading. Eco data were few and uncertainty on AI moved to a bit to the background. US, UK and EMU yields stabilized or gained a few bps, taking a breather after this month’s protracted decline, often nearing first support levels. US yields added between 2.8 bps (5-y) and 1 bp (2-y). A $70 bln 5-y US Treasury auction tailed and met cautious investors interest. EMU yields changed less than 1 bp. Equity markets left AI-related uncertainty behind with Eurostoxx 50 (+0.93%) touching a new record. US indices gained between 0.63% (Dow) and 1.26% (Nasdaq), counting down to the Nvidia results after the close. FX cross rates stayed within the established ranges. The dollar initially held up well, but lost momentum as trading proceeded. US Trade Representative Jamieson Greer indicating that President Trump still intends to raise the global tariff to 15% (where appropriate) highlighted uncertainty related to US trade policy, often a negative for the dollar. EUR/USD regained the 1.18 big figure (close 1.181). For the DXY trade-weighted index, a test of the 98 big figure was rejected (close 97.7). The yen initially suffered from (perceived) pressure from the government on the BoJ to remain cautious on further policy tightening, but USD/JPY finally also eased from the intraday peak levels, closing at 156.4 from 155.9.
Asian equities show a mixed picture this morning. US futures are trading slightly in red. Nvidia results were strong but the market reaction for now is guarded. The dollar also loses modest ground (DXY.97.6, EUR/USD 1.182). The yuan continues its ‘astonishing’ comeback. At USD/CNY 6.84, the Chinese currency trades at the strongest level against the dollar since March 2023. The yen is on a (slightly) better footing compared to previous days. (Hawkish) BoJ member Takata advocated the central bank should engage in a further gear shift as he assesses that the 2% inflation target has been achieved. BoJ governor Ueda in an interview also indicated that the bank at least will take a close look at the data to decide on the timing of further hikes. The yen this morning ‘rebounds’ to USD/JPY 156. The US and EMU eco calendar mostly contains data that only have limited impact on trading. US weekly jobless claims are a wildcard. Also keep an eye at the a $44 bln 7-y US Treasury auction. On equity markets, question is which direction sentiment tilts after the Nvidia results. (Geo)politics might again come to the forefront as US-Iran nuclear talks resume in Geneva. Brent oil holds near $71 p/b. UK markets keep a close eye on a vote for a lawmaker seat in Manchester, seen as a ‘referendum’ on PM Starmer. A labour defeat might rekindle uncertainty similar to what happened early this month, potentially weighting on UK bonds and sterling. EUR/GBP for now holds just north of 0.87.
News & Views
The Bank of Korea unanimously decided to leave the Base Rate unchanged for a sixth meeting at 2.5%. Inflation is expected to remain stable near the target level. Consumer price and core inflation for this year are forecast at respectively 2.2% and 2.1% (vs 2.1% and 2% in November), affected by upward cost pressures on some items, including electronic devices. Economic growth is projected to continue improving at a stronger than expected pace, supported by a recovery in consumption and strong exports (global chip demand). The central bank now estimates growth at 2% for the year, up from 1.8% in November, with a balanced risk assessment. Risks to financial stability nevertheless remain as highlighted by volatility in FX (KRW, JPY), housing (price growth slowing in Seoul and surrounding areas thanks to government’s macroprudential policy) and stock markets. The BoK’s conditional interest rate horizon (doubled from 3 to 6 months) suggests a strong leaning to keeping policy rate stable over this time horizon. The Korean won this morning tested its best levels against USD so far this year at USD/KRW 1420 which is the neckline of a technical triple top formation with final target at 1360.
The IMF concluded its regular Article IV consultation of the US. Incorporating the effects of the various policy changes, staff expect growth to accelerate in 2026 to around 2.4% (on a q4/q4 basis). The inflationary impulse from tariffs is expected to wane in the coming months, allowing core PCE inflation to fall back to 2% by early 2027. Risks to the near-term outlook for growth and inflation are seen as balanced. The unemployment rate is seen steading close to 4% in 2026-2027 as the effects of slower employment growth and the ongoing slowing of population growth balance each other out. Such scenario should allow the Fed to lower the Fed funds target rate towards 3.25%-3.5% by year-end. Under current policies, the general government deficit is expected to remain in the 7-8 percent of GDP range, causing general government debt to reach 140 percent of GDP by 2031. Together with increasing levels of short-term debt this represents a growing stability risk to the US and global economy.
 better footing compared to previous days. (Hawkish) BoJ member Takata advocated the central bank should engage in a further gear shift as he assesses that the 2% inflation target has been achieved. BoJ governor Ueda in an interview also indicated that the bank at least will take a close look at the data to decide on the timing of further hikes. The yen this morning ‘rebounds’ to USD/JPY 156. The US and EMU eco calendar mostly contains data that only have limited impact on trading.){kind=link}