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‘Great progress’, ‘We’re close but not there on inflation’, ‘We don’t get excited about one or two good readings, and we don’t get excited about one or two bad readings.’ These are some semi-live comments from Fed Chair Powell at its second day hearing before Congress in the wake of blow-out US January inflation figures, published less than two hours earlier. Anyway, in those figures, the progress on inflation was well masked. US January headline inflation jumped 0.5% M/M (from 0.4% and 0.3% expected) rising the Y/Y measure to 3.0% (from 2.9%). Similar story for core CPI inflation at 0.4% M/M (from 0.2%) with the Y/Y measure reaccelerating to 3.3% from 3.2%. Food (0.4% M/M) and energy prices (1.1%) both also services inflation (0.5% M/M and 4.3% Y/Y) don’t suggested a that a swift return toward 2.0% was gaining momentum. Idem for shelter prices (0.4% M/M, 4.4%). The market reaction was straight forward. US yields closed between 7.2 (2-y) and 9.8 bps (5-y) higher. US markets now only see a next 25 bps Fed rate cut fully discounted in the final quarter of the year. The fact that the biggest yield rise occurred at the belly of the curve suggests that markets feel that even in a scenario of persistent inflation, the (political) bar remains high of the Fed to resume raising rates. Markets for now only consider a higher-for-(much)-longer scenario. Still, US yields closed off the intraday peak levels. A decline in the oil price (Trump suggesting upcoming Ukraine peace talks) capped a rise in inflation expectations. Even so, the US 10-y $42 bln Note sale, despite the higher yield, only attracted mediocre investors interest. German yields in sympathy gained between 5.3 bps (2-y) and 3.3 bps (30-y). US equities opened about 1.0% lower on tighter interest rate conditions post the CPI release, but easily reversed most of the initial loss. Dollar gains were limited and short-lived except for USD/JPY (close 154.4 from 152.5). Especially the euro showed remarkable resilience. Interest-driven USD strength, if any, was counterbalanced by the prospect that an end to the war in Ukraine might be on the horizon after Trump’s phone call with Putin kickstarted the process.

Asian equity markets this morning mostly show solid gains. The market focus is shifting from the risk of US tariffs to the potential positives from an end to the war in Ukraine. This evidently applies to European markets. EUR/USD this morning jumps to currently trade near 1.043. This theme probably also will set the tone on European markets later today. Aside from the Ukraine risk-on , the eco calendar contains the US PPI and jobless claims data. They probably won’t amend the higher-for-longer message from yesterday’s US CPI. The US 2-y yield is close to the key 4.40% resistance area. However, for a break the market probably has to reconsider Fed rate hikes. We’re not that far yet. In FX, the euro is gaining traction. A break beyond 1.0442 would open the way to the 1.0533/1.0630 previous correction highs. UK Q4 GDP at 0.1% Q/Q reported this morning was less worse than expected, but the details (poor private consumption and investments) confirms an ongoing uphill battle for the UK economy. Sterling gains modestly (EUR/GBP 0.834).

News & Views

The European Commission yesterday confirmed that it will cut the settlement cycle for stock, bond and fund trades from two days to one. Single-day securities settlement will begin on October 11 2027, aligning the switch with those in the UK and Switzerland. The move will bring a significant reduction in margin requirements for market participants and would also unlock important benefits, notably by achieving risk reduction, margin savings and the reduction of costs linked to misalignment with other major jurisdictions. The US shortened its settlement time in May of last year with countries like Canada, Mexico, India and China also already on the T+1 scheme.

News agency Bloomberg runs an article citing at least six EU member states who would be pushing the EC to allow more flexibility on refilling requirements for gas storage ahead of next winter. The Gas Coordination Group meets today. Targets are currently designed to ensure that inventories are 90% full by November 1st, but current levels (48% full on average) are relatively low because of cold weather, low wind generation and loss of Russian supplies. There is concern that overly strict targets are at least partly responsible for the surge in gas prices to the highest level in two years’ time.

The UK economy outperformed expectations in December, with GDP expanding by 0.4% mom, significantly stronger than the 0.1% growth forecast. The services sector led the way, posting 0.4% monthly growth, while production output also rebounded, rising by 0.5%. However, the construction sector remained weak, contracting -0.2% mom.

For Q4 as a whole, GDP increased by 0.1% qoq, defying expectations for a -0.1% contraction. Services grew by 0.2% in Q4, maintaining its position as the primary growth driver, while construction saw a moderate expansion of 0.5%. However, industrial production was a notable drag, shrinking by -0.8%.

For full-year 2024, GDP increased by 0.8% compared to 2023, a modest but better-than-feared outcome given the economic uncertainties. Services expanded by 1.3%, cushioning the economy, while production sector contracted by -1.7%, and construction grew slightly by 0.4%.

Full UK GDP release here.

Short term Elliott Wave in Copper shows 5 swing sequence from 11.14.2024 low, favoring more upside. Up from 11.14.2024 low, wave 1 ended at 4.335 and pullback in wave 2 ended at 4.005. The metal has resumed higher in wave 3. Up from wave 2, wave ((i)) ended at 4.47 and pullback in wave ((ii)) ended at 4.1835. Internal subdivision of wave ((ii)) unfolded as a double three Elliott Wave structure. Down from wave ((i)), wave (w) ended at 4.235, wave (x) ended at 4.389, and wave (y) lower ended at 4.184 which completed wave ((ii)) in higher degree.

The metal has resumed higher in wave ((iii)). Up from wave ((ii)), wave i ended at 4.3535 and pullback in wave ii ended at 4.3065. Wave iii higher ended at 4.5095 and pullback in wave iv ended at 4.411. Wave v higher ended at 4.715 which completed wave (i) in higher degree. Pullback in wave (ii) ended at 4.541. Pair has resumed higher in wave (iii). Near term, as far as pivot at 4.1845 low stays intact, expect dips to find buyers in 3, 7, or 11 swing for further upside.

Copper (HG) 60 Minutes Elliott Wave Chart

Copper (HG) Video

https://www.youtube.com/watch?v=KqR5bBJjoLY

Uh oh... Yesterday’s inflation update from the US didn’t go well. January data showed a hotter-than-expected report across monthly and annual readings and all categories including food, energy and housing. In numbers, the US headline inflation accelerated to 3%, instead of decelerating to the Federal Reserve’s (Fed) 2% target. Core inflation – the one that excludes food and energy and that matters more to the Fed under the pretext of being less volatile – ticked up to 3.3%, and Fed Chair Jerome Powell said in the second day of his semiannual testimony – and following the CPI release – that they ‘were close but not there on inflation’. ‘Close’? Not so much: inflation sticks around the 3% mark since summer, and will hardly point its nose to the 2% target with Trump’s tax cuts and tariffs.

PS: US federal budget gap widened to a record for the first third of the fiscal year, and the cumulative deficit for October through January widened 25% (Bloomberg).

As such, the Fed rate cut expectations melted like snow under the sun after yesterday’s clear uptick in US inflation suggested that the Fed would better wait and see before doing anything else. The US 2-year yield – that best captures the Fed expectations – jumped almost 10bp yesterday and the US 10-year yield – which will serve to control the borrowing costs under the new treasurer Bessent jumped around 12bp. Activity on Fed funds futures suggests that the Fed is not ready to announce its next rate cut before the September meeting – gradually kicked down the road from May at the start of the year. And worse, swap traders don’t expect the Fed to cut the rates before December – and hence cut just one more time this year, if it cuts at all. The Fed’s next move could be a rate hike – instead. It all depends on how Trump’s tariffs will hit back the US consumer.

Gold gained despite the rising US yields and the historically negative relationship between US yields and gold prices is no longer a thing – given that big buyers including central banks – flee the US debt and replace it with gold. As such, yes, I think that hitting the $3000 per ounce level in gold could trigger some profit taking and a tactical short opportunity, but the medium to long-term outlook for gold remains positive. If Bitcoin could rally to $100K, gold could well continue its journey toward – I don’t know - $4000 per ounce?!

In the FX, the US dollar didn’t rise on the back of rising hawkish Fed expectations and rising yields. But the greenback is swiftly offered in the Asian session – maybe due to some relief on hopes of an eventual—if imperfect—resolution in Ukraine. Crude prices plunged 2.70% below the 100-DMA yesterday and are extending losses toward the $70pb psychological support this morning. Potentially waning geopolitical risks on the Russian front, the melting Fed cut expectations and the tariff unknown gather dark clouds over the global economic outlook and could encourage a dive in US crude prices below that level and pressure the price of a barrel of Brent crude toward the $70pb level, as well.

Elsewhere, the dollar’s weakness despite the hot CPI read encourages other currencies to recover some of the latest losses. The EURUSD for example jumped past the 50-DMA and is preparing to test a minor Fibonacci resistance. But the medium-term outlook for the EURUSD remains bearish below the 1.06 mark, and macro traders are probably looking for interesting top selling opportunities on the back of diverging Fed and European Central Bank (ECB) policy outlooks. Today, the US PPI and weekly jobs figures could give reason to the USD bulls to pile back in.

In equities, the S&P500 sure kicked off yesterday’s session on a negative note but the index recovered losses throughout the session and ended the day with a meagre 0.27% slide, while Nasdaq 100 managed to eke out a 0.12% advance. The rally in US equities somehow slowed by underwhelming earnings from the Magnificent 7 companies, but the rest of the index is doing pretty well. Around three quarters of the companies in the S&P500 already reported their earnings and the earnings per share grew 12.5% in Q4 compared to a 7% rise expected into this earnings season. But the earnings beat resulted in a meagre average performance of -0.1%. What does that mean? It means that the rotation trade won’t be enough to offset a potential fallout if - God forbid - the Big Tech companies were to fall from grace.

In focus today

From the US, January PPI and weekly jobless claims are due for release. It will be interesting to see if the PPI-figures come in higher than expected like yesterday's CPI.

In the euro area, focus turns to industrial production data for December, which is expected to show a small decline of 0.6% m/m by consensus. However, the decline will likely be larger than 0.6% m/m as German industrial production declined 2.4% m/m in a sign of a still weak industrial sector.

In Sweden, Riksbank's vice governor Per Jansson holds a speech at 08:00 CET on "Trust and flexibility going forward". We will be watching to see if Jansson aligns with Aino Bunge's dovish tones from yesterday.

Economic and market news

What happened overnight

In Japan, wholesale inflation for January printed higher than expected at 4.2% y/y (cons: 4.0%), while the monthly print was 0.3% m/m, as expected. This was the fifth consecutive acceleration in wholesale inflation, reflecting persistent price pressures and bolstering the case for further BoJ rate hikes this year, as we project.
What happened yesterday

In geopolitics, Trump and Putin had a 90 min call yesterday and the two countries have agreed to kick off negotiations to end the war in Ukraine. Trump later had a separate call with Ukraine that did not last as long, and it remains unclear what will Zelensky's/ Ukraine's role be in the upcoming talks, or if there is any. US defence secretary Pete Hegseth said that its unrealistic for Ukraine to restore its pre-2014 borders or for Ukraine to become a member of NATO.

In the US, January CPI surprised sharply to the topside as headline CPI grew by 0.5% m/m SA (cons. +0.3%, Dec +0.4%) and core inflation accelerated to 0.4% m/m SA (cons. +0.3%, Dec. +0.2%) - for more detail please see Global Inflation Watch - Tariff Uncertainty blurs the outlook, 12 February. Additionally, we will evaluate our dovish Fed view of four rate cuts in 2025 over coming days.

While having not signed any tariffs yet, Trump repeated his plans to impose reciprocal tariffs very soon. The comment comes shortly before a visit from Indian Prime Minister Narendra Modi, and the Trump administration having complained about India's high tariffs on U.S. imports. With a U.S. CPI-release on Wednesday that surprised to the upside, economists have once again highlighted the possible inflation risks associated with tariffs. Later today, we host a webinar at 10.00-10.45 CET providing an update on the whole tariff situation.

In the euro area, Bundesbank President Nagel stated that the ECB should ease its policy gradually rather than attempting to reach the elusive "neutral" interest rate, which is estimated to be between 1.75% and 2.25%, according to last week's r*-publication from the ECB. That said, the remarks are not surprising given that Nagel is viewed as one of the über-hawks of the ECB.

In Sweden, Riksbank Vice Governor Bunge was on the wire, talking about the state of the economy and monetary policy. Bunge emphasized that inflation has been close to 2% and indicators suggest that inflation will align with the target going forward. Looking at the upside surprise in January, she pointed out that it remains to be seen what caused this and stressed that individual figures should be interpreted with caution. Overall, her remarks were somewhat dovishly twisted.

Equities: Equity investors took the inflation surprise with ease. Global equities were admittedly slightly lower (MSCI World -0.1%) but that did not stop the buying in Europe and especially Germany, a full 1% higher (11% YTD). Even Nasdaq was in positive. So, inflation did not trigger a clear-cut risk off session, which we argue it should not. However, it is still surprising to see markets coping so well with negative news and yield jumps. Remember new tariffs also taken with a shrug earlier this week. Perhaps this comes down to the not overly aggressive positioning in markets. Our correction monitor admittedly shows overbought conditions but far from an outright sell signal. Defensives outperformed, but only marginally. The only sector sticking out was energy, reverting -2%. Small caps underperformed again, as has been the case the last week, taking underperformance to 1.3p.p. YTD globally. Futures are higher this morning.

FI: US Treasury yields rose significantly on the back of higher-than-expected US inflation data and the market continues to reduce expectations for future rate cuts by the Federal Reserve. Currently just one rate cut is priced in for the rest of 2025, which is a significant reduction from the autumn 2024, when 6-7 rate cuts were priced in for 2025. The negative reaction from US also sent European government bond yields upwards across the yield curve.

FX: Whipsaw action in EUR/USD with an initial flurry to the low 1.03's on the back of yesterday's hotter-than-expected US CPI print, before turning around and retracing all the way to 1.04 on Trump's announcement of his call with Putin. The EUR found broad support, with EUR/JPY and EUR/CHF moving firmly higher, the former rallying close to 1.5%. Scandies did not benefit from the EUR-move and instead ended the day close to session highs vs EUR. CEE currencies did however benefit, with PLN, CZK and HUF all outperforming the single currency.

Daily Pivots: (S1) 188.07; (P) 188.99; (R1) 190.74; More...

GBP/JPY's extended rebound suggests that fall from 198.94 has completed with three waves down to 194.73. Intraday bias is now on the upside for 194.73 resistance first. Firm break there will solidify this case and target 198.94 next. On the downside, below 190.75 minor support will turn intraday bias neutral again. Overall, corrective pattern from 180.00 would likely extend for a while.

In the bigger picture, price actions from 208.09 are seen as a correction to rally from 123.94 (2020 low). Strong support should be seen from 38.2% retracement of 123.94 to 208.09 at 175.94 to contain downside. However, sustained break of 152.11 will bring deeper fall to 100% projection of 208.09 to 180.00 from 199.79 at 171.70, even still as a correction.

Daily Pivots: (S1) 158.49; (P) 159.73; (R1) 161.56; More...

EUR/JPY's strong break of 159.74 support turned resistance suggests that fall from 164.89 has completed with three waves down to 155.72, ahead of 154.40 key support. Intraday bias is back on the upside for 164.89 or even further to 166.67. On the downside, below 158.96 minor support will turn intraday bias neutral again first. Overall, sideway pattern from 154.40 would extend further for a while.

In the bigger picture, price actions from 175.41 are seen as correction to rally from 114.42 (2020 low). Strong support should be seen from 38.2% retracement of 114.42 to 175.41 at 152.11 to contain downside. However, sustained break of 152.11 will bring deeper fall to 100% projection of 175.41 to 154.40 from 166.57 at 145.56, even still as a correction.

Daily Pivots: (S1) 0.8320; (P) 0.8338; (R1) 0.8363; More...

Intraday bias in EUR/GBP stays neutral for the moment and near term outlook is mixed. On the upside, above 0.8376 minor resistance will bring stronger rally towards 0.8472. However, on the downside, break of 0.8290 will resume the fall from 08472 to retest 0.8221 low.

In the bigger picture, rebound from 0.8221 medium term bottom could extend higher through 55 W EMA (now at 0.8435). However, medium term outlook will be neutral at best as long as 0.8624 cluster resistance zone (38.2% retracement of 0.9267 to 0.8221 at 0.8621) holds. Another decline through 0.8221 would remain mildly in favor.

Daily Pivots: (S1) 1.6455; (P) 1.6512; (R1) 1.6593; More...

EUR/AUD's strong rebound argues that price actions from 1.6800 could have completed as a three wave corrective pattern to 1.6391. Intraday bias is back on the upside for retesting 1.6800 first. Decisive break there will resume whole rally from 1.5963 to 61.8% projection of 1.5693 to 1.6800 from 1.6391 at 1.6908. For now, risk will stay on the upside as long as 1.6391 support holds, in case of retreat.

In the bigger picture, with 1.5996 key support (2024 low) intact, larger up trend from 1.4281 (2022 low) is still in favor to resume through 1.7180 at a later stage. Nevertheless, sustained break of 1.5996 will indicate that such up trend has completed and deeper decline would be seen.

Daily Pivots: (S1) 0.9450; (P) 0.9479; (R1) 0.9516; More....

Intraday bias in EUR/CHF stays neutral first. On the upside, firm break of 0.9516 will resume whole rally from 0.9204. Nevertheless, below 09441 minor support will turn bias back to the downside for 0.9359 support instead.

In the bigger picture, sustain above 38.2% retracement of 0.9928 to 0.9204 at 0.9481 should confirm that whole fall from 0.9928 has completed at 0.9204. Further rally should then be seen back to 61.8% retracement at 0.9651 and above. However, another rejection by 0.9481 will keep outlook bearish for extending larger down trend through 0.9204.