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Geopolitics:

First shots have been fired in trade war: While it took more than a year before the trade war starting in the first term of US President Donald Trump’s, it only took 10 days this time. A 10% tariff rate was put on China related to Fentanyl coming to the US via Mexico. China was quick to retaliate with tariffs on energy, export controls on metals and targeting several US companies (see box).

It is interesting that China throws export controls into the mix in its retaliation as it has normally only been used in the ‘tech war’ in response to US export controls on microchips. Several commentators have interpreted China’s retaliation as moderate as the tariffs only cover a small part of imports coming from the US. However, I would argue the export controls on key metals are more painful for the US and the same goes for measures towards single US companies. PVH Corp dropped 15% since the retaliation was announced. China sends a clear signal it could hurt other major US companies and thus US stock market performance in case of a further escalation. PVH Corp may not move the overall market but if China goes after big US tech companies, and potentially Tesla, it could have a wider impact. Nvidia is already under an anti-trust investigation and China looks into a similar move on Intel. China likely knows that Trump may be more sensitive to how US stocks perform than tariffs on US trade.

Xi-Trump call cancelled, tariffs just an ‘opening salvo’: A call between Xi and Trump was apparently planned to take place on Tuesday this week but cancelled after China retaliated. On Tuesday afternoon, Trump said he was in no hurry to speak to Xi and that the tariffs was only an ‘opening salvo’. He added that "If we can't make a deal with China, then the tariffs would be very, very substantial". As I wrote last week the ‘real’ trade war will probably not start until the US trade study looking into China’s unfair practices etc. is done by 1 April. Our baseline scenario is still that US average tariffs on China will ultimately end up of around 40% over the next 1-2 years from currently just below 25% (including the latest 10% increase).

Panama leaves Belt and Road Initiative, US claims victory: Panama is officially leaving the Chinese Belt and Road Initiative following US pressure. The news came few days after US Secretary of State Marc Rubio visited the country and Rubio called the decision a “victory”. China’s ambassador to UN Fu Cong called the decision “regrettable” and said that “The smear campaign that is launched by the US and some of the other Western countries on the Belt and Road Initiative is totally groundless”. An audit by Panama of the Hong Kong company that operates two of the five ports in the Panama Canal has been launched and a law suit has also been filed against the Hong Kong company. It seems likely the company will end up having to end the port operations.

Panel warns US risk losing next industrial revolution: At a hearing held by the US-China Economic and Security Review Commission, a panel of China experts warned that the US is at risk of falling behind China as the country is making significant strides in the realms of artificial intelligence (AI) and humanoid robotics. One panellist stated, “China’s AI and robotics ecosystem has seen significant growth, with major companies driving innovation in humanoid robotics and embodied intelligence…these firms are pioneering advancements in robotic hardware, AI integration, and industrial automation, positioning China as a leader in next-generation intelligent robotics.” China’s decades long focus on tech and industrial policy programs continue to put China at the frontier in a rising number of manufacturing areas, such as within EVs, batteries and drones. AI and robotics are also advancing fast.

Markets:

Chinese stocks on a roll: Despite Trump firing the first tariff shots last week, Chinese stocks have performed strongly. This week offshore stocks were up 6% and they have outperformed US stocks lately. The DeepSeek breakthrough two weeks ago has provided optimism back to tech stocks that have led the gains. With more stimulus, positive tech stories and Chinese long-term funds pushed to invest in the market, equities are getting a better foundation. The upside may be capped once the trade war really takes off. In the medium to long term, I still see value, though, as current levels are still low in a historical perspective.

CNY weakening pressure eased lately: Despite the rise in US tariffs, the pressure on the yuan has eased somewhat over the past weeks (chart). It reflects a slight weakening of the overall USD as US yields have moved lower and the removal of tariffs on Canada and Mexico for now. We continue to see USD/CNY moving higher on a 12-month horizon towards 7.60 as we look for the trade war to get tougher during the year. EUR/CNH has stabilized somewhat around the 7.56 level mirroring the stabilisation seen in EUR/USD (chart).

Chinese bond yield back at lows: The Chinese 10-year yield is back at the recent low of 1.60% as the soft PMI data and threat of tariffs has added to the expectations of low(er) for long. Next week CPI data are likely to show another weak print for January.

Economy:

PMI’s for January warning of need for continued stimulus: Chinese PMI’s from both NBS and Caixin pointed to some weakening in January, especially in the service sector (see charts below). The first months of the year should always be treated with some caution due to the effects from Chinese New Year, but still the numbers give rise to some caution and underlines the need for continued stimulus.

Strong China New Year travel spending: Providing some light was reports of strong holiday spending over the New Year break last week. The number of trips hit 501 million, a 5.9% increase from last year. The number of foreign travellers also reached a level similar to the one prior to the pandemic suggesting that China’s visa-free travel has had a clear positive effect on inbound tourism.

Donald Trump caused a significant market reaction this week by announcing steep tariffs on Canada, Mexico, and China starting from 4 February, which pushed the broad USD higher and sent equities lower. However, after he quickly put the tariffs on Mexico and Canada on hold for a month, the market reaction reversed, and overall equity indexes ended the week higher due to positive earnings reports. Although the outcome remains unclear, we anticipate more tariffs on China later this year, with the EU and possibly other countries being affected soon after. The new tariffs are linked to border security and could be removed or reduced following negotiations, though there is a risk of a tit-for-tat escalation in the short term. China's package of retaliation measures includes 10-15% tariffs on US energy imports and export controls on five metals used in defence, clean energy, and other industries, showing its readiness to engage in conflict if Trump is inclined to do so. On 13 February, we are hosting a webinar to shed light on this situation, see invitation: US Tariff Update - Deal or No Deal?.

On the data front, HICP inflation in the euro area increased to 2.5% y/y in January, slightly above expectations for an unchanged print at 2.4% y/y. The increase was entirely due to energy inflation while food inflation declined, and core inflation was unchanged at 2.7%. Despite the elevated yearly growth rates, the most recent monthly price increases on core inflation rhymes well with 2% annualised inflation. On the political front, French prime minister Bayrou managed to pass the 2025 budget and survive a no-confidence vote.

In the US, the ISM manufacturing index rose more than expected to 50.9 from 49.3, reaching its highest level since September. This increase aligns with the PMI surveys and indicates positive momentum for the US manufacturing sector. In contrast, both the services PMI and ISM fell in January, with the ISM index dropping to 52.8 from 54.0. Data on US productivity in Q4 showed that productivity growth weakened. Although the data is volatile, the current pace is now close to the pre-pandemic trend of around 1%, down from over 3% seen in the second half of 2023. This indicates that structural growth is slowing, meaning firms will either need to pass a larger share of nominal wage costs onto their selling prices or absorb them into their margins.

The Bank of England lowered the policy rate by 25bp to 4.50% as widely expected. At the same time, the BoE delivered a dovish twist to its guidance as two members voted for a larger 50bp cut and they lowered their growth projections, see BoE Review, 6 February.

Next week, the key data release will be the US January CPI, while US politics will also remain in focus. We forecast US headline inflation at 2.9% y/y and core inflation at 3.1% y/y. Attention in the US will also be on Fed Chair Powell's congressional testimony on Wednesday and US retail sales on Friday. In China, CPI and PPI data will be released on Monday, with focus on whether a call between Xi Jinping and Trump, cancelled this week due to China's retaliation to Trump's 10% tariffs, will take place. In the euro area, data releases are limited, but Q4 employment data on Friday will be a highlight. Additionally, the US is set to unveil Trump's plan to end the war in Ukraine at the Munich Peace Conference starting on Friday.

Full report in PDF.

In the new week, Fed Chairman Jerome Powell will address Congress on Tuesday and the House of Representatives on Wednesday. The prepared speech will be the same in both cases, but all attention will be focused on his answers to lawmakers’ questions and the outlook for monetary policy.

The key economic news will be the release of US consumer inflation data on Wednesday, 12 February. It has been accelerating since September and reached 2.9% in December. Further acceleration is a strong positive for the Dollar as it pushes back the timing of a rate cut.

Don’t miss the UK’s monthly and quarterly GDP estimates on Thursday, 13 February. The Bank of England has just lowered its growth forecast for this year to 0.75%, which is expected to be weak and negative for the Pound.

On Friday, 14th February, US retail sales are due to be released. Sales excluding autos have been rising every month since last May. The big question is whether this trend will be broken.

Markets

The long-awaited re-evaluation of the neutral rate in the euro area turned out to be much ado about nothing. Estimates varied widely depending on the measurement technique. What mattered most in the end was whether or not the bottom of the pre-pandemic 1.75-2.5% range had risen in this new era. The ECB is guessing that it didn’t. The practical implication is that the central bank could lower rates as low as 1.75% before adopting a supportive stance. The latter is not warranted given the lingering inflationary risks, especially in the services sector and ahead of an expected economic recovery. Two things stand out though. One is that the variability at the lower bound estimates decreased sharply compared to pre-2020, which does reveal some upward pressure on the neutral rate. Second is that the staff paper goes at length trying to downplay the usefulness of this theoretical, unobservable neutral rate for actual policymaking. ECB chief economist Lane did the same earlier this week as part of an unusually hawkish speech. It suggests, if anything, that the ECB wants to at least contain (too dovish) market expectations. Money markets already almost fully price in four additional moves (to 1.75%).

Moving on to the next potential market moving candidate for today: US payrolls. Job growth remains solid. The January outcome of 143k was slightly below expectations (175k). But November and December saw a combined 100k upward revision. The household survey, just as in December, tells a similar story with 223k employment growth. That was more than enough to offset the increase in labour participation (rate rose to 62.6%), leading to an unexpected decline in the unemployment rate to 4%. To top it off, wages grew an above-consensus 0.5% m/m to 4.1% y/y. Yearly wage growth now appears to be stabilizing around 4%, significantly above the levels seen prior to the pandemic. US yields dropped up to 7 bps in a kneejerk reaction to what a small headline miss to begin with anyway. It reveals market sensitivity is currently skewed to downside surprises. US rates erased losses and more as the strong details began to sink in. They currently trade 4-5.4 bps higher across the curve. We’re now spotting the first signs of a bottoming out process. US yields pull European rates a few bps higher as well. The Fed’s extended rate pause (at least through June) gets firm market backing now. The next first full rate cut isn’t priced in before September. Dallas Fed president Logan during yesterday’s BIS event even openly pondered whether more cuts are necessary this year at all. The dollar is trading extremely stoic with a tiny strengthening bias. EUR/USD trades around 1.036, DXY just south of 108 and USD/JPY at 152. Both European and US stock markets trade little changed.

News & Views

Canadian employment rose by 76k in December, building on the solid 91k pace from December and beating consensus (25k) by a wide margin. Details showed an increase in both full-time (+35.2k) and part-time (+40.9k) occupations. Employment gains in January were led by manufacturing (+33k; +1.8%) and professional, scientific and technical services (+22k; +1.1%). The unemployment rate avoided the feared uptick from 6.7% to 6.8% and even declined to 6.6%. This occurred even against the background of a higher participation rate (65.5% from 65.4%). Average hourly wages rose by 3.5% Y/Y (down from 4% in December). The Canadian dollar holds the balance with a strong USD today as the numbers reduce the likelihood that the BoC will implement more rate cuts even as the lingering tariffs pose significant downside risks to the Canadian economy. USD/CAD is testing first support in the 1.43-area. A break lower would make the technical picture in the pair more neutral. CAD swap rates add 7 to 9 bps across the curve.

The Turkish central bank published its updated inflation outlook. The CBRT raised the end of year forecast to 24% from 21% with a projection band of 19%-29%. It added that it was mostly a mechanical revision driven by factors beyond the control of monetary policy. It doesn’t suggest any easing of the monetary policy stance. The end-2026 forecast was unchanged at 12% while a first prognosis for end-2027 came in at 8%. The CBRT sets the policy rate in a way to ensure the tightness required by the projected disinflation path. In December and January, they conducted back-to-back 250 bps rate cuts to bring the policy rate at 45% currently. EUR/TRY trades sideways (36-38.50) near record highs since last summer.

Non-farm payrolls rose 143k in January, slightly below the consensus forecast calling for a gain of 170k.

• This morning's report also included more comprehensive benchmark revisions, which are done annually to better align the establishment survey figures to observed employment counts reported in tax filing data. The revisions showed the level of employment as of March 2024 was lower by 589k.
• The Bureau of Labor Statistics also revised its seasonal adjustment factors (dating back to 2020) as well as the birth/death factors used to scale payroll changes up or down depending on the estimated rate of firm formation. These revisions showed that payroll growth between April 2024 – December 2024 was revised slightly lower by a total of 21k jobs. However, revisions through the fourth quarter were notably higher (adding an additional 101k jobs to the previously reported figures), suggesting more hiring momentum heading into 2025.

Private payrolls rose 111k – notably lower than the 273k reported in December – with the largest gains seen in health care & social assistance (+66k) and retail trade (+34.3k). Government hiring rose 32k.

In the household survey, new population controls were introduced last month (as is the case every January), to reflect new population estimates from the Census Bureau. Unlike the establishment survey, the historical household data is not revised, distorting the month-to-month changes for civilian employment, unemployment, and the labor force. However, the ratios in the survey (i.e., the unemployment and participation rates) remain largely unaffected.

• Civilian population was revised higher by 2.9 million in January, as prior population estimates have significantly undercounted immigration flows in recent years.
• The unemployment rate ticked lower by 0.1 percentage points to 4.0%, while the labor force participation rate edged up to 62.6%.

Average hourly earnings rose 0.5% month-on-month (m/m) in January – an acceleration from December's more modest gain of 0.3%. On a twelve-month basis, wage growth was up 4.1% (unchanged from the month prior), while the three-month annualized edged up to 4.5% (from 4.3% in December).

Key Implications

There was a lot to digest in this report. But perhaps the biggest takeaway was that hiring momentum was even stronger than previously expected at the end of last year – averaging 204k jobs per-month in the fourth quarter. And even though the January figures showed some deceleration in payrolls, it was likely due to wildfires in California and cold weather across much of the U.S. – suggesting we could see some bounce back in February.

While it was previously thought that that labor market had fallen into a sweet spot, this morning's release suggests things are still running a bit hotter than previously expected. The unemployment rate dipped to an eight-month low, while wage growth has shown more staying power. With inflation progress having stalled in recent months and heightened uncertainties on how far the new administration will go on tariffs, the Fed is likely to remain more cautious on rate cuts and hold the policy rate steady until sometime this summer.

The Canadian labour market's solid job gains carried over into 2025, with 76k new jobs beating expectations. Job gains were split between full (+42.3k) and part-time (+38.6k) positions.

The healthy job gain pushed the unemployment rate down another 0.1 percentage point to 6.6%.

Following a period where labour force growth was outpacing job creation, the proportion of the population aged 15+ with a job has now risen for three consecutive months. And this has occurred across age cohorts: youth (15-24 years), core age (25-54 years) and older people (55-64) have all seen their employment rates rise.

Employment gains across industries were mixed. Gains were led by manufacturing (+33k), professional, scientific and technical services (+21.7k), construction (+19.3k) and accommodation and food services (+14.9k). Meanwhile, other services (-13.9k), educational services (-7.9k) and business building and other support services (-7.4k) led the declines.

Given the threat of tariffs in the spotlight, Statistics Canada included a feature on manufacturing employment, which accounts for 8.9% of total employment in Canada. Specifically, 39.4% of manufacturing jobs depend on U.S. demand for Canadian exports, or roughly 641k jobs.

Lastly, total hours worked jumped a massive 0.9% month-on-month, pointing to solid economic growth on the month. Meanwhile wage inflation continued to cool. Average hourly wages were up 3.5% year-on-year in January (from 4.0% in December).

Key Implications

Three consecutive months of solid job growth suggests the cyclical boost to Canada's economy from lower interest rates is clearly taking effect. Unfortunately, the imminent threat of tariffs hanging over the Canadian economy, is likely to temper business confidence and could weigh on hiring in some sectors in the coming months.

The Bank of Canada continued to lower interest rates in January, such that interest rates are no longer a drag on the economy. Now it is over to Canadian governments to do what they can (see commentary) to improve the competitiveness of the economy in the face of the tariff threat.

Daily Pivots: (S1) 150.83; (P) 151.86; (R1) 152.48; More...

Intraday bias in USD/JPY is turned neutral with 4H MACD crossed above signal line. Focus stays on 38.2% retracement of 139.57 to 158.86 at 151.49. Strong bounce from current level will keep decline from 158.86 as a correction, and retain near term bullishness. Firm break of 153.70 support turned resistance will turn bias back to the upside for stronger rebound. However, sustained break of 151.49 will raise the chance of bearish reversal, and target 61.8% retracement at 146.32 next.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). The range of medium term consolidation should be set between 38.2% retracement of 102.58 to 161.94 at 139.26 and 161.94. Nevertheless, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 0.9015; (P) 0.9038; (R1) 0.9074; More…

Intraday bias in USD/CHF stays neutral at this point. Consolidation from 0.9200 could extend further. Outlook will remain bullish as long as 0.8956/64 support holds. Firm break of 0.9200/9223 will resume the whole rally from 0.8374 and carry larger bullish implication. However, sustained break of 0.8964 will complete a double top reversal pattern, and turn bias to the downside for deeper decline.

In the bigger picture, decisive break of 0.9223 resistance will argue that whole down trend from 1.0342 (2017 high) has completed with three waves down to 0.8332 (2023 low). Outlook will be turned bullish for 1.0146 resistance next. Nevertheless, rejection by 0.9223 will retain medium term bearishness for another decline through 0.8332 at a later stage.

Daily Pivots: (S1) 1.2360; (P) 1.2437; (R1) 1.2511; More...

Intraday bias in GBP/USD stays neutral for the moment. While corrective rebound from 1.2099 could still extend, upside should be limited by 38.2% retracement of 1.3433 to 1.2099 at 1.2609. On the downside, break of 1.2248 support will bring retest of 1.2099 first. Firm break there will resume whole decline from 1.3433. However, decisive break of 1.2609 will raise the chance of near term reversal, and target 61.8% retracement at 1.2923.

In the bigger picture, rise from 1.0351 (2022 low) should have already completed at 1.3433 (2024 high), and the trend has reversed. Further fall is now expected as long as 1.2810 resistance holds. Deeper decline should be seen to 61.8% retracement of 1.0351 to 1.3433 at 1.1528, even as a corrective move. However, firm break of 1.2810 will dampen this bearish view and bring retest of 1.3433 high instead.

Daily Pivots: (S1) 1.0355; (P) 1.0381; (R1) 1.0410; More...

EUR/USD dips mildly but stays well inside range of 1.0176/0531. Intraday bias remains neutral and more consolidations could be seen. Strong resistance is expected from 1.0531 to limit upside. On the downside, break of 1.0176 will resume whole fall from 1.1213. However, sustained break of 1.0531 will rise the chance of bullish reversal and turn bias back to the upside for stronger rally.

In the bigger picture, immediate focus is back on 61.8 retracement of 0.9534 (2022 low) to 1.1274 (2024 high) at 1.0199. Sustained break there will solidify the case of medium term bearish trend reversal, and pave the way back to 0.9534. However, strong support from 1.0199 will argue that price actions from 1.1274 are merely a corrective pattern, and has already completed.