Weekly focus – ECB holds rates steady amid inflation falling below target

In the US, Trump's nomination of Kevin Warsh as the new Fed chair was received positively by markets, as the USD regained ground and precious metals turned lower this week. While Warsh has occasionally sided with Trump in calling for lower rates in the US, we still think his nomination should reduce concerns regarding the Fed's independence. This week also brought a string of labour market data that all surprised on the downside. The ADP data showed US employed increased by 22k private sector jobs in January (consensus: +48 k). The Challenger report showed more job cuts than expected in January and the JOLTs job opening came in at 6.5m in December (consensus 7.2m). Hence, the US ratio of job openings to unemployed fell to just 0.87 in December. Such cooling is usually a good predictor for weakening wage growth and may be a concern for the private consumption outlook and, all else equal, supports the case for earlier cuts from the Fed. On the other hand, the ISM manufacturing surprised significantly positively rising to 57.1 in January from 47.4 while the services index was as expected at 53.8 (cons: 53.5, prior 53.8). The jobs market report scheduled for Wednesday will thus be very important to follow.

In the euro area, inflation declined as expected to 1.7% y/y in January from 2.0% y/y while core inflation was slightly weaker than expected at 2.2% y/y (cons: 2.3% y/y). The decline in headline inflation was well expected due to a significant base effect on energy inflation, which was the main reason for the decline. Yet, a weaker-than-expected services inflation print of 0.15% m/m s.a. means that the January report provided a dovish signal for the ECB. Despite inflation falling below target the ECB decided to leave its key policy rates unchanged with the deposit facility rate at 2.00%, as widely expected by markets and consensus. Lagarde accentuated the positive factors of the economy such as low unemployment while downplaying the role of the inflation undershooting and strengthened euro. For further information, see ECB Review - Accentuate the positive, 5 February.

In the UK, the Bank of England kept the interest rate unchanged at 3.75% in an unexpectedly narrow vote split of 5-4, which was a dovish surprise. In their report, they concluded that the economic outlook for the UK involves less growth and inflation than previously anticipated. This also entails that we continue to aim for the next rate cut in April but also pencil in another cut in November. For details, see Bank of England Review, 5 February. 

In China, the January PMIs were a mixed bag. The official NBS PMI manufacturing dropped 49.3 (consensus 50.1) from 50.1 whereas the private RatingDog PMI manufacturing increased to 50.3 (consensus 50.0) from 50.1. The details show the difference was due to export orders. However, the PMIs do not change the picture of a Chinese economy that continues to muddle through in a two-speed fashion with strong exports and tech developments amid weak domestic demand.

Next week focus turns to the US job market report, Q4 employment cost index, retail sales, and January CPI. We expect 60K new jobs and CPI at 2.4% y/y in January. In Asia, the Japanese election this Sunday is important for financial markets while China publishes home price data and CPI during the week. In Europe, we receive the first euro area employment data for 2025Q4 and UK GDP.

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