Dollar gains were unconvincing
Markets
The January jobs report blew past some of the most optimistic estimates, ending a sequence of disappointing (labour market) data since last week. While the 130k employment growth isn’t exactly stellar, it was double the 65k expected and negatively skewed by continued job cuts at the government level (42k). Signs of labour market fragility were there, though. January employment was almost exclusively driven by the health care sector while the annual revision resulted in an average monthly job growth last year of just 15k instead of 49k. But combined with an unexpected drop in the unemployment rate to 4.3% even as the participation rate rose, it forced a wrongfooted market into pushing back the next Fed rate cut to July from June again. Kansas City Fed Schmid later offered counterweight to the recent string of mostly dovish Fed policymaker comments. He thinks the central bank should hold rates at a “somewhat restrictive” level, citing growth momentum and still-hot inflation. US yields rose but finished off the intraday highs. Net daily changes varied between 2.3-5.8 bps in a bear flattening move with a tailed 10-yr auction weighing on Treasuries too. German bunds outperformed. Rates initially rose in sympathy with the US but forfeited all (limited) gains later in the session to close -0.3 (2-yr) and -3.4 (30-yr) bps lower. Dollar gains were unconvincing. EUR/USD barely fell to close at 1.1872. DXY treaded water around 96.83. The Japanese yen extended this week’s rebound to USD/JPY 153.26. Sterling’s attempt to find some footing back below EUR/GBP 0.87 was in vein. Today’s data won’t help GBP either with sub-par Q4 growth of a meagre 0.1% q/q (1% y/y). Government spending did the heavy lifting. Private consumption was tepid, fixed capital formation fell and net exports contributed negatively (export drop, import rise).The remainder of the economic calendar has little to offer although a 30-yr Treasury auction and the US weekly jobless claims could offer some intraday volatility. They at least did so last week after an unexpectedly sharp jump. The real focus of US markets lies on tomorrow’s CPI though. European investors are zooming in on the informal European summit in Belgium. Discussions center around the single (capital) market, increasing the bloc’s competitiveness amongst others through deregulation and how to achieve that when you have 27, often conflicting, views (coalition of the willing?). Prior to the meeting, the likes of French president Macron and even BuBa chief Nagel steered towards joint EU debt to address some of the challenges.
News and views
The US Congressional Budget Office yesterday released new forecasts for the budget and economic outlook for the period 2026-2035. The budget deficit would rise from $1.9tn in fiscal year 2025 to $2.7tn by 2035. It temporarily drops from 6.2% of GDP in 2025 to 5.2% by 2027. In later years, outlays increase faster than revenues, on average, resulting in a 6.1% of GDP deficit in 2035. This is significantly more than the 3.8% average deficit over the past 50 years. Trump’s tariffs – under the uncertain assumption of remaining in place through the coming decade – would reduce deficits by $3tn. This offsets some of the $4.7tn increase coming from his Big Beautiful Bill. Debt over the period swells as increases in mandatory spending and interest costs outpace revenue growth. The debt ratio is forecast to rise from 100% of GDP this year to 118% in 2035, surpassing its previous high of 106% in 1946. By 2035, net interest payments will grow to 4.1% of GDP, about one-sixth of all federal spending. The CBO’s sees economic growth cooling from an estimated 2.3% in 2024 to 1.9% in 2025 and 1.8% in 2026 amid higher unemployment and lower inflation. Real GDP then grows by 1.8% per year, on average, through 2035. Roughly four-fifths of the growth over that period is due to increases in the productivity. The CBO sees the Fed reducing interest rates though 2026 (level set at 3.3% for 2027). It anticipates the 10-y US yield to ease towards 3.8%/3.9% over the forecasting period, with inflation (PCE) seen holding near the 2% level from 2027.
According to a monthly survey on the economy by the Bank de France, economic activity strengthened in January in all three sectors - industry, market services and construction - at a faster pace than the expectations expressed last month. Industrial activity exceeded its long-term average for the eighth consecutive month, driven by the defence and aerospace sectors. In February, business leaders expect their activity to increase at a sustained rate in industry, and more moderately in services and construction. The monthly uncertainty indicator continues to fall in services and construction, but remains at a high level. It rose very slightly in manufacturing, reflecting the international climate and persistent geopolitical and trade tensions. The cash flow situation is still judged to be slightly worse than normal in industry, but is improving in the services sector. Based on the survey and other evidence, BdF estimates GDP to rise in 0.2%-0.3% in Q1.
Author
KBC Market Research Desk
KBC Bank
