Euro area inflation to show drop

In focus today

In the euro area, focus turns to flash HICP inflation data from January. We track euro area HICP at 1.7% y/y (Dec: 1.94% y/y) in line with consensus estimates as lower French inflation averages out higher inflation in Germany and Spain. We anticipate the entire decline to be explained by energy inflation, which is set to fall due to very large base effects despite higher energy prices in January relative to December. We expect core inflation to remain at 2.3% y/y due to unchanged goods and services inflation.

In the US, the ADP private sector employment report will provide markets with the first sense of what to expect about the delayed January Jobs Report. ADP's weekly employment estimates showed steadily positive jobs growth over the reference period. ISM Services index will also be released for January. Finally, we will also be looking out for the Quarterly Refunding Announcement, where we expect the Treasury to maintain the current nominal coupon auction sizes.

In Poland, the National bank of Poland will announce their policy rate decision. The market expects the interest rate to be maintained at 4.00%.

In Sweden, the Riksbank will release a summary of last week's meeting at 9:30 CET today. We are curious about how the individual Board members assessed a more stable labour market in relation to the lower inflation outcome and disinflationary risks associated with a sustainably stronger krona. Last week's press release reiterated that "The policy rate is expected to remain at this level for some time to come".

Also in the euro area, the final services and composite PMI for December is up for release. We expect it to confirm flash data in line with Monday's release of final manufacturing PMI.

Economic and market news

What happened overnight

In China, the Ratingdog Service PMI was released at 52.3, up from 52.0 in December and the highest reading since October, as hiring reached its highest levels since July and strong new orders.

In Japan, the service sector continued its expansion as the final service PMI came in at 53.7, slightly above the flash estimate of 53.4 and up from 51.6 in December. This marks the fastest pace of growth in nearly a year in the service sector.

What happened yesterday

In the US, the House of Representatives approved the funding package that ends the partial government shutdown that began on Saturday, as the Senate already approved the bills over the weekend. In the evening, President Trump signed it into law. After this deal, Congress has approved 11/12 of the full-year funding bills. The negotiations over the final remaining bill regarding funding for the Department of Homeland Security (DHS) will continue for at least the next two weeks, but even if the DHS ends up in a shutdown, it will no longer cause any true disruptions in markets. In other words, the shutdown risk is now cleared until the next fiscal year begins on 1 October. This ensures that even though Friday's jobs report will still be delayed, the release will be pushed back only by a few days.

In the euro area, the ECB's quarterly Bank Lending Survey showed that banks tightened credit standards for firms due to higher perceived risks and a lower risk tolerance in Q4 2025. Credit standards tightened mainly for firms in industry, while non-financial services saw no tightening. Banks are also expected to tighten credit standards in the first quarter of 2026. 

In France, inflation surprised to the downside in January in contrast to Germany and Spain. The flash release shows HICP inflation at 0.4% y/y (cons: 0.6%, prior: 0.7%) and CPI at 0.3% y/y (cons: 0.6%, prior: 0.8%). The downside surprise was driven by weaker-than-expected prices for manufactured goods, softer services inflation, as well as a continued drag from energy prices.

Equities: Global equities declined 0.3%, in a tech led sell-off. While S&P 500 ended 0.8% lower, and Nasdaq -1.4% the Russell 2000 ended the day higher at 0.3%. Stoxx600 was 0.1% higher. However, calling it a broad-based tech sell-off would be a stretch. The sell-off was focused on software companies (and even some financial services firms), following a new AI tool by Anthropic.

FI and FX: Risk sentiment soured, equities sold off and the oil price rose after news that the US Navy shot down an Iranian drone that headed toward an aircraft carrier. S&P 500 closed -0.84% and Nasdaq -1.4% after recovering from intraday lows of -1.6% and 2.4% respectively. Higher oiled supported the NOK which broke below 11.40. EUR/SEK went south again in a new attempt to take out 10.50, despite unstable-to-adverse risk sentiment. EUR/USD is back above 1.18 and USD/JPY above 156. Fixed income held relatively stable with UST10y hovering around 4.28%.