European leaders gather in Paris to discuss the future of European security

In focus this week

Today, European leaders gather in Paris for crisis talks about the future of European security regardless of US engagement, how to support Ukraine and strengthen Europe's position to negotiate. This comes as a response to President Donald Trump opening peace talks with Russia while limiting European involvement in the negotiations.

Markets are continuing to observe the recent movements in politics around the world, with the highlights being the potential ceasefire in Ukraine, the German federal election on Sunday and any signs of Xi-Trump talks related to the recent tariff increases.

The main data print of the week is anticipated to be the release of the PMIs from most major countries on Friday, apart from China, and with US regional surveys coming in the days before. Focus will be on the euro area release as to whether it continues to move in a positive direction supporting the view that the European economy is slowly being supported by rising real incomes and lower interest rates. 

Today in Sweden, the monthly labour force survey is due at 08.00 CET where we expect to see a stabilisation of the current weak labour market, but without any marked improvement in the unemployment figure. Such an outcome would be in line with last week's PES report that showed an unchanged unemployment rate and a return of layoffs to their historical average after being at elevated levels in early autumn.

Economic and market news

What happened overnight

In the US, Secretary of State Marco Rubio said that Ukraine and Europe would be part of any real negotiations to end the war in Ukraine. The peace talks will kick off this week in Saudi Arabia between negotiating teams from the US and Russia. Ukraine's representatives apparently will not attend and their role in the process remains unclear. Read more on an alternative 'dirty deal' scenario and the expected market impacts in Research Global - What would a dirty deal in Ukraine mean for markets? 16 February.

In Japan, Q4 GDP came in above expectations at 2.8 % (cons: 1.0 %) and consumption growth for the same period slowed by less than expected, staying in the positives at 0.1% (cons: -0.3%). The strong prints caused the yen to rise and potentially pave the way for additional BoJ hikes down the road.

What happened over the weekend

The Security Conference in Munich, dominated headlines over the weekend, with a primary focus on the US-EU relationship. EU leaders are set to meet in Paris to continue discussions on the future of the EU across several topics. 

In the US, January retail sales surprised to the downside across both headline sales at -0.9% m/m (cons: -0.2% m/m) and control group sales (-0.8% m/m SA). Overall, the print was weak, but less than the headline figures would suggest. The modest downtick in US yields is justified, but this should not have dramatic market impact. 

In the euro area, employment increased 0.1% q/q in the fourth quarter of 2024, showing that the labour market remains resilient despite weak growth. The picture seen last year appears to be repeating itself, with Spain recording strong employment growth at 1.0 % q/q and Germany stagnating at 0.0 % q/q. We forecast a small increase in the unemployment rate as employment growth stagnates and the labour force grows.

In Norway, the Norwegian Technical Calculation Committee for Wage Settlements released their report ahead of this year's central wage negotiations. Notably, annual wage growth in 2024 came in at 5.3 % and the committee expects inflation to drop to 2.5 % in 2025, which could limit the upside risk to Norges Bank's wage growth estimate for this year of 4.2 %. All in all, the expected rate cut in March is not at risk. We maintain our call for four cuts in 2025, as growth has been weaker than expected, oil investments are about to turn, and domestic inflation keeps falling.

Equities: US and European equities were little changed on Friday and sector performance tightly bunched. This was a well-deserved break for markets, after rallying >1.5% for the week. Risk on was visible on Friday too: Europe outperformed the US (9% ytd vs 4% in the US). Vix dropped below 15, which is the lowest since late January. Investors found financing in defensives, with health care and consumer staples the worst performing sector on Friday. All in all, risk-on continued in markets last week despite the higher inflation print, hawkish Fed speeches and dirty dealmaking in Ukraine. This goes in line with our view that as long as demand stays strong, equity investors will be happy. Futures are higher this morning but note that US markets are closed for holiday.

FI: The direction for global bond yields still seems very uncertain even though we have been pricing out rate cuts from the Federal Reserve since the autumn last year. However, if we look at the movement in 10Y US Treasury yields since the inauguration of Donald Trump there has been no clear direction with 10Y Treasuries trading with a yield between 4.4% to 4.6% based on signals from the Federal Reserve as well as key economic data such as last week's US inflation. However, there has been a clear path for the US 10Y swap spread, which has widened some 10bp since late January.

FX: The broad USD declined last week as markets unwound some of the stretched USD-bullish positioning tied to Trump's policy agenda, particularly on tariffs, where there has been plenty of rhetoric but little immediate implementation. The weaker USD, combined with progress in Ukraine peace talks, supported EUR/USD to just below 1.05. USD/JPY fell back into the 152-153 range amid declining US yields. Both AUD and NZD ended the week on a strong footing, supported by broadly positive risk sentiment. In the Scandies, SEK outperformed, pushing EUR/SEK below 11.25, while EUR/NOK held around 11.65.