Except for political pressure, the Fed finds itself in a good place to wait and see

Markets

Last week’s payrolls ended the debate on whether or not the Fed should further reduce its policy rate anytime soon. They simply weren’t weak enough for the US central bank to neglect the fact that it is taking too long to bring inflation back to its policy target. Yesterday’s US inflation figures in this respect didn’t bring profound new insights. Headline inflation was exactly in line with expectations at 0.3% M/M and 2.7% Y/Y. Core inflation was marginally softer than expected at 0.2% M/M and 2.6% Y/Y. In a first reaction, markets tried to embrace this perceived softness. However, with a lot of statistical noise from the shutdown playing on the background, markets soon concluded that it was futile to try to draw any firm conclusions on the timing of the next Fed rate cut. Except for political pressure, the Fed finds itself in a good place to wait and see. After rising slightly in the run-up to the release, US yields at the end of the day changed less than 1 bp across the curve. A $22bn 30-y bond auction didn’t cause any ripples on broader interest rate markets. There’s no indication that the debate on Fed independence has any material impact on LT US risk premia for now. European yields also found some kind of short-term equilibrium. German yields changed between -0.3 bps (2-y) and +1.7 bps (30-y). The lingering unease about Fed independence for now also has little negative impact on the dollar. DXY reversed Monday’s setback (close 99.13). EUR/USD slipped back to close at 1.164. Geopolitical considerations add to the market conclusion that other majors including the euro aren’t a real alternative to the dollar. In this respect, metals (gold, silver but also the likes of copper and tin) nearing/hitting record levels seem to reflect a better store of value.

The Japanese Takaichi trade continues this morning after recent headlines suggesting that the Japanese Prime Minster might call snap elections, maybe as soon as next month. Japanese equities continue their record race (Nikkei + 1.5%). Japanese yields remain upwardly oriented. This time it’s the turn of the 5-y yield to touch a new historic top (1.61%). The yen (USD/JPY 159.1) continues fighting an uphill battle as markets try to find out where Japanese authorities might step in with interventions. At least for now, this fear apparently isn’t that big. Later today, the eco calendar contains December US PPI price data and retail sales. However, with the payrolls and the inflation data unable to move positioning, it is unlikely that those reports will do the job. Markets will also keep a close eye on the US Supreme Court today which might bring a verdict on the US IEEPA import tariffs. Markets also prepare for the earnings season, with some major US banks reporting Q4 resuts.

News and views

China’s trade surplus hit a record $1.2tn last year. December’s trade balance came in at $114.14bn, data showed this morning. 2025 was nothing but a bumper year for Chinese trade, with monthly surpluses having hit records in four of the 12 months. While US exports have fallen off a cliff due to import tariffs (-20% y/y for the full year of 2025, Bloomberg calculates), inbound shipments to Africa picked up sharply (by 26% y/y). China also got a bigger foothold in Southeast Asia (+13%), the EU (+8%) and Latin America (+7%). Not only trade flows got rewired, the composition of exports did as well. High(er)-value goods surged with the likes of semiconductors, cars and ships recording +20% gains. Toys, shoes and clothing on the other hand contracted.

The International Energy Agency in its monthly Short Term Energy Outlook Report expects that lower oil prices will cut US drilling activity and reduce the top producing country’s output by 1% this year. The IEA estimates Brent crude oil prices to average $56 a barrel this year, down from $69 in 2025 amid global production continuing to outpace demand, resulting in a buildup of inventories. This forecast was made under the assumption of Venezuelan sanctions to remain in place through 2027. If these are to be lifted further and other US government policy related to Venezuela leads to increased production in the oil rich Latin American country, oil prices could fall more steeply than currently expected, the IEA said.

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