French budget talks enter final stage

In focus today

Today, focus turns to French politics as lawmakers reach the final stage of negotiating a budget agreement. Sources indicate that Bayrou intends to reduce the public deficit to 5.4% of GDP from last year's 6.2%. The budget draft will be debated in the National Assembly today, and Bayrou is likely to pass the bill without a majority.

Attention also shifts to the euro area inflation data for January. HICP inflation rates in Germany, France, and Spain were broadly unchanged compared to last month. We also forecast that euro area HICP inflation will remain at 2.4% y/y. Core inflation is projected to slightly decrease to 2.6% y/y (prior: 2.7%) due to lower services inflation. Additionally, the final release of manufacturing PMI for January should confirm the flash release that rose more than expected.

For the US, we get the ISM manufacturing index for January. Its preliminary PMI counterpart released earlier pointed towards recovering activity at the beginning of the year.

At 8.30am CET, the Swedish manufacturing PMI will be released. Recent PMIs have consistently exceeded the 50-mark (last print 52.4) outperforming France and Germany. Although the NIER manufacturing survey fell in January, we still expect a solid print above the 50-mark.

The week is packed with US data releases, including key events such as the ISM service index, JOLTs and the jobs report. On Thursday, the Bank of England will announce its rate decision.

New feature from the Danske Bank Global Research team: Personal customers in Denmark, Sweden and Finland now have access to a selection of research articles in Danske Bank's Mobile App. You will find the new feature under Investments.

Economic and market news

What happened during the weekend and overnight

Overnight in China, Caixin's early January PMI were released, mirroring last week's weak official PMI. It fell short of expectations at 50.1 (cons: 50.5, prior: 50.5), indicating slowed factory activity growth. The decline in foreign orders and average selling prices highlights pressure from rising competition and global uncertainties. However, manufacturers' sentiment has improved due to signs of increasing domestic demand and anticipated government support measures.

Over the weekend, Trump imposed new tariffs on Canada, Mexico and China, initiating a trade war with three of the US's largest trading partners. The executive order enforces a 25% tariff on imports from Canada and Mexico, excluding Canadian oil and energy products, which faces a 10% levy. Chinese imports are hit with an additional 10% tariff. The changes apply to all goods imports from countries that together account for around 45% of all US imports. In retaliation, Canada announced 25% tariffs on US goods like alcohol, clothing, household appliances and lumber, while Mexico's President Sheinbaum said the country would also launch retaliatory tariffs and other measures. 

What happened Friday

In France, inflation was slightly below expectations in January, with the HICP inflation index remaining at 1.8% y/y (cons: 1.9%, prior: 1.8%). The monthly increase in seasonally adjusted services inflation was 0.0%, reinforcing the argument for further ECB rate cuts.

In Germany, CPI inflation was lower than expected in January, although the details on core services and HICP were not as weak as indicated by regional data, CPI inflation declined to 2.3% y/y (cons: 2.6%, prior: 2.6%) while HICP inflation, the measure prioritised by the ECB, remained unchanged at 2.8% y/y as expected.

In the US, the Employment Cost Index was slightly above expectations, exceeding levels that would be comfortable for the Fed if productivity growth returns to its typical pre-pandemic pace. The impact on firms' unit labour costs will be clearer this week with the release of Q4 growth productivity data. December PCE inflation aligned closely with expectations, as indicated by Thursday's Q4 figures. The EUR/USD fell slightly lower on the ECI data.

Equities: Global equities ended lower on Friday, dragged down by the US and news of US trade tariffs. Last week's and Friday's performances are somewhat secondary, as the tariffs are shifting focus and having a significant impact on markets this morning. However, let's be clear: these tariffs are being introduced at a time when we have strong macroeconomic conditions, loosening monetary policy, solid earnings and with global equities at an all-time high. Hence, the markets will be more resilient than if we were facing macroeconomic, monetary, and earnings headwinds. Nonetheless, as we are close to all-time highs after a solid January, markets will naturally get hit by the negative effects of the tariff announcements. In the US on Friday: Dow -0.8%, S&P 500 -0.5%, Nasdaq -0.3%, and Russell 2000 -0.9%.

Unsurprisingly, most Asian markets are lower this morning, including Japan, South Korea, and Taiwan, which are down by approximately 3%, despite not being the direct targets of the tariffs. However, we believe this is logical, as the tariffs should be seen through the lens of their effects on global growth. European and US futures are down 1.5-3% this morning.

FI: European rates dropped sharply on the German inflation data missing expectations. 2y German yields were down 4bp on the release, as markets may have to rethink the inflationary profile for the euro area this year. That said, with new weights and menu price adjustments it is too early to make firm conclusions. The weekend confirmation that the US is imposing 10/25/25% tariff on China/Canada/ Mexico is set to impact trading appetite this morning. While this is less than the worst-case scenarios, the announcement confirmed the tariff induced volatility on Friday. That trading sessions will continue to be vigilant on potential tariff headlines. Canada and Mexico have already said they will retaliate, while China will do "corresponding countermeasures". UST futures are up, thus 10y UST is down about 5bp in the overnight session.

FX: Tariffs shook the markets on Friday with a volatile session in FX. At the end of the day, US equity indexes closed in negative territory and the USD gained vs its G10 peers. President Trump confirmed over the weekend that steep tariffs on Canada, Mexico and China will apply from Tuesday alongside threats that EU will be targeted as well. Canada immediately responded by setting tariffs on US goods, while other counterparties indicate that they are ready to retaliate. EUR/USD has dropped further to around 1.02 from Friday's close at 1.0362, USD/CAD has traded a multi-year high just shy of 1.48 and the MXN is being hit as well. Equity futures are firmly in red indicating a sour opening. While the correlation between equities and EUR/Scandies has been poor recently, the risk in EUR/SEK and EUR/NOK is probably skewed to the upside if markets stay sour although the fundamental impact would also depend on the design of any possibly tariffs directed toward Europe. Besides tariff jitters, focus is on today's EA CPI and the global batch of confidence numbers.