January European inflation figures came in at the high end of expectations
Markets
European stock markets bit the dust yesterday, underperforming strongly vs US peers. The EuroStoxx50 tumbled 3.6% with some national indices doing even worse. Spain for example lost 4.6% over threats from president Trump to “cut off all trade” after the country denied the US access to military basis for the bombing campaign against Iran. Main indices on Wall Street lost around 1%, paring initial opening losses of up to 2.75% (Nasdaq). US stocks recovered after the Trump administration sought to assure energy trade flow through the Strait of Hormuz by offering insurance guarantees and naval escorts if needed. It’s not clear how quickly this can come about and we’re not sure whether oil tankers are ready to take the personal risk. But the news in any case caused oil and gas prices to return from their intraday highs. Net daily changes still amounted to <5% for Brent and >20% for Dutch TTF gas though. Core bonds, fearing inflation risks, extended their fall. They finished off the lows though with yields printing between 2.4-3.4 bps higher in the US and 2.8-6.6 bps in Germany. The Middle East war will continue to dominate overall sentiment, in the first place through energy markets. And despite Trump’s assurances, Brent is again rallying almost 3% towards the $85 barrier on growing supply concerns. Iraq, OPEC’s second-biggest producer, late yesterday began closing its biggest oil field due to shipping constraints. Asian markets are suffering with major net oil importers such as Japan feeling the heat. The Nikkei yanks almost 4% lower. Huge outflows press the likes of South Korea down by 12%. is The greenback rallied yesterday with EUR/USD down from 1.1688 to 1.1613. The pair traded as low as 1.1530 before the upward trending line that connects the August and November lows offered some support. While having zero market impact, it is still worth noting that yesterday’s January European inflation figures came in at the high end of expectations. Overall prices rose the expected 1.9%, accelerating from 1.7%. Core CPI, however, topped consensus estimates by accelerating to 2.4% from 2.2%. Our in-house nowcast was 1.81% for headline. The Middle East conflict obviously resulted in an adjusted nowcast for March, which now stands at 2.13% for the headline and 2.2% for core. The current underlying assumption of a 15% oil and 40% TTF gas price rise (vs last month) remains subject to revision. The economic calendar today features some interesting data including the Fed Beige Book release, the ADP job report for February (50k) and the ISM services index (53.5 from 53.8). Despite their high-profile nature we don’t expect them to influence trading much. Even in case of a miss, we don’t expect core bonds to rally in what would be a stagflationary environment.
News and views
GDP growth in Australia in Q4 2025 accelerated to 0.8% Q/Q and 2.6% Y/Y, up from 0.5% Q/Q. The Australian Bureau of Statistics said private and public demand both contributed to growth. Household spending rose 0.3%. Government expenditure grew 1%. Private investment increased for the fifth consecutive quarter (0.7%). Inventories contributed a positive 0.4% to the overall growth figure. Net exports delivered a small negative contribution (-0.1 ppt). Despite a constructive demand picture, the household saving ratio increased to 6.9% from 6.1%. The ratio is now at its highest level since the September quarter 2022. Household disposable income rose 1.8%, significantly higher than the nominal increase in household spending (1.1%). Also from a supply side point of view, growth was broad-based with production levels rising in 17 of the 19 industry groups. The reaction release was modest even as the Reserve Bank of Australia recently indicated the economy grows above capacity. This maybe has to do with the mix of modest consumption growth and a higher savings ratio. After opening higher, the 2-y yield even eased slightly (-4 bps to 4.27%). Money markets still see a chance of about 25% of a March rate hike. The Aussie dollar eases slightly to test the AUD/USD 0.70 level.
China PMI releases published this morning showed mixed, diffuse picture. The official PMI, which is mainly based on state-owned (large) and domestic oriented companies eased slightly from 49.8 to 49.5. Both the manufacturing measure (49) and the non-manufacturing survey (49.5) held below the 50 mark. At the same time, the RatingDog China composite PMI, which is compiled by S&P global and seen as more sensitive to foreign demand, accelerated sharply (composite 55.4 from 51.6, manufacturing 52.1 from 50.3 & services 56.7 from 52.3). On manufacturing, S&P analyses that the rise ‘was boosted by stronger increases in new orders, output and stocks of purchases. These impacts were partly countered by shorter suppliers' delivery times, while the employment component again exerted a broadly neutral impact’. On services S&P sees activity expanding at the fastest pace since May 2023, but this still also resulted in a fresh fall in staffing levels. Input price inflation remains modest, but some pricing power lifts output prices. After a correction over the previous three days, the yuan this morning stabilizes near USD/CNY 6.9154.
Author
KBC Market Research Desk
KBC Bank
