Lagarde to step down early as ECB president

In focus today

In the UK, January CPI inflation is released today. Two of the recent four prints have been softer than expected but core inflation remains elevated at 3.2%. The speed of the continued disinflationary path will determine when we get the next rate cut from the Bank of England. 

In the evening, the minutes of FOMC's January meeting are due for release. Markets will keep a close eye on any more nuanced clues regarding the most likely timing for rate cuts.

Ukraine and Russia will continue peace talks from yesterday although there are little expectations of major breakthrough. Land disputes remain the key sticking point, as Russia demands control of the remaining 20% of Donetsk, which Ukraine refuses to concede. The negotiations come days before the fourth anniversary of Russia's invasion.

Economic and market news

What happened overnight

The Reserve Bank of New Zealand maintained the interest rate at 2.25% as expected. The meeting lowered market expectations for a rate hike in the near future with governor Anna Breman stating that they are not expecting a hike "until we see more inflationary pressures and a stronger economy".

In the euro area, Christine Lagarde is expected to step down as European Central Bank president before her term ends in October 2027, most likely before the French presidential election in April 2027 according to Financial Times. It has not been confirmed by the ECB officially. Her departure would allow Emmanuel Macron to be amongst the EU leaders that select her successor instead of a possible new French president from the far right. This raises the likelihood of getting a classical candidate and smoothens the process. We expect a limited impact of the new ECB president as EU leaders historically have aimed to strike a balance within the ECB's executive board between doves and hawks. Even with the early departure, EU leaders have plenty of time to discuss and select a new president as part of the large shift taking pace in ECB top positions the coming two years. Hence, we do not expect a market impact from this piece of news.

In Japan, exports increased 16.8% y/y (cons: 12%, prior: 5.1%) in January, the fastest growth in over three years, driven by strong Asian demand ahead of China's Lunar New Year. Exports to China rose 32%, while shipments to the U.S. fell 5%. Imports dropped 2.5%, leading to a smaller than expected trade deficit of 1.15 trillion yen. The increase may be temporary, potentially leading to lower than expected export in February.

What happened yesterday

The UK jobs report for December was released with the unemployment rate increasing to 5.2% (Nov: 5.1%), generally in line with expectations. The increase marks the highest unemployment rate in almost 5 years in the UK and supports the recent more dovish signs from the Bank of England. The increase in the unemployment rate reflects weaker hiring activity and that more people out of work are actively job searching.

In Germany, the ZEW survey showed an improvement in the current economic situation while expectations were broadly unchanged in February. Expectations fell marginally to 58.3 from 59.6 against an expected rise to 65.2 by consensus. In contrast, the assessment of the current situation rose as expected to -65.9 (cons: -65.9) from -72.7. Hence, a small rebound in the German economy has been visible in the past months according to the ZEW and expectations remain at high levels relative to the past years. 

Iran and the United States reached an understanding on key guiding principles in nuclear talks, easing fears of regional conflict in the Middle East, although no deal is expected in the very near future. Iran reiterated it would only negotiate its nuclear programme in exchange for sanctions relief, rejecting discussions on its missile stockpile.

Equities: The US returned after the holiday with a shrug. At least that is how it looked on the surface, with S&P 500 ending 0.1% higher. However, beneath the surface the software scare continued. The software rebound on Friday reversed, and the sector sold off -2% again, being one of the worst performing industries.

However, what is noteworthy in the session is that consumer staples sold off heavily. Staples has been one of the best performing sectors during the last month, as investors have sought shelter from AI disruption. The fact that staples and software sell off in tandem is interesting. It could be at a sign that overall risk sentiment is about to revert back to the cyclical fundamentals, but in which AI disruption fears lingers in the software industry, without spilling over to overall risk appetite and a broader defensive rotation. We see a big catchup potential in the cyclical trade and believe value cyclicals and small caps is the best was to play this. Futures are higher this morning.

FI and FX: Yesterday's session saw a halt to the last week's drop in US yields with notably also the USD real rates curve rebounding a couple of bp. Meanwhile the long-end of EUR rates continued to drive a bullish flattening of the EUR curve with 2s10s now back to levels last seen in mid-November. In FX space the NZD has been the primary underperformer alongside the GBP following a relatively soft Reserve Bank of New Zealand overnight and weak UK figures yesterday. Also, EUR/SEK and EUR/NOK have edged somewhat higher while EUR/USD was little changed following stories this morning that Christine Lagarde will leave the ECB ahead of our her 8 year term. Oil has traded slightly heavy over the last 24 hours with Brent Crude falling to USD 67.5/bbl on signs of progression in the US-Iran nuclear talks.