New Zealand expected to hold rates despite Australia's recent hike

In focus today

• Today, the UK jobs report for December is released. The unemployment rate is expected to remain fairly stable with consensus at 5.2% and the previous rate at 5.1%. Following the recent more dovish signs from the Bank of England, the pace of the cooling of the labour market will be key to gauge the timing of the next rate cut.
• In Germany, the February ZEW survey is released. The assessment of both the current situation and expectations rebounded in January, which is a positive sign for the economy. Industrial orders have also rebounded, meaning there are tentative signs of a recovery taking shape in Germany, so we expect to see a further improvement in the February data. 
• Overnight, we expect the Reserve Bank of New Zealand (RBNZ) to maintain its monetary policy unchanged, in line with consensus. Markets are pricing the first rate hike only for Q4 even though the central bank of neighbouring Australia hiked rates already two weeks ago.

Economic and market news

What happened overnight

This morning for the US, we slightly adjusted our Fed call and now see two more 25bp rate cuts in June and September (prev. March and June). We then expect the Fed to maintain the terminal rate at 3.00-3.25% through the rest of 2026 and 2027. While last week's strong January jobs report alleviated the need for near-term policy easing, we still see a good case for the Fed resuming rate cuts in summer. Cooling wage growth and housing inflation as well as the risk of private consumption surprising negative are likely to tilt the balance towards a cut, when Kevin Warsh has his first meeting as the Fed chair in June.

What happened yesterday

In Sweden, it was a big surprise as seasonally adjusted unemployment dropped to 8.0% (cons: 8.8%), while employment remained unchanged at high levels. Both the December and January reading suggest fairly big revisions to the better for both the unemployment rate and the employment rate. The strong labour market should balance out some of the pressure on the Riksbank from the low inflation readings and should decrease the probability of a rate cut in H1.

Also in Sweden, inflation expectations decreased in February, particularly for the one-year horizon, which decreased to 1.4% from 1.5% in January. The decrease reflects the downside surprise in the January inflation figures.

In geopolitics, Iran conducted naval drills in the Strait of Hormuz, a vital shipping route, after the US on Sunday deployed an additional aircraft carrier in the region. This comes ahead of talks in Switzerland today, where Iranian Foreign minister Abbas Araghchi and US special envoy Steve Witkoff will meet to discuss nuclear weapons and Iran's missile program.

Equities: Little changed on Monday and in thin volumes as US and much of Asia were closed for holiday. European and Nordic equities little changed on headline with Stoxx 600 0.1% higher and OMX Nordic All-Share -0.1% lower. Risk off continued below the surface, with a defensive bias of banks, defence, telecom and insurance among the top performers. More importantly, tech stocks continued to underperform, which we view as the origin of the current defensive rotation. Hence, the modest rebound in software in US on Friday did not survive. This looks set to continue today, as US futures are -0.5-1% lower, with Russell 2000 and tech-heavy Nasdaq leading the declines.

FI and FX: Yesterday was a quiet day for fixed income as European yields remained largely unchanged with 2Y swap rates trading just below 2.20% and 2Y Bund yields at 2.05%. After long-end yields have declined over the past week with 2Y US Treasury yields down almost 10bp to 3.40% and 10Y US Treasury yields down about 15bp to 4.05% the US was out for Presidents' Day yesterday. Similarly, the USD broadly consolidated in a quiet start to the week, with EUR/USD holding in the mid-1.18-1.19 range. While NOK FX did very little during yesterday's session, momentum has in recent week still been strong supported by both global and domestic drivers. Today, we look for the latest labour market report out in the UK to see whether this can trigger a move out of the recent very narrow 0.86-0.87 range in EUR/GBP.