Riksbank expected to keep rates unchanged

In focus today

• In the US, November import and export data is set for release today. The trade deficit has narrowed significantly as imports have declined after Trump's tariff hikes, despite domestic demand remaining resilient.
• In Sweden, the Riksbank is expected to maintain its policy rate at 1.75% during its rate decision meeting, aligning with December's communication. The central bank is likely to repeat the statement that 'the rate is expected to remain at this level for some time to come', while previous rate cuts continue to support the ongoing recovery.
• Overnight Japan will release January CPI, with December CPI at 2.0% y/y and CPI excl. fresh food and fuel at 2.3% y/y. The Bank of Japan's December minutes highlighted the growing impact of a weak yen on inflation, as firms continue to pass on rising costs. The central bank maintained its hawkish inflation outlook, revising core inflation forecasts higher through to 2027, and signalled vigilance over mounting price pressures that could prompt further rate hikes. 

Economic and market news

What happened yesterday

In the US, the Fed kept interest rates at 3.50-3.75%. Chair Powell struck a balanced stance, highlighting the economy's unexpected resilience and stabilisation in labour market data. Economic growth was described as "solid" rather than "moderate," and concerns about downside risks to employment were notably removed, signalling a lower likelihood of near-term rate cuts. Governor Waller's dissent over a rate cut presented a mildly dovish surprise, but the overall tone of the meeting was mixed. Despite the recent weakening of the USD, Powell avoided addressing its inflationary risks directly, leaving markets largely unmoved. For details see Fed review: Balanced and optimistic, 28 January.

In relation to the USD, Treasury Secretary Scott Bessent stated that the Trump administration is committed to a 'strong dollar policy' and that the US is "absolutely not" intervening in USD/JPY, addressing speculation about currency market interference. His comments provided some relief for the USD, lifting USD/JPY back above 153 and EUR/USD remained steady in the mid-1.19 to 1.20 range. 

In Canada, the Bank of Canada left policy rates unchanged as expected, citing inflation projections close to target during the forecast period. The BoC showed no inclination to signal imminent rate cuts or hikes, pointing to uncertainties surrounding geopolitics and trade.

In geopolitics, the US has urged Iran to reach an agreement over its nuclear programme, warning of potential military action if a deal is not struck. President Trump stated that an "armada" is heading toward Iran and hinted at large-scale military intervention. Meanwhile, US forces will conduct a multi-day air exercise in the Middle East as Washington bolsters its military presence amid heightened tensions.

Equities: Equities little changed yesterday in a wait-and-see mode ahead of the tech earnings reports released after closing. Tech continued to outperform even before these numbers, with semis in particular extending recent outperformance (Intel and TXN +11%!). A slight cyclical bias in the sector preference while small caps continued to lag. US futures are slightly higher this morning.

The monetisation of AI and capex plans in focus. Meta was the positive standout with sales rising 24% y/y and AI contributing through advertising efficiency. Microsoft grew top line impressively as well at 17% y/y, but Azure revenue grew 'only' 38%, a percentage point below the rate in Q3. This drove shares in different directions in the aftermarket with Microsoft -6% and Meta +10%. Capex was bigger than expected, but the capex surprises were at least lower than in Q3. Meta updated their capex outlook to around USD 115-135bn for 2026, which would imply almost a doubling from its 2025 capex spend, but not miles from consensus expectations at 110bn. As for actual spend, capex came in at 22,1bn which was 5% more than expected. Microsoft's spend rose to 37,5bn and 9% more than expected. However, Microsoft beat capex spend with 15% and Meta 6%, so in this sense it was a more moderate quarter this time.

FI and FX: The USD slide took a breather yesterday and Treasury Secretary Bessent's comment that the US is "absolutely not" intervening in USD/JPY helped push USD/JPY back above 153. Despite the tentative USD stabilization, we saw AUD/USD continuing moving higher as markets are positioning themselves for an RBA hike next week. Scandies continue to be supported in the current sentiment, with further SEK and NOK strength and EUR/DKK hitting the lowest levels since September. Despite the elevated FX volatility of late, we have not yet seen the corresponding pick-up in bond volatility. Yesterday was no exception, with relatively muted moves in rates both before and after Fed.