Risk of intervention in JPY increases

In focus today

In Germany, the Ifo indicator for January is released. The PMI report released on Friday rebounded more than expected so it will be interesting to see if the Ifo index shows the same picture of the economy. 

The key events for the remainder of the week include rate decisions in the US, Sweden, and Canada on Thursday. On Friday, the focus will shift to European inflation, with preliminary data for January from Spain and Germany.

Economic and market news

What happened over the weekend

US-brokered talks between Russia and Ukraine concluded on Saturday without any agreements, as reflected in statements from all three parties. Despite the lack of a deal, both Moscow and Kyiv expressed openness to continued dialogue, with a new round of discussions scheduled for next Sunday. The talks took place amid ongoing hostilities, including Russian airstrikes that left over a million Ukrainians without power in freezing winter conditions.

In Japan, PM Takaichi vowed to counter speculative market activity following Friday's sharp yen strengthening, warning of potential intervention if volatility escalates. The yen's rally, driven by intervention risk, has had spillover effects on the broader USD, which may find some support from the Federal Reserve's cautiously hawkish stance and resilient economic data.

In the US, domestic political tensions escalated after several Democratic senators threatened to block a Department of Homeland Security funding bill over calls for reforms and accountability within agencies like ICE. This move, triggered by public safety concerns following a fatal shooting involving a Border Patrol agent, raises the likelihood of a partial government shutdown as funding deadlines approach.

What happened Friday

In the euro area, January PMIs surprised to the downside. The composite PMI remained steady at 51.5, falling short of the consensus estimate of 51.9. The weaker-than-expected figure was primarily driven by a decline in the services PMI, which dropped to 51.9 from 52.4, against market expectations of a rise to 52.6. Meanwhile, manufacturing PMI showed a slight improvement, rising to 49.4 from 48.8, but it remains in contraction territory.

French PMIs highlighted diverging trends, with the services PMI falling to 47.9, signalling contraction, while manufacturing PMI surprised to the upside at 51.0. Although the services sector has been volatile, its current level aligns with earlier quarters when the economy still managed to grow. Germany's PMIs provided a positive surprise, with the composite PMI rising to 52.5, driven by gains in both services and manufacturing. However, a sharp drop in the services employment index raises concerns, making labour market developments key to watch.

In the US, January flash PMIs were in line with expectations, with composite PMI at 52.8 (prior: 52.7). Services price indices continued to moderate, with little change in employment indices. Manufacturing showed a modest improvement in new orders (50.8 from 49.1), though export orders weakened further (47.3 from 49.1).

The final University of Michigan consumer survey indicated that 1-year inflation expectations softened to 4.0% in January, down from the preliminary estimate of 4.2%. While this represents the lowest level since January 2025, it remains significantly higher than the 3.3% recorded at that time. Additionally, consumer confidence improved further in the final January release. The combination of higher confidence and slightly lower inflation expectations is likely to be viewed positively by the Fed.

In Sweden, employment grew more than expected in Q4, rising by 0.6% q/q. However, unemployment remains elevated and rose unexpectedly to 9.1% in Q4, driven by a higher-than-anticipated number of individuals entering the labour market. Indicators suggest that labour demand continues to improve, pointing to potential significant progress for the labour market this year. While the strong employment growth underscores ongoing improvements, Friday's high unemployment figures could prompt the Riksbank to adopt a cautious stance on labour market prospects in its upcoming announcement.

Equities: The tariff relief proved short-lived in equity markets, with most indices fading to unchanged closes on Friday. As a result, the earlier tariff-driven sell-off has not yet been fully retraced. Value cyclicals like industrials and financials that would typically bounce as politics de-risk, declined ~1% on Friday. Global small caps, which have performed strongly year-to-date, surprisingly lost momentum on Friday, with the Russell 2000 slipping nearly 2% on Friday. Meanwhile, US mega-cap technology stocks were mostly higher ahead of this week's earnings releases, reversing the recent small caps versus big tech trade.

FI and FX: Broad USD posted its largest weekly decline since May last week. USD/JPY starts the week around 154 following Friday's possible intervention by Japanese authorities, and EUR/USD looks to have 1.19 in sight. Scandies continues to benefit from the broad USD weakness, but strategy-wise we still view the latest declines in EUR/SEK and EUR/NOK both as temporary. US yields ended the week more or less unchanged, whereas European rates closed higher. This week's main event is the Federal Reserve meeting on Wednesday, where the FOMC is widely expected to take a pause in the easing cycle, which is also our call.