US bond and stock markets are closed today for President’s Day
Markets
January US CPI inflation numbers extended last week’s rally in US Treasuries. US yields shed 3.9 bps to 5.5 bps with the belly of the curve outperforming the wings. The US 2-yr yield closed exactly at key support (3.4%) while the US 10-yr yield lost minor support at 4.10% to end at the lowest level since the end of November (4.05%). Near term Fed rate cuts bets remain low (10% for March, 30% for April), but investors become more confident in the path towards 3% by year-end. Diving into the inflation figures, headline prices rose by 0.2% M/M with the core index up 0.3% M/M. The annual number slowed from 2.7% Y/Y to 2.4% Y/Y with core inflation down to 2.5% from 2.6%. Core services (ex. housing) increased by 0.56% M/M, the biggest increase in a year. In Y/Y terms, this closely watched indicator (for it measures “domestic” inflation) by the Fed fell to the lowest since 2021. But a more dynamic annualized number based on the three-month moving average marched to the highest since April 2024. Markets ignored this detail, but based on those core pressures the KBC nowcast for February rises to 2.52% Y/Y for headline inflation and 2.54% Y/Y for core. Both core and energy prices push the unconditional forecast back to 2.9% for headline and 2.7% for core by the spring. Atlanta Fed Goolsbee raised the issue on Friday evening, saying that high services inflation is worrisome. He feels that we’re not on a path back to 2% inflation yet, but that we’re rather stuck around 3%. He wants to see progress before backing a frontloading of rate cuts. Friday’s post-CPI move remained limited to US Treasuries with EUR/USD going nowhere at 1.1870 and US stock markets ending their final session of the week close to unchanged.
US bond and stock markets are closed today for President’s Day. China is closed for the week to celebrate Lunar New Year. Reduced trading volumes and the empty eco calendar set the tone for subdued trading today. The agenda remains thin later out with February PMI survey’s on Friday amongst the sole highlights. The monthly UK eco update gets some more attention as labour market numbers (tomorrow), CPI (Wednesday) and retail sales (Friday) will further shape near term policy expectations for the Bank of England. Odds of a March rate cut rose to 65% in the wake of the dovish hold early February. BoE governor Bailey was/is the pivotal vote and he indicated readiness to pull the trigger especially in case of a further deterioration of circumstances in the labour market. The EUR/GBP 0.8750 resistance area is the one to watch.
News and views
Japanese growth in 2025’s final quarter came in materially lower than expected. The quarterly pace of 0.1% (0.2% annualized) missed the 0.4% bar and came after a downwardly revised Q3 to -0.7% from -0.6. Details were less worrisome though, with weak public investments and notoriously volatile private inventories being the main culprits. They respectively subtracted 0.1 and 0.2 ppts from growth. But PM Takaichi’s strong mandate and election pledges suggest government spending is about to shift in higher gear. Private consumption remained tepid but nonetheless added 0.1 ppts to growth. Fixed capital formation supported the headline through a 0.2 ppts contribution. Net exports flatlined. The GDP price deflator in Q4 eased slightly to 3.4% from an upwardly revised 3.5% in Q3. That remains among the highest (outside the years shortly after the pandemic) in the last few decades. Japanese yields shed a marginal 2 bps at the front end of the curve in a kneejerk reaction this morning and JPY underperforms global peers. USD/JPY rises a tad to north of 153. That said, these numbers do not disrupt the Bank of Japan’s case for further rate hikes at all. Japanese money markets are flipflopping between June and July for a move to 1%.
Germany’s finance minister Lars Klingbeil said the government is considering to exempt borrowing for a planned raw materials fund from the debt brake. The decision hasn’t been taken yet but Klingbeil acknowledged that the money is needed if it wants to reduce dependencies from geopolitical rivals such as China but also potentially from the US. Germany wants to secure supply chains (of raw materials and critical minerals) by creating reserves. It already launched a state-backed raw materials fund two years ago but its small size (€1bn) raises serious questions. Excluding additional investments would come after German chancellor Merz in March last year announced something similar for defensive spending.
Author
KBC Market Research Desk
KBC Bank
