European Breakfast Briefing - Jan 29, 2025

European Breakfast Briefing

Market Snapshot

• FX: US dollar holds Tuesday's rebound ahead of Fed decision; yen leads gains; Antipodeans underperform after Aussie Q4 CPI undershoots expectations
• BONDS: US Treasuries hold gains from mid-Jan ahead of Fed's decision; ACGBs outperform after Q4 CPI; JGB futures hold nearly-flat overnight showing
• GOLD: Flat in Asia, hovering below record highs ahead of the Fed
• OIL: Holding lower for the week as markets assess tariff, DeepSeek threats to crude
• STOCKS: E-minis virtually flat in Asia; Nikkei 225 regains some ground after three-day streak of losses

Highlights

China

• No yuan fix today - China out for holiday

Japan

• Jan Consumer Confidence Index 35.2; BBG median 36.5; Dec 36.2

Australia

• Q4 CPI +0.2% Q/Q; BBG median +0.3%; Q3 +0.2%
• Q4 CPI +2.4% Y/Y; BBG median +2.5%; Q3 +2.8%
• Q4 Trimmed Mean CPI +0.5% Q/Q; BBG median +0.6%; Q3 +0.8%
• Q4 Trimmed Mean CPI +3.2% Y/Y; BBG median +3.3%; Q3 revised +3.6%, was +3.5%
• Q4 Weighted Median CPI +0.5% Q/Q; BBG median +0.6%; Q3 +0.9%
• Q4 Weighted Median CPI +3.4% Y/Y; BBG median +3.5%; Q3 revised +3.7%, was +3.8%
• Dec CPI +2.5% Y/Y; BBG median +2.5%; Nov +2.3%
• Dec Trimmed Mean CPI +2.7% Y/Y; Nov +3.2%

New Zealand

• Dec Filled Jobs SA +0.1% M/M; Nov revised +0.2%, was +0.3%

Asian Morning Session

FOREX: The US dollar (DXY: 0.0%) trades a little below neutral levels in otherwise lacklustre trade, with participants happy to keep it at current ranges ahead of the Fed's monetary policy decision (due at 1900GMT), largely retaining Tuesday's 0.5% higher daily close at current levels. With markets all but fully pricing in expectations for the Fed to make no change to interest rates later, focus in the greenback has swung between Trump's supposed tariffs on Mexico, Canada, and China (to come by 1 Feb - this Saturday), while reverberations from the DeepSeek-inspired selloff in risk assets (and the dollar) on Monday have continued to play out

• The yen has traded a little on the strong side today, leading gains amongst G10 FX peers, although USD/JPY has flipped between somewhat shallow gains and losses so far. USD/JPY currently deals ~20pips softer at ~155.35 at writing, holding around the 155.00 level as participants have awaited the Fed's monetary policy decision. Today's release of the minutes to the BOJ's Dec monetary policy meeting did little harm to the space (more details on the minutes below). USD/JPY has so far avoided a return to Monday 5.5-week low of 153.72 as haven demand from then has cooled off
• The Antipodeans have brought up the rear of the G10 FX basket in Asia-Pac dealing although both AUD/USD (-0.2%) and NZD/USD (-0.1%) are trading off session lows (at 0.6227 and 0.5654) at writing. The softness in both the Aussie and Kiwi today had mainly come after the release of Australia's Q4 CPI report (details below), with the softer-than-expected prints for headline, trimmed mean, and weighted median CPI seen sending the Australian Dollar lower as participants sealed odds of a 25bp rate cut come the RBA's upcoming 18 Feb monetary policy decision
• CHF/USD (+0.1%) has nudged higher, paring some of Tuesday's ~0.3% drop, although this leaves the pair only ~0.3% firmer on the week so far (down from as much as 1.0% higher on Monday at one point), representing a trimming of haven-inspired gains amidst a broad selloff in risk assets (and some non-risk assets) from early in the week

BONDS: Treasuries are a little richer across the curve as we have worked our way towards the Fed's monetary policy decision, with yields seen trading at around their lowest levels seen in at least a month - representing the decline in hawkish Fed expectations from mid-Jan (when Treasury yields had most recently peaked) following the release of the better-than-expected CPI outturn then (when the US CPI report for Dec had shown core CPI coming in lower than forecast). Cash Treasuries run 1.0-1.5bp richer across the curve, with the belly leading the bid

• TYH5 is +0-06+ at 109-07+ on somewhat lower volumes of ~61K lots, with proximity to impending event risk and widespread holidays in the Asia-Pac region (owing to the Lunar New Year/Spring Festival holiday) likely limiting matters here. The contract currently trades well through Tuesday's intra-day peak, reversing Tuesday's 0-04 lower close at current levels
• Aussie bonds outperformed in Asia, surging after the release of Q4 CPI early on, with participants seen cementing odds of a 25bp rate cut come the RBA's next monetary policy decision on 18 Feb (details of the data release below)
• JGB futures operate not that much changed from its slightly softer overnight close (-2 ticks at 141.16 at writing), having erased an early bid to fresh session highs (+11 ticks at 141.29) as we have worked our way across the session, with nothing by way of a lasting, meaningful reaction to the earlier release of the minutes to the BOJ's Dec monetary policy meeting seen

GOLD: Gold is very slightly softer at ~$2,762/oz at writing, trading within a tight $5/oz range established in Asia-Pac dealing so far. The precious metal has incrementally added to Tuesday's ~$23/oz higher close at current levels, with that move seen erasing the bulk of the drop seen on Monday, leaving the precious metal only incrementally softer on the week. Gold currently sits a short distance below last Friday's near-three-month peak of $2,786.01/oz as we have approached the Fed's monetary policy decision for Jan (due later at 1900GMT - a hold is widely expected), recalling that it had come to within a whisker of a challenge of its 31 Oct record high of $2,790.10/oz then

• See: GOLD: Holding Monday's Drop; 31 Oct Record High Remains Elusive As Tariff Uncertainty Weighs; Trump Says Wants Tariffs "Much Bigger" Than 2.5%

OIL: WTI (Mar contract) and Brent (Apr) are ~$0.20 softer apiece to print ~$73.60 and ~$76.30 respectively, having reversed a very modest set of gains seen at the open, erasing part of the limited ~$0.30-$0.40 higher close seen on Tuesday. The overall fallout in crude prices from the broader market's reaction to DeepSeek (recalling the plummet seen in several assets on Monday) has been rather limited, with WTI and Brent currently trading only ~$1 below last Friday's closing levels

• See: OIL: Crude Holds Recent Losses As DeepSeek, Tariff Matters Weigh; US Inventory Data Up Next

STOCKS: Noting that several markets in the Asia-Pac region are out for holidays today, US e-minis currently deal flat to 0.1% softer apiece at writing, with S&P500 contracts seen narrowly leading the way lower, paring some of their gains seen from Tuesday when major stock indexes had recovered a chunk of the losses seen at the start of the week (noting that much of the high-profile losses in the S&P500 and the NASDAQ on Monday had been focused on a few names - mainly Nvidia)

• The Japanese Nikkei 225 (+0.9%) has rebounded somewhat from yesterday's ~1.4% lower close as well, putting it on track to snap a three-session streak of losses seen prior. Sentiment here has recovered in tandem with the rally seen in US equities on Tuesday, with semiconductor-related names notably outperforming alongside familiar heavyweights such as Fast Retailing (+1.4%), Recruit Holdings (+2.5%), and Keyence Corp (+0.9%)

JAPAN: Early in Tokyo dealing, the BOJ released the Minutes to the Dec monetary policy meeting, showing that Board members generally had a flat-to-positive view of conditions and the outlook for the Japanese economy, with policymakers observing that private consumption, corporate profits, and employment, and income gains were continuing on "moderate" uptrends, while industrial production and exports had been stagnant (BOJ link to Minutes here)

The Board ultimately decided to hold off on a rate hike as they said that more information on domestic wage/price developments were needed, while uncertainty around the outlook in overseas economies remained unclear - particularly that of the (then) incoming US administration. One member also highlighted the low-liquidity state of markets in December as another factor for not rushing to increase interest rates then, and that "more time should be taken in examining the impact of the July 2024 policy interest rate hike"

• See more writing here: JGBS: Futures Reverse Early Gains; BOJ Dec Minutes Shows Members Opted To Wait For More Information Amidst Elevated Uncertainty

AUSTRALIA: Q4 CPI undershot expectations across the headline, trimmed mean, and weighted median CPI measures, marking a quicker-than-forecast deceleration from the Q3 result. While headline CPI has been trending within the RBA's 2% - 3% target band for inflation for two straight quarters now, focus has been largely centred around the trimmed mean measure, owing to well-documented wariness over the impact of government subsidies on the former. That being said, when accounting for said subsidies from the government's Energy Bill Relief Fund, headline CPI would have come in at +2.6% Y/Y - notably still within the RBA's 2% - 3% target band. Apart from that, the trimmed mean measure inched closer to the upper bound of the target band while also undershooting the RBA's own forecasts of +3.4% Y/Y (and +0.7 Q/Q) issued in the Nov SoMP (ABS data release here, media release here; RBA Nov SoMP here)

NEW ZEALAND: RBNZ Chief Economist Conway spoke earlier in the session, giving a speech titled "Beyond the cycle: Growth and interest rates in the long run". In essence, while he didn't offer a different view of the near-term economic outlook from the RBNZ's Nov Statement, he said that lower interest rates globally and slow productivity growth domestically will have served to pull the neutral rate of interest lower across the longer term, although that trend is now flattening off (and even reversed recently). The RBNZ places the long-term nominal neutral interest rate at between 2.5% - 3.5% - essentially no change from that seen in the Nov SoMP, while also noting that the OCR is now at 4.25% (RBNZ link to engagement here)

Conway said that as the OCR gets closer to the middle of the 2.5% - 3.5% neutral OCR estimate band, it would be appropriate for policymakers to move more slowly re: tweaks to interest rates - again no change from the Nov Statement here

With the upcoming Feb monetary policy meeting expected to see the RBNZ cutting rates by 50bp - taking the OCR to 3.75%, a smidge above the upper bound of the neutral rate estimate range, cues to the outlook from the Feb Statement after the 18 Feb monetary policy decision are expected to be the next point of interest on this front, with participants expected to parse how quickly the RBNZ will be seeking to cut rates in '25

Certainly, OIS markets currently see the RBNZ as reducing the OCR to 3.00% (notably the mid-point of the 2.5% - 3.5% estimate of neutral) possibly by as quickly as the Oct '25 monetary policy meeting, which may be a touch too quick for the Reserve Bank. Furthermore, some have brought up the possibility that the RBNZ is under-estimating the neutral rate of interest, which may further upend views that the RBNZ will continue to opt for a rapid pace of cuts as we receive more updates on the economy in '25

NZ FinMin Willis said that the '25 Budget (to be announced on 22 May) will contain measures that "go beyond the traditional budget focus on spending and savings initiatives", and that "our government intends to introduce several legislative and regulatory measures at the budget focused on removing barriers that hold back job and wealth creation"

This comes as fiscal room for the government to juice a rebound in economic activity remains limited, considering that they are currently racing to get the fiscal deficit back into a surplus at the soonest possible date while avoiding a general increase in taxes - a tall ask, by any measure. The Treasury forecast in Dec that the NZ deficit will return into a surplus by '29, although the current NZ government is looking to shorten that to '28 at present

European Preview

Turning to Europe, the Riksbank's monetary policy decision for Jan is due at 0830GMT, with OIS market still pointing to some uncertainty re: if the central bank will opt for a 25bp rate cut or not. Nevertheless, 20 of 22 analysts polled by BBG see a 25bp cut on the cards, taking the policy rate to 2.25 (see: The Riksbank should cut 25bp this week)

Beyond that, the euro area will be updating on it's December M3 Money Supply YoY, while Germany will release it's GfK Consumer Confidence data and Spain will post it's 4th quarter GDP numbers. Survey of twenty-nine economists conducted by Bloomberg News put Spain's Q4 2024 GDP forecast unchanged at 0.6% q/q. They expect Spain's economy to expand 3.1% in 2024 and 2.3% in 2025

Central bank-speak in Europe will be headed by BOE Gov Bailey and FPC members Benjamin, Oakes, and Bowe, speaking out of a Treasury Committee hearing on the Nov Financial Stability Report

Over in NY hours, US Fed will determine the targeted range for the Fed Funds rate, the IORB rate will also be determined. Other items on the data docket includes December Advanced Goods Trade Balance, Wholesale Inventories MoM and December Retail Inventories MoM

Fed officials will be under their usual pre-FOMC blackout - decision is due on 29 Jan

Looking at matters up north, the BOC is set to deliver a 25bps cut, with the country facing threat of tariffs and political uncertainty

On the data front,

US

• Weekly MBA Mortgage Applications will be published. (vs 0.1% prior)
• US Dec Advance Goods Trade Balance is expected to fall by -$105.5b. The previous reading was -$102.9b.
• US Dec P Wholesale Inventories MoM is expected to increase by 0.2% (vs -0.2% prior)
• US Dec Retail Inventories MoM is expected to increase by 0.2% (vs 0.3% prior)
• US FOMC Rate Decision (Upper Bound) is expected to increase by 4.5% (vs 4.5% prior)
• US FOMC Rate Decision (Lower Bound) is expected to increase by 4.3% (vs 4.3% prior)
• US Fed Interest on Reserve Balances Rate is expected to increase by 4.4% (vs 4.4% prior)

Eurozone

• Eurozone Dec M3 Money Supply YoY is expected to increase by 3.9% (vs 3.8% prior)

Germany

• Germany Feb GfK Consumer Confidence will be published. The previous reading was -21.3

Spain

• Spain 4Q P GDP YoY is expected to increase by 3.2% (vs 3.3% prior)
• Spain 4Q P GDP QoQ is expected to increase by 0.6% (vs 0.8% prior)

Sweden

• Sweden Dec GDP Indicator SA MoM will be published. (vs 1.4% prior)
• Sweden Dec GDP Indicator WDA YoY will be published. (vs 2.1% prior)
• Sweden 4Q GDP Indicator SA QoQ is expected to increase by 0.3% (vs -0.1% prior)
• Sweden 4Q GDP Indicator WDA YoY is expected to increase by 1.1% (vs -0.1% prior)
• Sweden Dec Household Lending YoY will be published. (vs 1.6% prior)
• Sweden Riksbank Policy Rate is expected to increase by 2.3% (vs 2.5% prior)

Italy

• Italy Jan Consumer Confidence Index is expected to increase by 96.5 The previous reading was 96.3.
• Italy Jan Manufacturing Confidence is expected to increase by 85.8 The previous reading was 85.8.
• Italy Jan Economic Sentiment will be published. The previous reading was 95.3.

Austria

• Jan Unicredit Bank Manufacturing PMI will be published. The previous reading was 43.3

Belgium

• Belgium 4Q P GDP SA QoQ will be published. (vs 0.3% prior)

Switzerland

• Switzerland Jan UBS Survey Expectations will be published. The previous reading was -20

Canada

• Bank of Canada Rate Decision is expected to see the policy rate reduced to 3.00% (vs 3.25% prior)

TREASURIES CLOSE

Treasury yields rebounded slightly Tuesday as equity and commodities markets steadied and as investors digested broader implications of the DeepSeek AI platform on valuations across the industry.

• Stronger-than-expected core Durable Goods Orders lifted the Atlanta Fed’s estimate for Q1 GDP to 3.2% (3%), boosting sentiment on the session.
• However, January Consumer Confidence disappointed, falling back similarly with other polls from PMI and UMich that reflect a cooling of post-election optimism and fading fears over tariffs and inflation.
• Ahead on Wednesday’s FOMC decision, the rate futures market is currently discounting around 50 bps in easing over the rest of the year, in line with current Fed forecasts.
• See: Things That Stick Out: FOMC Preview Edition and Things That Stick Out: Fed Preview Update Edition

The benchmark UST 2- and 10-yr yields ended little changed at 4.20% and 4.54%, respectively.

The Treasury auctioned $85bln 42-day cash management bills which drew 4.260% with 28.02% allotted at the high. The bid to cover was 2.71.

• Indirect bidders were awarded 61.1% and directs 4.5% which left primary dealers with 34.5%

The discount margin on the $30bln 2yr FRN was 0.098% with 88.62% allotted at the high. The bid/cover was 3.01 versus 2.98 previously.

• Indirects took 77.5% versus 74.8% previously with Direct bidders coming away with 1.7% versus 0.9%. Primary dealers were awarded 20.9% versus 29.5% last.

The $44bln 7-year note auction was decent. The notes came at 4.457%, 0.9bps through the 1 p.m. screen bid of 4.466%, with 49.84% at the stop. The bid/cover ratio was 2.64 vs 2.76 previously and a prior 5-auction average of 2.66.

• Indirects were awarded 67.1% versus 87.9% prior and a prior 5-auction average of 73.9%, while direct bidders came away with 23.1% versus 2.9% last and a prior 5-auction average of 16.1%. Primary dealers were awarded 9.9% versus 9.3% last and a prior 5-auction average of 9.8%.

The New York Fed RRP demand was $112.760bln.

There were no bids for the New York Fed repo operation.

FX CLOSE

Dollar ignores soft data set as tough tariff talk weighs on FX markets; FOMC on deck

• EM outperforms on risk recovery; momentum from Trump Taiwan threat carries over to US session
• Durable Goods disappoints, with headline falling 2.2% and the prior month revised lower by 0.8 bps to -2.0%
  • Ex-transportation flat at 0.3%
• FHFA House Price Index (MoM) rose 0.3% in November
• Consumer Confidence dips to 104.1, a sharp decrease from last months 109.5
  • Present situation down to 104.1 from 109.5 prior
• Richmond Fed Manufacturing rises to -4 from -10 prior
• Dallas Fed services activity declines to 7.4 from 10.8 prior
• US Equities bounce back from yesterdays washout
  • Nasdaq recovers it's 50DMA nr 21504.21
• Gold within 1% of all-time highs and important 2800.00 psychological level

Euro, Sterling remain on the back foot in quiet trade despite disappointing US durable goods, consumer confidence data

• Hawkish tariff commentary continues to provide a tailwind for the dollar ahead of the FOMC tomorrow
• French consumer confidence rose to 92
• Irish GDP shows diverging data from QoQ and YoY view
  • QoQ declined 1.3% from 3.5% prior
  • YoY rose 6.3%, sharply above the 2.9% previously
• The Bank of England announced a repo facility for non-bank financials
  • The BoE will hope to stave of a repeat of the 2022 bond meltdown
  • Emergency cash will be available to insurers, pension funds

JPY, CHF underperform on recovery in global equities

AUD, NZD retreat from their respective 50DMA's on China tariff worries despite uptick in stocks

CAD liquidity overhang weighs as Canadian government plans Covid-style liquidity buffer in response to tariff threats

MXN enjoys relative reprieve on risk appetite despite the February 1st deadline being days away

• See: Colombia Bows to Tariffs — Will Mexico follow suit?

DATA RELEASES

CENTRAL BANKS

AUCTIONS

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