Slow Start to a Busy Week

Today, all eyes are on the German Ifo index. It will be intriguing to determine if the Ifo numbers align with the stronger-than-expected release of the German PMI from Friday.

This week is expected to be quite active, especially due to several central bank meetings. On Wednesday, the Riksbank, the Bank of Canada, and the Federal Open Market Committee (FOMC) will all announce their interest rate decisions. Following this, the European Central Bank (ECB) will meet on Thursday.

Additionally, there are significant economic announcements scheduled. In the eurozone, the flash GDP data for Q4, along with country-specific GDP figures and January's flash inflation from Spain, will be released on Thursday. Then, on Friday, Germany and France will publish their January inflation data. In the United States, we can expect the January durable goods orders report on Tuesday, followed by the Q4 GDP release on Thursday and the PCE inflation data on Friday.

Recent Economic and Market Developments

Overnight Summary

In China, the NBS PMIs showed a decline in January, with the composite measure slipping to 50.1 (previously 52.2). Both the manufacturing and services indices posted weaker results. Notably, the manufacturing index fell short of expectations, decreasing to 49.1 (consensus: 50.1, previous: 50.1), marking its lowest level since August 2024. The NBS attributed this drop to the upcoming holiday that starts Wednesday. They also reported that industrial profits fell by 3.3% over the year.

On the geopolitical front, the US has extended the ceasefire between Israel and Lebanon until February 18. The initial ceasefire, which was established in late November, halted a conflict that had lasted 14 months between Israel and Hezbollah.

Reflecting back on Friday's economic data, it was a pivotal day dominated by PMIs from the eurozone, UK, and the US. For the euro area, the composite PMI surprisingly rose to 50.2 (consensus: 49.7, prior: 49.6). The rise was driven mainly by the manufacturing PMI, which climbed to 46.1 (cons: 45.3, prior: 45.1). However, this indicates continuing production declines. The services PMI remained stable at 51.4 (cons: 51.5, prior: 51.6), indicating ongoing expansion and supporting a expected 0.2% quarter-over-quarter increase in Q1 GDP. The labour market remains resilient, as suggested by the employment PMIs for January.

Similarly, the UK PMIs also exceeded expectations, suggesting improved economic activity. The composite measure for the UK increased to 50.9 (consensus: 50.1, prior: 50.4), with services rising to 51.2 (cons: 50.8, prior: 51.1) and manufacturing at 48.2 (cons: 47.0, prior: 47.0). The service sector is primarily driving this growth, albeit modestly. While input and output prices are still under pressure, which is a concern for the Bank of England (BoE), we believe that the BoE can still comfortably proceed with a 25 basis point cut at their next meeting on February 6.

In contrast, the US PMIs presented a mixed picture. The composite PMI dipped to 52.4 with the services PMI unexpectedly dropping to 52.8 (cons: 56.5, prior: 56.8). Meanwhile, the manufacturing index increased to 50.1 (cons: 49.7, prior: 49.4). Some sub-components such as services business activity and new orders also saw declines, though both price and employment indices increased, suggesting that the details may not be as soft as the headline figures indicate. Conversely, the manufacturing data looked more solid, with improvements in firms' order-inventory balances and recovery in new orders across domestic and export demand. Overall, the data signals a more ambiguous view of the economy across services and manufacturing.

In the US political landscape, President Trump had threatened to impose emergency tariffs of 25-50% on Colombia after the country refused military flights carrying deportees. However, these tariff threats were shelved after an agreement was reached on Sunday. Though Colombia only accounts for approximately 0.5% of US imports, the situation may serve as a warning to other nations moving forward.

On the equities front, global markets fell on Friday after experiencing eight consecutive days of gains. Interestingly, only the tech and energy sectors saw declines, while most other sectors remained positive. The day started well but lost momentum as the day progressed. Market movements can often be linked to specific events, but this particular Friday did not have any standout reasons, especially with satisfactory European figures being released. By the end of Friday, the Dow Jones had dipped by 0.3%, the S&P 500 also down by 0.3%, the Nasdaq fell by 0.5%, and the Russell 2000 decreased by 0.3%. In Asian markets this morning, most equity indexes are in the red, with Nasdaq futures down more than 2% at the time of this report.

This downturn is primarily attributed to concerns surrounding DeepSeek AI and the potential threat to US leadership in AI, semiconductor, and technology sectors. Although it is early in the situation, it’s a development that cannot be ignored, especially given the high valuations of AI-related stocks in the US. Any disruption to this narrative could significantly impact market conditions. It's worth noting that this week is also the peak of the earnings season, with five major companies, referred to as the MAG 7, set to report their earnings.

In fixed income, euro rates closed up by 3 basis points in the 10-year point on Friday after experiencing significant volatility. The better-than-expected PMIs, especially from Germany, surprised market participants, effectively removing 6 basis points of the ECB's expected cut pricing for the year. Currently, the market anticipates just 88 basis points of cuts. We continue to advocate the ECB taking its policy rate into easing territory, below 2%. During the trading session, the yield on 10-year Bunds rose by 6 basis points at one point but retracted after the US PMIs underwhelmed markets.

In terms of foreign exchange, the EUR/USD pair crossed the 1.05 mark during Friday’s trading session following a positive set of euro area PMIs. However, overnight, the USD surged back as Trump reignited concerns over global tariffs. The GBP managed to recover some ground towards the end of last week after a shaky beginning to the new year due to ongoing fiscal anxieties. In the Scandinavian currencies, it has been a volatile week for the NOK, influenced by Trump's negative comments about oil prices, and by the lack of concrete actions on global tariffs, alongside a weakening USD and friendlier relations with China which have contributed to a strengthening of the NOK.

Ifo, PMI, GDP, inflation, equities, tariffs, manufacturing