Sentiment remained upbeat across markets this week as President Trump's inauguration went by without the immediate implementation of trade tariffs, while comments that he would prefer not to impose tariffs on China surprised. That set the tone for higher equities and a weaker US dollar. A hawkish 25bps hike from the Bank of Japan on the back of upward revisions to the inflation outlook supported the JPY. A lull of other event risks ahead of next week's Fed and ECB meetings saw headlines from the Davos forum gain more focus than might otherwise have been the case - notably around President Trump's call for lower oil prices and interest rates.
The set up into next week's Fed meeting looks straightforward with markets priced for the FOMC to press pause on its easing cycle. Caution is expected to prevail amid uncertainty over the timing and design of policies under the Trump administration, while the 256k outcome on December payrolls that drove the unemployment rate to fall to 4.1% confirmed ongoing strength in the labour market. However, markets drew confidence from last week's CPI and PPI reports that the disinflationary process has not been derailed, pricing in further Fed easing in 2025 - albeit at a more gradual pace.
Turning to the ECB, the Governing Council is expected to continue its easing cycle with a 25bps cut next week. Comments at Davos from ECB President Lagarde highlighting increased confidence in the trajectory of inflation back to target broadly aligns with market expectations for the key policy rate to be cut towards 2% over the course of the year from its current level of 3%. Restrictive monetary policy has weighed materially on growth in the euro area, while the outlook has been subject to further headwinds from trade tariffs. January's preliminary PMI reading was slightly improved at 50.2 from 49.6 in December but still consistent with an economy in which growth has essentially stalled.
From a local perspective, attention is laser focused on next week's long-awaited Q4 CPI report. The key outturns are set to decide whether or not the RBA delivers on a 25bps rate hike in February that markets have already largely priced in. Consensus is for headline CPI to print at 0.4%q/q and 0.6%q/q on the trimmed mean or core rate. Watch out for my full preview of the CPI report ahead of the release.
