A broadly downbeat week across markets that saw US and European equities decline while currency pairs were offered on the US dollar side. A vacuum created by a thin calendar for top-tier data and other events left markets to speculate that the US exceptionalism story may be faltering - disappointing results from retail giant Walmart a key factor here - with uncertainty over tariffs also a headwind to the growth outlook. Recent data on US inflation and the labour market has cast doubt that the Fed will be able to resume its easing cycle after January's pause. The Japanese Yen has received the bulk of attention from traders, benefitting from safe-haven flows and strong inflation data that has boosted pricing for more BoJ tightening. Central bank news focused on events locally as the RBA (-25bps) and RBNZ (-50bps) cut policy rates, decisions that were discounted into market pricing ahead of those announcements.
The post-meeting narrative to the RBA's 25bps cut to 4.10% on the cash rate (reviewed here) continues to focus on the Board's reluctance to endorse the 50bps of additional easing priced into the Australian rates curve. On decision day and at Friday's parliamentary testimony, Governor Bullock highlighted the risk that disinflationary progress could slow if rates are eased too quickly, leaving inflation above the midpoint of the 2-3% target band. That was the exact scenario the RBA's updated forecasts painted in the February Statement on Monetary Policy under an assumption that the cash rate is cut in line with market pricing to 3.6% by the end of the year. It may also be noteworthy that the RBA characterised this rate cut as reversing the final hike from late 2023, potentially implying that an easing cycle is not justified on disclosed form.
Strength in the labour market largely explains the RBA's caution around further easing. January's Labour Force Survey confirmed employment momentum continued into 2025 with a 44k increase, above the 20k consensus (reviewed here). Although the unemployment rate moved up from 4.0% to 4.1%, seasonality was a factor, and it also came alongside a rise in labour force participation to 67.3%, a new record high. But while the labour market is in robust shape, wages pressures are cooling. In Q4, the Wage Price Index lifted by 0.7% - softer than the 0.8% pace expected - as the annual pace eased from 3.6% to 3.2%, a low since Q3 2022 (reviewed here).
Following the Fed's decision to pause its easing cycle last month, the tone of the meeting minutes conveyed an FOMC firmly in wait-and-see mode. Risks to both sides of the mandate - 2% inflation and full employment - are formally judged to be 'roughly in balance' but in practice the FOMC is currently more concerned about higher inflation than weaker growth. Upside risks to the inflation outlook were the key discussion point around the policy table in Washington as the FOMC cast its mind forward to the potential impacts of the Trump administration's agenda on trade and immigration as well as supply disruptions that could occur if geopolitical developments offshore were to deteriorate.
On the activity side, downside risks to growth would materialise if the very strong US labour market were to weaken unexpectedly. But growth could also be stronger than expected on the back the deregulation policies President Trump will pursue, while a continuation of the momentum in domestic spending was also cited by the FOMC. None of these discussions were new news to markets, but the minutes did reveal that some members raised the possibility of pausing the process of reducing the balance sheet amid uncertainty over the funding plans of the Treasury under the new administration.
Inflation and labour market data out the UK surprised to the upside of expectations this week, but markets continue to see the BoE on an easing path of quarterly cuts taking rates to 4% by year-end (4.5% currently). Higher inflation was expected due to a number of technical factors within the dataset in January, but headline CPI still came in above expectations rising from 2.5% to 3.0%yr (vs 2.8% forecast). Of more significance to the BoE is signs of persistent inflation pressures in prices and wages. Key related measures firmed in January: core CPI lifted from 3.2% to 3.7%yr (as expected) and services inflation moved up from 4.4% to 5.0%yr. Meanwhile, in the labour market, wages growth (ex-bonuses) increased to be running at a 5.9%yr pace in January from 5.6% previously. However, speaking after the release BoE Governor Bailey said the pay growth figures did not raise the alarm about inflationary pressures in the labour market.
