Markets got away relatively unscathed from what might have been a damaging week amid new trade and geopolitical tensions and a significant JGB market selloff. Risk assets rebounded after President Trump confirmed at the Davos forum that the tariffs threatened last weekend on eight European countries (including the UK) had been averted for now by the framework agreement over Greenland, though the details are limited. Meanwhile, Japanese bond yields steepened sharply on fiscal sustainability concerns (30s +16bps this week), but the spillover to other regions ended up fairly contained. In FX, higher rates gave support to an ailing JPY as the BoJ left policy on hold, but the standout was the local AUD. Key factors to AUD strength were the broader risk rebound and strong domestic labour market data, which boosted RBA February rate hike pricing to around 50%.
Data release in the US took a back seat to events in Davos and had little market reaction. The Fed is firmly expected to remain on hold at next week's meeting, a stance reaffirmed as the core PCE deflator - its preferred inflation metric - firmed as expected from 2.7% to 2.8%yr in November. Fed forecasts updated late last year showed an expected decline to 2.5% over the course of 2026 before settling around the 2% target in 2027. Data on the consumer was solid with Black Friday sales boosting personal spending by 0.5% in November and 0.3% in real terms. Real spending in annual terms is now tracking at 2.6%, moderating from a 3.2% pace a year earlier.
In the UK, headline CPI inflation lifted a touch from 3.2% to 3.4%yr in December, above the 3.3%yr consensus due largely to temporary factors (tobacco taxes and holiday travel). More importantly from a Bank of England standpoint, core inflation at 3.2%yr and services inflation at 4.5%yr were below its forecasts and 0.1ppt under market expectations. Meanwhile, softness in the labour market was highlighted by unemployment printing at an unchanged 5.1% in November - up from 4.4% a year ago - and wages growth (ex-bonuses) slowing to a 4.5% annual pace, its lowest since early 2022. This all supports continued BoE easing, with two rate cuts expected in 2026.
Resurgent employment growth of 65.2k drove Australia's unemployment rate down to a 7-month low of 4.1% in December as the labour market rediscovered form at the end of 2025 (see here). A hawkish repricing of the RBA outlook followed the report, a February rate hike now considered a line-ball call and a lock by May. The deciding factor will likely be next week's December quarter CPI report, with the RBA more concerned about renewed inflationary pressures than the labour market overheating. The December labour market update is also likely to be seen in the context of an indifferent run through much of the back half of 2025.
The 65.2k rise in employment was well above the 27k figure expected, rebounding off a 28.7k fall in November. This was the strongest gain in 8 months, with the full time segment (54.8k) leading the way. That made inroads into the unemployment rate, which fell from 4.3% to 4.1% - its lowest since May - but was assisted by only a modest rise in the participation rate to 66.7%. Nonetheless, sizeable declines in the underemployment rate from 6.2% to 5.7% and in total underutilisation from 10.5% to 9.8% - a 2½-year low - were clearly consistent with a broad retightening of labour market conditions.
