The on-again, off-again headlines around tariffs from the Trump administration saw markets trade through elevated uncertainty this week. The US dollar continued to perform - except against the Yen on signs the BoJ is preparing to hike rates again - with an added boost coming from a solid payrolls report. Treasury yields repriced higher at the front end of the curve, but the longer end was lower this week as markets digested the quarterly refunding announcement favourably and Treasury Secretary Bessent said Trump wants a lower 10-year yield rather than calling for Fed rate cuts. In the UK, delivery of the BoE's expected 25bps rate cut came with a dovish tilt (more below). Meanwhile, an ECB research paper suggested its estimate of the neutral policy rate was in the 1.75-2.25% range (depo rate is currently 2.75%), but VP of the ECB de Guindos downplayed the importance of the concept from a policymaking perspective.
January payrolls were consistent with an analysis of continuing strength in the US labour market. Although the headline figure at 143k was light relative to the 175k consensus estimate, backward revisions boosted payrolls for the prior two months by a net 100k. The BLS did not identify any discernible impacts from the Southern California fires. Meanwhile, the unemployment rate tightened from 4.1% to 4.0% (alongside an uptick to 62.6% participation) and average hourly earnings printed at 4.1%yr (with upward revisions to prior months) - hawkish elements of the report that markets keyed off during Friday trade. The report (unsurprisingly) clearly carried more weight with markets than other data through the week that was on the soft side of expectations: ISM services activity gauge slowing from 54 to 52.8 in January (vs 54.3 expected), and job openings falling from 8.2 million to 7.6 million in January (vs 8mn).
The Bank of England cut Bank Rate by 25bps to 4.5% as expected, but the 7-2 vote split was the most dovish analysis from the Monetary Policy Committee in the current easing cycle. All 9 MPC members voted to cut this week, with the 2 dissenting votes being cast by members Dhingra and Mann for a larger 50bps cut - a surprising call from the latter after opposing both of the previous rate cuts voted through in August (5 cut to 4 hold) and November (8 cut to 1 hold) last year. This week's decision maintains the sequence of quarterly rate cuts, occurring at meetings where the BoE has published updated economic forecasts. Markets expect this to remain the playbook through the remainder of 2025, a nod to the BoE sticking with its message of 'gradual' rate cuts being appropriate. This sees almost 3 additional rate cuts priced into the curve.
In the BoE's latest Monetary Policy Report, the key changes made to the Bank's forecasts were for higher inflation and slower growth. Despite a conditioning assumption of higher market interest rates, headline inflation was called up 40bps on the previous set of forecasts to 2.8% in 2025 and 3.0% in 2026 before slowing to 2.3% in 2027 (from 2.1%). This became the main subject of the post-meeting press conference where Governor Bailey (joined by Lombardelli and Ramsden) explained that higher inflation was forecast due to energy price resets and government-regulated prices - factors that were not expected to generate second-round effects on prices and wages that would require the BoE to act. That sees the BoE retaining enough confidence in the disinflationary process in the UK to reduce the restrictiveness of monetary policy, supporting the economy amid a weaker growth outlook; GDP growth for 2025 was cut by 1ppt to just 0.4% before rebounding to 1.5% in 2026 (from 1.6%).
Domestically, solid retail sales data has not shifted the dial with markets as a February RBA rate cut remains priced in. Cyber Monday limited the usual pullback post the November Black Friday sales to just a -0.1% decline in December (vs -0.8% expected). In a sign that cost-of-living subsidies and the Stage 3 tax cuts are starting to lift the malaise for households, retail sales lifted by 1.4% across the quarter, with a 1.0% rise in underlying volume demand the driving factor. For more analysis see my review here. Other notable developments in Australia this week included a modest 0.7% increase in dwelling approvals in December (see here), while the trade surplus narrowed sharply to close out 2024 at $5.1bn as imports (5.9%) accelerated at their fastest pace in 15 months (see here).
