UST yields bounced Friday on another solid jobs report + a sharp uptick in UMich inflation expectations, with 2yrs closing at 4.29%, up almost 8bps, while 10yrs were up 6bps at 4.49%, 2s10s spread near YTD lows. IG spreads widened marginally on the move. Market pricing for Fed rate cuts continues to shift, with the next cut now fully priced for September, pushing back expectations amid persistent inflationary signals.
Non-Farm Payrolls (NFP) came in softer than expected at 143k (175k est.), though upward revisions for prior months mitigated the downside. Unemployment declined to 4.0%, having been expected to remain unchanged at 4.1%, while Average Hourly Earnings (AHE) surged 0.5% MoM (0.3% est.), reinforcing concerns about wage-driven inflation.
University of Michigan (UMich) Consumer Sentiment fell to a seven-month low of 67.8 (71.8 est.), but inflation expectations within the survey spiked, with one-year expectations rising to 4.3% (3.3% est.), the highest since November 2023, a worrying scenario.
President Trump’s plans for "reciprocal tariffs," leading to further volatility.
Federal Reserve Governor Goolsbee signalled that wage growth is "about consistent with 2% inflation" but acknowledged that new tariffs could disrupt supply chains. Market pricing for Fed rate cuts continues to shift, with the next cut not priced in until September.
European Central Bank (ECB) policymaker Vujčić stated that market pricing for three rate cuts is "not unreasonable," while BoE’s Pill stressed the need for gradual easing in UK, following the 0.25% last week, which took rates to 4.5%. The ECB also updated its estimate of the neutral rate to 1.75%-2.25%, while the BoE revised the UK’s real neutral rate up to 0.75%, implying a nominal neutral rate between 2.25% and 3.75%. The Bank of Japan’s neutral rate is estimated at 2%, with Deutsche seeing the terminal rate for its current cycle at 1.25%. Saying that neitral rates are purely an academic concept..
The U.S. will soon commence a 6 month review of its participation in global multilateral banks such as the World Bank, IADB etc., sparking some selling. A U.S. withdrawal would have limited economic benefits but could significantly reduce its influence over key institutions. The U.S. currently contributes only $3.7bn to the IBRD yet holds 16% of voting rights.
Corporate earnings for Q4 rose 12.4% y/y, marking the highest growth rate since mid-2022. While credit spreads remain tight (near 2007 levels), corporate balance sheets are significantly stronger than in prior cycles.
Over the weekend NY Post reports Trump and Putin discussed end to Ukraine war. Zelenskiy open to security for commodity deal around rare earths. JD Vance will meet the Ukrainian President at the Munich Security Conference 14-16 Feb.
Trump says Musk will help uncover “hundreds of billions” in US govt fraud via DOGE.
China Jan CPI accelerated for first time since August, supported by household spending around CNY holidays. China’s factory deflation extended into a 28th month with a 2.3% decline. China’s retaliatory tariffs on US goods are scheduled to take effect today.
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