This week, we look out for the US CPI and Retail Sales

Markets

Friday’s US payrolls solidified the Fed view that it can sit back and wait as the US economy is in a good place. Headline US job growth at 143k was slightly softer than expected (175k), but came with a cumulative upward revision (Nov and Dec) of 100k. The household survey also was strong. The unemployment rate declined from 4.1% tot 4.0% even as the participation rate rose to 62.6% from 62.5%. Wage growth was stronger than expected, jumping 0.5% M/M to 4.1%. Later, the U. of Michigan consumer confidence declined modestly, but inflation expectations measures reaccelerated with especially the 1-y head measure jumping sharply from 3.3% to 4.3%! The release only reinforced the post-payrolls rebound in US yields. Yields closed between 7.7 bps (2-y) and 5.6 bps (30-y) higher. The move aborted a tentative downside drift in US yields (fear for US growth) of late. US money markets now fully discount a next Fed rate cut in September with only 50% of a second step priced for December. The ECB study on the potential level of a neutral policy rate didn’t yield much news. It is still estimated between 1.75% and 2.25%, but the report downplays its relevance in making day-to-day decision on monetary policy. German yields closed the session with changes of less than 2.0 bps across the curve. Higher yields, especially after the U. of Michigan inflation expectations, release weighed on equities. US indices declined between 1.0% (S&P/Dow) and 1.36% Nasdaq. The dollar gained, albeit modestly (DXY close 108.04, EUR/USD 1.033), leaving the recent range intact. The yen again slightly outperformed (close USD/JPY little changed 151.4).

Market headlines this morning are ‘dominated’ by US president Trumps’ intention to impose tariffs of 25 % on all imports of steel and aluminum to the US. However, it is still uncertain when the duties will take place. Apparently, announcements on new tariffs also are becoming subject to the law of diminishing returns as the market reaction remains guarded and orderly. US yields are little changed, even marginally softer this morning. Asian equities are trading mixed. US and EMU futures even gain marginally. The dollar gains modestly (DXY 108.23, EUR/USD 1.0315). The eco calendar in the US and EMU is thin today. Later this week, we look out for the US CPI (Wednesday) and retail sales (Friday). Fed Chair Powel will appear before Congress on Tuesday and Wednesday. For now, there is no reason for him to leave the wait-and-see, higher for longer bias. The US Treasury with also execute the early month 3-y, 10-y and 30-y auction series during the week. US yields, especially at the short end of the curve, remain well supported. The USD reaction function looks like becoming a bit more stoic, especially on trade war headlines and to a lesser extent on strong US data. EUR/USD is looking for direction in a 1.02/1.05 ST trading range.

News and views

Rating agency Fitch affirmed the Belgian credit rating at AA-, but sticks with its negative outlook which is already in place for two years. The outlook reflects the ongoing uncertainty regarding the new government’s ability to reduce the deficit as planned and stabilize the debt path. The rating agency cites two potential triggers for a rating downgrade. First, failure to formulate a credible fiscal consolidation strategy that would lead to stabilisation of government debt-to-GDP over the medium term. Second, evidence that diverging labour costs from trading partners will lead to a persistent deterioration in international competitiveness, putting pressure on Belgium's medium-term growth prospects. Fitch maintains its budget deficit forecast of 4.8% of GDP in 2025 and 4.7% in 2026, but medium-term projections have slightly improved. The debt ratio is estimated at 103.7% of GDP end-2024 and expected to keep rising to 107.9% of GDP by 2026. The Belgian economy is expected to grow by 1.2% this year and by 1.4% in 2026 but downside risks persist, particularly from US tariff hikes. Rating agencies Moody’s (Aa3, negative outlook) and S&P (AA, stable outlook) give their first updates of the year on April 11 and April 25.

Chinese January inflation rose for the first time since August 2024. The 0.7% M/M gain pushed the annual inflation figure up from 0.1% to 0.5% Y/Y, slightly above consensus (+0.4%). Core inflation, stripping out food and energy prices, rose from 0% Y/Y to 0.6% Y/Y with services rising by 1.1% Y/Y. The pick-up in inflation was likely driven by a temporary spending boom around the Lunar New Year celebrations and is not the start of a turnaround. More volatility (and a setback) is likely next month because of the high comparison base related to the (later) timing of Lunar NY in 2024. Chinese producer prices remain mired in deflationary territory (unchanged at -2.3% Y/Y) since September 2022.

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