The Reserve Bank of Australia today made a first step in easing policy restriction

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Spotlights were on Europe yesterday. US financial markets were closed for President’s Day while French president Macron summoned a handful of European leaders as well as EC president von der Leyen and Nato chief Rutte. The goal was not so much to announce big defense initiatives – Europe’s buy-in at the negotiation table with Russia – as it was to show the EU’s decisiveness and speediness when it is once again cornered. Actual decisions, however, require all 27 member states to be part of the discussions. Funding as always will be one of the key topics. Options include an escape clause that keeps defense spending out of the fiscal equation so that countries can still abide by the 3% deficit rule or re-purposing existing funds (e.g. unused resources of the pandemic recovery fund). Eventually, though, we think we will end up in a Next Generation EU-style joint borrowing on the European level. Resistance from some of the staunchest opposition indeed appears to be easing. Either way, setting up a European defense architecture is going to require massive investments with a significant part of that being recurring. German bunds underperformed vs swap with yields rising between 2.7 and 7 bps in a bear steepening move. French OATs declined as well, pushing up rates 1.7-5.2 bps. UK gilts outperformed (+0.4-3.2 bps). The country is already spending 2%+ on defense, making the additional effort relatively smaller compared to European peers. The euro closed lower, against the dollar (EUR/USD <1.05) but more so against sterling. EUR/GBP turned to the 0.83 big figure ahead of some economic data scheduled for release starting today. The labour market report was strong on all accounts – 6% wage growth, a lower-than-expected unemployment rate and consensus-topping employment gains. EUR/GBP 0.83 is cracking. The US Treasury market reopened in Asia by adding several basis points across the curve. Fed governor Waller said inflation didn’t show any real progress in recent months. A similar pattern emerged in 2024 which was then followed by easing price pressures after all that paved the way for the first rate cuts later in the year. Waller said this may be the case again in 2025 but until that’s clear, he favours to keep rates steady. Today’s eco calendar has not that much to offer but the geopolitical one does. US secretary of state Rubio, national security adviser Waltz, and Witkoff, Trump’s special envoy to the Middle East, will be meeting Russia’s foreign policy advisor Ushakov and foreign minister Lavrov in Riyadh. It’s the high-level first in-person meeting since the invasion in 2022. We keep a slight bearish bias on core bonds and are neutral on EUR/USD. While the prospect of a ceasefire and eventual end to the war is positive for the euro, there are too many uncertainties as well as other topics including tariffs that are holding the common currency back.

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After holding its policy rate at 4.35% since November 2023, the Reserve bank of Australia (RBA) today made a first step in easing policy restriction as it cut the policy rate by 25 bps to 4.10%. The RBA assesses that inflation has fallen substantially as higher interest rates have been working to bring aggregate demand and supply closer in balance. Underlying inflation reached 3.2% in the December quarter, a little faster than expected. Demand growth has been subdued and wage pressures have eased, giving the Board more confidence that inflation is moving sustainably to the 2-3% RBA target. However, the RBA still holds a cautions stance on further easing as risks to inflation are seen to the upside. In this respect, RBA refers to unexpectedly strong labour data of late. The RBA also slightly upwardly revised to path for underlying inflation over 2026 (2.7% EoY from 2.5%) and warns on a high degree of uncertainty both on growth and inflation. Policy will remain restrictive after today’s decision. At the press conference, governor Bullock explicitly said that the RBA can’t declare victory on inflation yet and that today’s decision doesn’t imply that further cuts are coming. For that more evidence on inflation is needed. The 3-y government bond yield rises about 6 bps (3.93%). AUD/USD trades unchanged at 0.636 despite overall USD strength.

According to (outgoing) member of the Hungarian central bank (MNB) Gyula Pleschinger, the MNB has no room to cut its policy rate this year. At the same time he also sees it unthinkable for the MNB to hike rates. Pleschinger indicated that the new MNB leadership under the former Finance Minister Mihaly Varga will remain focused on the bank’s price stability mandate. Pleschinger expects inflation to restart declining in February after the surprise uptick (1.5% M/M and 5.5% Y/Y) in January to return to 4.0% by the end of the year.

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