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Today's economic developments and market movements.

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Key themes: 
Market focus was on Q4 GDP data releases from the US and Europe, and the monetary policy decision and the European Central Bank (ECB).

Weaker GDP prints supported a rally in government bond markets. European bonds outperformed on the back of the ECB news.

In FX markets, headlines about tariffs on Canada and Mexico helped USD to reverse its previous losses and end the day unchanged. 

Performance of different equity markets was mixed, with European benchmark indices reporting the biggest gains.

Iron ore made further gains, while oil prices remained within a tight range this week.

Share markets: Results from major equity markets varied significantly, with European markets taking the top positions. The ECB interest rate cut and strong earnings results pushed the Eurostoxx 50 1% higher, while the FTSE100 in the UK was up similar amount. The S&P500 in the US struggled to keep up, rising just 0.1%, as technologies stocks underperformed, but a confirmation of solid, albeit weaker than expected, US GDP growth spurred equities more closely linked to the economic cycle. Domestic equity market ended yesterday’s session 0.6% in green, with financial and consumer discretionary stocks leading the way.

Interest rates: Weaker GDP prints and the ECB interest cuts supported a rally in government bonds. Bunds were among the best performers, with 10Y yield down 6bp, supported by the 0.2% GDP contraction in Germany alongside the message from the ECB that further interest rate cuts towards the neutral rate are on the horizon. Gilt yields were also significantly lower across the curve. The 10Y was also down 6bp on the day, to 4.56%, the lowest level this year, now down more than 30bp from the peak in mid-January. The move should help to alleviate some of the biggest concerns about sustainability of the UK public finances.

The 10Y US Treasury yield declined only 1bp to 4.52%, as the earlier drop was reversed on the back of the news reports that the US is going ahead with the 25% import tariff on Canada and Mexico.

Australian government bonds sold off marginally in yesterday’s trading session. The 10Y yield was 1bp higher, but at 4.38% it was still down about 10bp from last week’s close. The bond futures signalled that the yields might fall today as they catch up with the global trends.

Foreign exchange: In FX markets, the USD index traded in red until the news headlines about the US import tariffs pushed it back to 108, unchanged level from the prior day. Against this backdrop, in the end most other major currencies lost some ground, with AUD down 0.2%, and EUR depreciating 0.1%.

The Japanese Yen was the top performing currency among G10 appreciating to 154,2, as the BoJ Deputy Governor Ryozo Himino said that the central bank will continue raising interest rates if the Japanese economy evolves as expected. News that the BoJ has taken steps to start reducing its balance sheet by phasing out its loan provisioning program aimed at supporting bank lending also contributed to the strengthening of the Japanese currency.

Commodities: Crude oil prices were up only very slightly, remaining within pretty tight range this week as traders wrestled with competing drivers including the potential for across-the-board US tariffs, signs of tightening in global crude markets as aggressive sanctions on Russia bight and pressure from President Trump on OPEC to bring prices down.  Metals generally marked time in thin trade with China on holiday until next week. President Trump recently stated that “tariffs would also be imposed on steel, aluminium and copper” providing a tailwind for copper, which gained almost 1%. Iron ore markets extended the upward trend of the last few days, helped by a weaker US dollar and hopes that China might avoid US tariffs. 

Australia
: There were no significant economic data releases on Thursday.  

Euro area: Euro area GDP disappointed in Q4, with activity remaining unchanged across the region and annual growth holding at 0.9%. The poor Q4 result was a consequence of persistent weakness in Germany and France, where activity fell 0.2% (-0.2%yr) and 0.1% (+0.7%yr) respectively. Italy’s economy was also stalled for a second successive quarter in Q4, but Spain continued to grow rapidly, +0.8% (3.5%yr). 

The euro area unemployment rate meanwhile edged up from a revised 6.2% (previously 6.3%), a record low, to 6.3% in December. 

As expected, the ECB cut its key policy rates by another 25bps at the Governing Council’s January meeting. Despite the disappointing Q4 GDP result, President Lagarde and the Governing Council showed confidence in the recovery in growth. They were also constructive on inflation, the disinflation process “well on track” to see annual inflation sustainably at 2.0% in 2025. Persistence in services inflation was referenced, but is expected to fade as wage growth continues to moderate. In terms of the outlook, in both the statement and press conference, the stance of policy and financial conditions were characterised as “restrictive” and “tight” respectively. President Lagarde also noted in her remarks that uncertainty over the outlook and a reduction in bank risk appetite saw credit standards for business loans tighten in Q4 2024 having stabilised over the prior year. This combination of financial factors is a significant risk to activity growth, arguably one that can be acted against given the path of inflation and the ECB’s sanguine view on price risks.

New Zealand: Having reached a ten-year high towards the end of last year, at the start of this year the headline index for general economic sentiment declined 8points to 54.3, while firms’ own activity expectations index was down 4.5points to 45.8. While the confidence levels remain relatively high in comparison to historical norms, the declines bring them closer in line with surprisingly weak economic growth data seen of late, including shockingly weak Q3 GDP, which showed a 1%qtr contraction.

United States:
 US GDP disappointed in Q4 2024, decelerating from 3.1% annualised in Q3 to 2.3%. However, the downside surprise was solely due to a pullback in inventory accumulation, domestic final demand growing 3.0% annualised, in line with the average of the prior three quarters and modestly higher than the long-term average prior to the pandemic. Household consumption drove this result, backing up Q3’s strong 3.7% annualised gain with a 4.2% result in Q4, principally on strength in services consumption although growth in goods consumption was also robust. The other components of demand were mixed, however. Government spending continued to contribute to GDP in Q4 thanks to growth at both the Federal and state & local levels, while housing investment rebounded after six months of declines. But business investment was weak, equipment investment falling at a 7.8% annualised pace (likely weighed down by industrial disputes) while structures activity declined 1.1% annualised. Net exports were neutral for GDP growth in the quarter despite a further widening of the nominal goods trade deficit. 

Among other economic data releases, initial jobless claims fell last week from 223k to 207k, a very low level relative to historical norms. Meanwhile, pending home sales were, in contrast, materially weaker than expected, activity declining 5.5% in December following a revised 1.6% gain (prev. 2.2%) in November. Tight supply and the rapid rise in the mortgage rates in late-2024 arguably drove the result. 

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