Look out for the three musketeers – Riksbank, BoC and Fed

In focus today

We expect the Federal Reserve to pause its cutting cycle tonight and maintain the policy rate target range at 4.25-4.50%, in line with wide consensus and market pricing. We still forecast the next 25bp already in the following March meeting, but doubt Powell will provide strong forward guidance amid the high fiscal and trade policy uncertainty, read more from Fed preview - Not stealing the spotlight, 23 January.

Today, we receive the first estimate of GDP growth in Spain for Q4 2024, ahead of the euro area aggregate data tomorrow. Recently, growth in Spain has been robust, with GDP increasing by 0.8% q/q in both Q2 and Q3 2024. It is anticipated that this strong growth persisted in Q4 at 0.6% q/q. The EU Commission's proposal for a "competitiveness compass" is also released. This compass is intended to establish the economic strategy guiding the Commission's efforts until 2029 and simplify regulation to achieve higher economic growth.

In Sweden, the GDP indicator is released at 08:00 CET, and we growth of 0.3% q/q in Q4, which if true would entail 2024 full-year growth at 0.6% y/y. The Riksbank convenes at 09:30 CET, where we expect a 25bp rate cut, bringing the policy rate to 2.25%. While the rate path from December assigned an equal weight for the next cut coming in January or March, the communication in the Minutes, the lower-than-anticipated CPI data and indeed weak demand suggest another back-to-back rate cut. As this is a small meeting, the key thing to watch for markets is the forward guidance in the press release and at the press conference.

At 15:45 CET, BoC announces its rate decision. Continued excessive supply, uncertainty about US trade policy and firms expecting further cuts ahead point toward a 25bp cut, which would bring the policy rate to 3.00%. Consensus and markets also anticipate a 25bp cut. We also get new economic projections as the BoC releases its quarterly Monetary Policy Report.

Economic and market news

What happened overnight

In Japan, minutes from the BoJ's December meeting revealed that the board discussed monetary policy conduct, focusing on how to use estimates based on the neutral interest rate and Japan's prolonged deflation period. BoJ staff have estimated the neutral range to be between 1% and 2.5%, while Governor Ueda has mentioned it is hard to estimate on a real-time basis. The BoJ kept the policy rate steady in December but hiked the rate from 0.25% to 0.5% at the January meeting. Looking ahead, we expect the BoJ to raise the policy rate to 1% through two additional hikes this year.

In Australia, inflation for Q4 2024 came in weaker than expected, with core inflation slowing to 3.2% q/q (cons: 3.3%, prior: 3.5%), supporting the notion of a rate cut from RBA in February - which would be the first policy change in more than a year.

What happened yesterday

In the US, according to Conference Board data, the consumer confidence ticked lower in January - with sentiment weakening across both current situation and expectations components. Notably intentions to take vacation were also lower, while inflation expectations were little changed. The widely followed "jobs plentiful"-index declined to the lowest level since last September. While data overall was to the weaker side, the figures could be affected by respondents' perception of Trump - the similar Michigan survey has shown a clear divergence between more optimistic Republican respondents and pessimistic Democrats. The market reaction was rather muted.

In the euro area, the bank lending survey was not favourable news for the ECB. Credit standards tightened for firms in Q4 2024 amid higher perceived risk and lower risk tolerance, while demand for firm loans remained weak. In the current quarter, banks expect to tighten credit standards for both households and firms, suggesting that lending growth will remain weak. In general, the data clearly suggests that the ECB's policy stance is still restrictive.

In Norway, retail sales declined 0.1% m/m in December, confirming that Christmas shopping was very moderate. As underlying growth remained muted at 0.4% 3M/3M, retail sales is improving. However, the release was still a bit disappointing as real wage growth is around 2% and the headwinds from higher rates have faded. Without any signs of an immediate turnaround in rate-sensitive sectors, this supports the signal of a rate cut in March.

In Hungary, the central bank kept the policy rate unchanged at 6.50%, as widely expected.

Equities: Global equities rose yesterday, with risk appetite gradually improving throughout the day. A lot of macro and micro data influenced financial markets. However, focusing on the US, it is clear that reconsideration of DeepSeek's impact on future outlooks was the dominant force. Consequently, we observed a reversal of Monday's performance, with tech stocks leading the gains and most other industries declining. As today is set to be a busy day with numerous company earnings reports and two major central bank meetings, the focus and impact of DeepSeek should begin to diminish. In the US yesterday, the Dow rose by 0.3%, the S&P 500 increased by 0.9%, the Nasdaq gained 2.0%, and the Russell 2000 went up by 0.2%. Several markets in Asia are closed due to the Lunar New Year. Those that are open, including Japan, are mostly higher this morning. Most futures in Europe and the US are marginally higher as well this morning.

FI: Global yields reversed some of its Monday gains as rates sold off yesterday. About half of Monday's risk-off rally was reversed. The French-German yield spread tightened 1bp to 72bp which is the tightest since October. BTPs came under slight pressure towards the end of the trading session following news that PM Meloni is being investigated. Until then, BTPs were on route to be the main outperformer yesterday. ECB's Bank Lending Survey could have been a better read for the ECB as dynamics require vigilance. Tightening credit standards was reported in Q4, and set to further tighten in Q1, while demand for loans was still positive. The report clearly suggests that the ECB's policy stance is still restrictive.

FX: EUR/USD stabilised above 1.04 as the USD broadly strengthened, supported by new Trump headlines emphasizing his push for universal tariffs exceeding 2.5%. The broad USD index climbed 0.5%, marking its largest intraday gain in a week. Today, focus turns to the Fed. For CAD, BoC is on the agenda where markets and consensus favour a 25bp rate cut. While US-related development - in particular tariff-news- is currently the main driver of USD/CAD, a more hawkish BoC would act as CAD-positive. For SEK, all eyes will be on the Riksbank meeting.