4Q24 GDP Grew Much Stronger Than Expected, Supporting BoJ Normalisation Ahead

Economic

Summary:

The Japanese economy continues to grow, faster than the BoJ's forecast. Given the upside risks to higher inflation, the BoJ is likely to raise rates as early as May if the Shunto wage negotation results are as strong as last year.

Japan’s GDP grew 0.7% QoQ sa in the fourth quarter (vs a revised 0.4% in 3Q24, 0.3% market consensus) thanks to solid external demand

Today's GDP data shows that the economy continues to grow steadily, with stronger-than-expected 4Q24 results and revised up 3Q24 growth (0.4% from 0.3%). Strong global demand for semiconductors appeared to have led to better exports and capex spending, while domestic demand softened a bit compared to the previous quarter.

Private consumption growth moderated to 0.1% after solid growth of 0.7% in 3Q24, but it was stronger than the market consensus of -0.3%. In 4Q24, real wage growth turned positive, as did household spending. As such, we believe that solid wage growth is clearly leading the consumption recovery. Both durable goods consumption (3.6%) and services consumption (0.1%) are behind the resilient growth of household consumption. However, we believe that faster inflation growth (CPI 2.93% YoY 4Q24 vs 2.77% 3Q24) will weigh on consumption going forward.

Meanwhile, business spending rebounded 0.5% (vs -0.1% 3Q24, 0.9% market consensus) mostly due to increases in tech investment related to semiconductors.

The contribution of net exports to GDP was 0.7 ppt as exports rose 1.1%, while imports contracted -2.1%. A notable increase in exports of services (4.1%) seems largely due to inbound tourism and 0.1% growth in exports of goods due to strong IT exports.

4Q24 GDP grew stronger than expected mostly due to strong external demand

BoJ watch

Today's results are better than the BoJ's current GDP forecast (0.6% YoY for FY24 GDP). On the inflation front, headline prices are expected to jump to 4.0% YoY in January and remain at a high level of 3% for some time. Growth and inflation conditions point to faster-than-expected rate action by the BoJ. Current market pricing dynamics suggest a rate hike in July, but we believe that the BoJ may act as early as May. According to a local news report, the outcome of Spring wage negotiations is likely to be as strong as last year.

However, the main risk to our call is US President Trump’s tariff policy. Tougher-than-expected reciprocal tariffs on Japanese goods could complicate the BoJ's growth outlook. But, in our view, the BoJ’s policy priority in the near term should be to contain excessive inflation. Thus, we maintain our BoJ forecast of a hike in May and October in 2025 and an additional hike in 2026.

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ING

Commodity

Oil prices are under pressure this morning with talk of a potential restart in oil exports from Iraq’s Kurdistan region.

Energy

Despite the downward pressure on oil prices through much of last week, the market still managed to eke out a small gain with ICE Brent settling 0.11% higher on the week. However, timespreads have weakened significantly since peaking in January, suggesting that the tightness in the physical market is easing. While the prompt ICE Brent spread is still in backwardation, the NYMEX WTI prompt spread has flipped back to a small contango.

Pressure on the flat price has continued this morning with suggestions that oil exports from Iraq’s Kurdistan region could resume in March, which could see exports of around 300k b/d through the Ceyhan pipeline. Flows were halted in early 2023 after a payment dispute between Iraq and Turkey. However, this is not the first time we have heard suggestions that exports could restart. In addition, if flows were to resume it would complicate issues around Iraqi output and its compliance with production targets under the OPEC+ deal.

Positioning data also shows that speculators are relatively more bearish towards the oil market. The managed money net long in NYMEX WTI fell by 18,303 lots WoW to 122,237 lots as of last Tuesday. This move was driven more by fresh shorts entering the market than longs liquidating. Meanwhile, there was little change in speculative positioning in ICE Brent, with the net long cut by just 569 lots to 289,154 lots.

European gas prices fell by a little more than 9% last week, the largest weekly decline since early January. However, prices still remain elevated, with TTF trading above EUR50/MWh. US and Russia talks working towards a peace deal between Russia and Ukraine will weigh on sentiment. In addition, there are ongoing discussions around flexibility with regards to storage refill targets.

There is still little clarity over whether Germany will subsidise storage refills and, if so, how it will be done. Although, the backwardation between summer 2025 and winter 2025/26 prices has flattened somewhat over the last week. If this trend continues, it obviously reduces the likelihood of new subsidies.

However, storage levels are a concern for Europe. Gas storage levels fell at a fairly quick pace last week, leaving them at a little under 45% full, compared to a 5-year average of 54% full. Colder weather forecasts for the next couple of days mean that these stronger storage draws will likely continue until weather turns milder later in the week.

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Owen Li

Economic

European shares were set to stay at record levels on Tuesday as investors pondered the prospect of debt-financed stimulus to fund higher defence spending, ahead of talks between U.S. and Russian officials over a possible Ukraine peace deal.

After scoring a new record close the day before , boosted by a powerful rally in arms stocks, European futures pointed to a steady start. Tradegate indications showed defence stocks remained in demand and could extend their rally even further.

Rheinmetall , Renk , Hensoldt , Thyssenkrupp were the top four most executed orders on the German platform, with their shares rising 5-8%. DAX futures rose 0.25% while EuroSTOXX50 contracts were broadly steady.

FTSE futures were up around 0.1%, broadly steady after data showed that British wages rose by an annual 5.9% in the last three months of 2024, helping sterling pare some of its losses.

Traders will be keeping an eye on Wall Street, as US investors return from a public holiday. Nasdaq futures rose 0.5%.

Meanwhile, this month's BofA fund manager survey showed bullish investors cut cash levels to 15-year lows, as they rotated into bond-sensitive sectors and to Europe, while 89% of those surveyed said U.S. stocks are overvalued.

In corporate news, earnings kept flowing in.

French IT consulting firm Capgemini reported a 2% drop in sales, narrowly beating market expectations, helped by sustained demand for its cloud and AI services.

Holiday Inn owner IHG reported 3% growth in its annual room revenue on Tuesday, above market expectations.

Source:Reuters

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Warren Takunda

Economic

Shares in European defence companies rallied on Monday as European leaders met to discuss Ukraine and regional security.

Italy's Leonardo showed gains of around 5.27% in daily trading as of around 11am CET, while shares in Germany's Rheinmetall were up 7.83%.

Germany's Hensoldt was up 9.81%, Sweden's Saab recorded a 10.34% gain, while France's Thales saw an increase of 4.72%.

Increased investor interest comes as European leaders are working on a new defence package to support Kyiv, although details have not yet been announced.

Politicians from across the region are meeting in Paris to discuss Ukraine, as concerns mount that the US will leave the EU out of negotiations.

Expected attendees include leaders from Germany, the UK, Italy, Poland, Denmark, Spain, and the Netherlands.

European Commission President Ursula von der Leyen, European Council President Antonio Costa, and NATO Secretary General Mark Rutte are also expected to attend.

The Trump effect

Since his inauguration, US President Donald Trump has shifted the narrative around Russia's war in Ukraine, pushing for a speedy end to the conflict.

Trump said on Sunday he believes he could meet "very soon" with Russian President Vladimir Putin to discuss ending the war, following a lengthy phone conversation with President Putin.

The US secretary of state Marco Rubio, meanwhile, confirmed that he would meet Sergey Lavrov, his Russian counterpart, in Saudi Arabia this week.

Keith Kellogg, the US special envoy to Ukraine, has said that European leaders would not be included in any discussions between the US and Russian over ending the war.

Kellogg argued that previous negotiations had failed because too many parties had been involved.

Munich Conference

The defence stock rally also came after comments made at the Munich Security Conference, which lasted from Friday to Sunday.

During the event, NATO Secretary General Mark Rutte said the alliance's spending target would be "considerably more than 3%" of GDP, up from its current target of 2% agreed upon in 2014.

Rutte added that NATO members would need to commit to a "strong timetable".

European Commission President Ursula von der Leyen, meanwhile, told the conference EU member states currently spend a combined 2% of their GDP on defence.

She stressed that this investment would need to increase by "hundreds of billions of euros" every year.

An army of Europe

The comments from Rutte have put a "rocket underneath defence stocks", said Russ Mould, investment director at AJ Bell.

"Shares in defence companies had already rallied hard since Russia invaded Ukraine as investors took the view that the shocking events would spur governments around the world to fortify their own defences," said Mould.

"Rutte's comments effectively confirm this line of thinking and have acted as another share price catalyst, even though markets had already priced in a stronger earnings environment for the sector," he added.

In January, Trump urged NATO's European members to spend 5% of their national income on defence, arguing that the US is taking an oversized responsibility for maintaining peace in the region.

Speaking during the Munich Security Conference, Ukrainian President Volodymyr Zelenskyy called for the creation of an "army of Europe", alluding to weakening US support.

Zelenskyy clarified that he would not accept a peace deal negotiated without Ukrainian involvement.

Source: Euronews

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Justin

Economic

Forex

USD/CHF gives up intraday gains and falls back to near 0.9000 as the US Dollar struggles to hold recovery.

Fed officials expect that the current monetary policy is in the right place.

The SNB could opt for negative interest rates to avoid risks of inflation remaining persistently lower.

The USD/CHF pair surrenders its intraday gains and falls back to near the psychological level of 0.9000 in European trading hours on Tuesday. The Swiss Franc pair gives up gains as the US Dollar (USD) corrects from the intraday high but still holds some gains. The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, struggles to hold above the key level of 107.00.

Earlier in the day, the USD Index rebounded on firm expectations that the Federal Reserve (Fed) will keep interest rates steady in the current range of 4.25%-4.50% for a longer period. On Monday, a string of Fed officials stated that there is no need for a monetary policy adjustment amid resilient United States (US) economic growth, still-elevated inflation, and a balanced labor market.

The upside in the US Dollar has been capped by faded fears of the immediate imposition of reciprocal tariffs by US President Donald Trump. Trump said on Thursday that he has asked his team to work on reciprocity, while market participants anticipated that the President could unveil a detailed reciprocal tariff plan immediately.

Meanwhile, the Swiss Franc (CHF) is expected to remain on the backfoot as soft Consumer Price Index (CPI) data for January has boosted expectations that the Swiss National Bank (SNB) could push interest rates into the negative territory. Year-on-year Swiss CPI decelerated to 0.4%, as expected, from 0.6% in December, undershooting SNB’s target of 0%-2%.

USD/CHF struggles to revisit its 15-month high, of around 0.9200. However, the outlook for the Swiss Franc pair remains firm, as the 20-week Exponential Moving Average (EMA) near 0.8947 is sloping higher.

The 14-week Relative Strength Index (RSI) falls into the 40.00-60.00 from the bullish range of 60.00-80.00, suggesting that the upside momentum has faded. However, the upside bias is intact.

For a fresh upside toward the round-level resistance of 0.9300 and the 16 March 2023 high of 0.9342, the asset needs to break decisively above the October 2023 high of 0.9244.

On the flip side, a downside move below the psychological support of 0.9000 would drag the asset towards the November 22 high of 0.8958, followed by the December 16 low of 0.8900.

USD/CHF weekly chart

Source: FXSTREET

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Alex

Economic

The Pound Sterling recovers sharply against its major peers after upbeat UK employment data for the three months ending December.

The UK economy added 107K workers and the jobless rate remained steady at 4.4%, lower than estimates of 4.5%.

Investors await the UK CPI data and the FOMC minutes on Wednesday.

The Pound Sterling (GBP) bounces back against its major peers on Tuesday after the release of upbeat United Kingdom (UK) labor market data for the three months ending December. The Office for National Statistics (ONS) reported that the economy added 107K workers, significantly higher than the 35K seen in the September-November period.

The ILO Unemployment Rate remained steady at 4.4%, while it was anticipated to have accelerated to 4.5%. Investors were worried about the employment data as business owners had been disappointed with Chancellor of the Exchequer Rachel Reeves’s announcement of raising employers’ contribution to National Insurance (NI). In the Autumn Budget, Reeves increased employers' social security contributions by 1.2% to 15%, which will come into effect from April.

The employment data also seems to be contradictory to Bank of England (BoE) Governor Andrew Bailey’s warning that he sees some softness in the labor market, as he said in an interview with BusinessLive on Monday. In the interview, Bailey also said that the economic outlook sluggish and surprisingly upbeat Q4 Gross Domestic Product (GDP) data had not changed the “bigger picture”. In February’s monetary policy statement, the BoE halved its growth forecasts for the year to 0.75%.

In addition to strong employment figures, Average Earnings data, a key measure of wage growth, accelerated in the three months ending December. Average Earnings Excluding bonuses accelerated to 5.9%, as expected, from the prior reading of 5.6%. Meanwhile, Average Earnings, Including bonuses, rose by 6%, faster than estimates of 5.9% and the former release of 5.6%.

High wage growth momentum would prompt inflation expectations and force the BoE to hold interest rates at 4.5%.

Going forward, investors will focus on the UK Consumer Price Index (CPI) data for January, which will be released on Wednesday.

Daily digest market movers: Pound Sterling recovers significant intraday losses against US Dollar

The Pound Sterling recovers most of its intraday losses against the US Dollar (USD) after better-than-expected UK labor market data. Earlier in the day, the GBP/USD pair declined as the US Dollar rebounded.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rebounds to near 107.00 from the two-month low of 106.50, which it posted on Friday. The Greenback bounces back as investors expect inflationary pressures stemming from United States (US) President Donald Trump’s economic agenda will be persistent.

President Trump has announced 25% tariffs on steel and aluminum imports from all nations and 10% on China. However, Trump’s reciprocal tariff plan is delayed and unlikely to come into effect before April. President Trump's nominated Commerce Secretary, Howard Lutnick, said on Thursday that the President will be ready to move on reciprocal tariffs by April 1.

Meanwhile, firm expectations that the Federal Reserve (Fed) will keep interest rates at their current levels for longer have also offered support to the US Dollar. Fed Governor Michelle Bowman said in her prepared remarks at the American Bankers Association conference on Monday that the benchmark interest rate "is now in a good place”, allowing the Committee to be patient and pay closer attention to the inflation data as it evolves. Bowman added that she wants to gain “greater confidence” that progress in lowering inflation will “continue” before supporting monetary policy adjustments.

Going forward, the Federal Open Market Committee (FOMC) minutes for the January meeting, which will be released on Wednesday, will be a major trigger for the US Dollar. Investors will look for cues about how long the Fed will keep interest rates in the current range of 4.25%-4.50%.

Technical Analysis: Pound Sterling aims to stabilize above 1.2600

The Pound Sterling strives to hold above the key level of 1.2600 against the US Dollar in European trading hours on Tuesday. The near-term outlook of the GBP/USD pair has turned bullish, as it holds above the 50-day Exponential Moving Average (EMA), which stands at around 1.2500.

The 14-day Relative Strength Index (RSI) holds above 60.00. A bullish momentum would activate if the RSI (14) sustains above that level.

Looking down, the February 3 low of 1.2250 will act as a key support zone for the pair. On the upside, the December 6 high of 1.2810 will act as a key resistance zone.

Source: FXSTREET

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Alex

Economic

The latest Market Talks covering FX and Fixed Income. Published exclusively on Dow Jones Newswires throughout the day.

0928 GMT - European defense stocks continue their steep upward trend in the morning trade as U.S. and Russian officials hold talks in Saudi Arabia on improving bilateral relations and potentially halting Ukraine war, and hours after European officials discussed security guarantees for Ukraine in the event of a ceasefire deal. Germany's Renk Group was the top European defense performer, rising 8.6% at 31.7 euros, followed by sensors provider Hensoldt, up 4% at 48.16 euros. Shares in Italy's Fincantieri advance 3.7% at 8.76 euros, while those in Britain's QinetiQ increase 2.9% at 4.03 pounds. France's Thales and Germany's Rheinmetall lag behind, rising 1.5% at 180.05 euros and 1.65% at 949 euros respectively. Shares in Italy's Leonardo go up 1.2% at 34.66 euros.

0851 GMT - Discussions among EU leaders for a joint fund for defence spending is unlikely to offer much support to the euro and other European currencies, ING analyst Francesco Pesole says in a note. "That's because the trigger is President Trump's threat to scale back military support for NATO borders in Europe, which is hardly a net-positive development for local currencies." It is also "far fetched" to hope any EU coordination on spending will be replicated on the fiscal side to counter U.S. tariff threats, he says. The eurozone's structural unpreparedness for the economic consequences of such tariffs forms the basis of ING's negative outlook for the euro. The euro falls 0.2% to $1.0462.

0850 GMT - Europe can't expect a major boon to its economy from a planned step-up in defence spending, Capital Economics' Jack-Allen Reynolds says. European leaders are planning to spend more on defense as they guard against an increasingly powerful Russia and less support from the U.S. But stimulus from that spending won't add more than a couple of decimal percentage points to GDP over the next few years, Capital Economics estimates. Increases in expenditure will be gradual and may be compensated with budget cuts elsewhere, while some spending may go to procurement from the U.S., Allen-Reynolds says. The impact of additional defense expenditure on inflation would also be "very small" and would unlikely impact monetary policy materially, he says.

0843 GMT - The euro looks set to fall further against the dollar as the threat of U.S. tariffs could lead to more aggressive European Central Bank interest-rate cuts than markets currently expect, ING analyst Francesco Pesole says in a note. The exchange rate has "obliterated the negative risk premium related to U.S. tariffs," he says. Optimism over Ukraine-Russia peace negotiations has offset concerns about tariff risks for now. However, tariffs would likely have more tangible implications for the ECB, the economy, and by extension the euro. The euro falls 0.2% to $1.0467. ING expects it to drop to $1.02 by the end of this quarter.

0842 GMT - Gold futures rise on safe-haven demand. Futures are up 0.7% at $2,922.10 a troy ounce. The precious metal has solidified its role as the foremost safe-haven asset and an attractive hedge against inflation, Tradu's Nikos Tzabouras says in a note. Gold--which has risen nearly 10% in the year-to-date alone--has benefited from President Trump's disruptive modus operandi, aggressive rhetoric and potential tariffs, which could hit global trade and intricate supply chains, Tzabouras says. Gold is set to naturally benefit from risk-off flows and central bank buying in the uncertain Trump 2.0 era, he writes. That said, while gold has benefited from the uncertainty so far the Federal Reserve will take a more cautious approach to monetary policy easing if inflation rebounds, which could boost the dollar and suppress precious metal demand, he adds.

0840 GMT - A less stringent approach to borrowing could allow Europe to invest more in defense while ironing out national-level discrepancies, Capital Economics' Jack Allen-Reynolds says in a note. The continent is gearing up to increase defense spending in response to shifting geopolitics, especially regarding Russia and the U.S. While national governments could borrow more to fund the extra spending, many--including France and Italy--already suffer from overstretched budgets, and others may not play ball, Allen-Reynolds says. Borrowing at the EU level would prove cheaper and more cost-effective, he says. While there is often resistance to extra borrowing, "the bloc's response to Covid-19 in 2020 shows that attitudes can change very quickly in times of crisis."

0833 GMT - Yields on U.K. government bonds, or gilts, rise as investors lower their expectations of Bank of England interest-rate cuts following stronger-than-expected labor-market data. "The jobs market holds up better than expected, generating strong wage growth that will keep the [BOE] monetary policy committee cautious," Pantheon Macroeconomics' Rob Wood says in a note. Average wage growth excluding bonuses in the three months to December accelerated to 5.9% from 5.5% previously. Unemployment held steady at 4.4%, below the consensus forecast of 4.5% by economists in a WSJ poll. The 10-year gilt yield climbs 4 basis points to 4.563% , Tradeweb data show.

0832 GMT - The impact of the forthcoming rise in U.K. employer national-insurance contributions and the national living wage could prompt the Bank of England to speed up interest-rate cuts in the second half of the year, Abrdn's Luke Bartholomew says in a note. For now, rate cuts will remain gradual after data Tuesday showed average pay growth picked up to 5.9% at the end of 2024, he says. However, the big test will be how the labor market reacts to the changes announced in the government's autumn budget. There are "clear signs" that hiring intentions have cooled in anticipation, he says. "If growth remains very sluggish there is a clear path to more rapid rate cutting in the second half of the year."

0817 GMT - The U.K. jobs market is due some loosening, Deutsche Bank's Sanjay Raja tells investors in a note. Unemployment was stable at 4.4% at the end of last year and average pay growth picked up pace to 5.9%, figures show Tuesday, pointing to a robust labor market despite signs of weakness in separate surveys. But an increase in employer taxes due to come into effect this spring will come at a price, and pay growth will also likely slow following a spike from a rise in minimum wages also due this spring, Raja says. "The labor market is creaking but not cracking," he says. "Some slack is emerging, but we aren't seeing a worrying spiral in unemployment - just yet."

0815 GMT - The dollar rises as its recent downward correction has likely run its course in the absence of tangible negative drivers, ING analyst Francesco Pesole says in a note. Markets will remain focused on any developments on U.S.-Russia talks over the Ukraine war, he says. Barring any major breakthrough, the "optimistic push and relative upbeat risk sentiment may stall or fade in the next couple of days and the dollar can continue to recover some ground." The DXY dollar index rises 0.3% to 106.915 after falling to a two-month low of 106.566 on Friday.

0803 GMT - U.K. businesses need a confidence boost, says Alex Hall-Chen at lobby group the Institute of Directors after data showed vacancies fell again in the three months to January. U.K. wage growth accelerated at the end of last year and unemployment remained stable, figures show Tuesday, but the drop in vacancies shows firms have little optimism to take on new employees, Hall-Chen says."The cumulative impact of recent employment reforms, coupled with upcoming increases to employer National Insurance Contributions and the National Living Wage, is significantly weakening the business case for hiring," he tells clients in a note, calling on business-friendly action from the government in London.

0736 GMT - March is likely to be a key test for China's economy and markets, Citi analysts write in a note. The rally in Chinese equities so far is a tech-led, sentiment-driven dynamism without significant changes in economic fundamentals, they add. The National People's Congress is scheduled to kick off on March 5 and is expected deliver the details of policy thinking, they say, adding that they the meeting is seen to be a mark-to-market one. The brokerage maintains its realistic expectations for a fiscal expansion of CNY2.5 trillion with trade-in subsidies doubling to CNY300 billion this year. "We tend to look for a solid start, with potential upside coming from export front-loading," the analysts write. A broad-based macro economy recovery marked with reflation may not be at the corner yet, they add.

Source：Dow Jones Newswires

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4Q24 GDP Grew Much Stronger Than Expected, Supporting BoJ Normalisation Ahead

Japan’s GDP grew 0.7% QoQ sa in the fourth quarter (vs a revised 0.4% in 3Q24, 0.3% market consensus) thanks to solid external demand

4Q24 GDP grew stronger than expected mostly due to strong external demand

BoJ watch

Potential Restart in Kurdish Oil Exports

Energy

Before the bell: Europe near peaks, defence in demand

Source:Reuters

European Defence Stocks Surge as Region's Leaders Plan Spending Boost

The Trump effect

Munich Conference

An army of Europe

Source: Euronews

USD/CHF Price Forecast: Strives for Firm Footing Above 0.9000

USD/CHF weekly chart

Source: FXSTREET

Pound Sterling Rebounds after Upbeat UK Employment, Strong Wage Growth Data

Source: FXSTREET

Global Forex and Fixed Income Roundup

Source：Dow Jones Newswires

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