Rates Spark: Bessent and Payrolls Key as We End a Tumultuous Week

Economic

Summary:

What a week! Tariff threats switched on and off, Bessent laser focussed on the 10yr yield, and next up is payrolls Friday. Meanwhile, a 25bp cut by the Bank of England safely delivered, and a dovish aftertaste, supports three more 25bp cuts this year. The ECB will publish a report on the neutral rate – potentially interesting. Lots to chew on over the weekend.

Treasuries take a pause as they brace for a "not-half-bad" payrolls report

Scott Bessent's laser focus on the US 10yr yield continued to reverberate through Thursday's trading, but this time without material effect on direction. We note the tightening between the 10yr Treasury yield and the 10yr SOFR rate into 43bp. That's down from the 50bp area over the turn of the year. It may appear to be an academic observation, but it's important. That 50bp spread was rationalised, in our view, by the size of the US fiscal deficit.

The thinking being that the SOFR curve is the risk free rate curve, and the Treasury curve sits above this to reflect its credit risk. This ranges from virtually zero in very short tenors out to much wider spreads in longer tenors. The 10yr spread had been in the 25bp to 30bp area in the wake of derivation of the SOFR rate and curve a few years back (Libor transition). But it shot up to above 50bp in late 2024, which we read as an extra spread to account for the implied credit risk coming from the elevated fiscal deficit and growing absolute debt levels.

So far in 2025, that spread has shown a tendency to narrow, and as mentioned, got down to 43bp on Wednesday, in part pressured there by a falling 10yr Treasury yield (Bessent's doing). This can be rationalised to the extent that e.g. DOGE will show some results, thus taking pressure off the fiscal deficit. That said, it remains to be seen whether this theme is a real runner as a genuine driver. If it is, there is room for Treasury yields to squeeze further lower (and for the spread to SOFR to tighten). If it isn't, then it can easily revert back up again. Which brings us to payrolls.

Payrolls Friday is anticipated to be a Goldilocks outcome, but with a clear tint of macro firmness – nothing wrong with a 175k expectation for jobs growth (above the 150k replacement rate), and a 4.1% unemployment rate. Get that, and Treasury yields won't have a clear route to head lower, at least not based off that number alone. The Fed would also look at this as the type of data that rationalizes an ongoing pause on any rate cutting ambition that the dots imply for 2025.

ECB staff forecasts of the neutral rate could in the end even help reopen the policy debate

European Central Bank staff is set to publish updated neutral rate estimates at 10:00am CET on Friday. The already known sub-title “statistical uncertainties and conceptual shortcomings” of this research bulletin already suggests that one should not draw too firm conclusions from the results. The market may still focus on the mid-point and how it compares to the range 1.75-2.25% that currently frames the discussions. On the other hand, a broader range (both to the up and downside) could also blunt the impact of calls such as those from individual officials more recently who have pointed out policy "target"-levels of around 2%. In the end, a broader range and more caveated results could open up the discussion again and lead the ECB back to a truer meeting-by-meeting approach – thus softening the current gravitational pull of the 2% level for market expectations.

The ECB has so far tried to steer the attention to broader measures of the ECB’s policy stance, and not just the distance from a vague neutral measure. There was no way of summarising the restrictiveness of monetary policy into a single number, but Chief economist Lane did outline at least nine factors that would have to go into any assessment. These range from taking into account the rolling off of super-cheap debt, the market's rate expectations, measures of policy transmission, to bond and equity risk premia which can also be exogenously influenced.

The Bank of England delivers cut with dovish aftertaste

The Bank of England (BoE) cut rates by 25bp as expected, but the votes did initially give a dovish flavour to the decision. Not only did the arch-hawk Mann support a cut, she even voted in favour of 50bp, together with the more dovish Swati Dhingra. On the other hand, the updated forecasts were more on the hawkish side, with inflation remaining just above target in two years’ time. Overall the net impact from the meeting on sterling rates was close to zero on the day.

We maintain a more dovish view compared to market pricing and in our view the outcome of the meeting was in line with our baseline of three more cuts in 2025. The risks seem tilted to the downside, with services inflation coming down and the jobs markets showing fragilities. If these trends were to accelerate, a 50bp suddenly seems less remote. As such we would argue that the front end of the sterling rates curve can still nudge lower from here. A more dovish BoE helps convince markets to lower rates, but we probably first need a series of better inflation number to really see a structural move lower.

To stay updated on all economic events of today, please check out our Economic calendar

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Owen Li

Commodity

Crude oil prices were set to end the week with a third consecutive decline as worry about the effect of Trump’s tariffs and China’s retaliation to them dragged benchmarks down.

At the time of writing, oil was slightly up from Thursday, with Brent crude at $74.69 a barrel and West Texas Intermediate at $70.92 per barrel, but both were lower than they were on Monday, by over 2%.

The slide in prices followed the introduction of a 10% tariff on all Chinese imports into the United States, which prompted China to respond in kind, slapping a 10% import duty on U.S. crude and a 15% tariff on liquefied natural gas.

A Thursday announcement by the Department of Treasury that it would sanction several people and vessels carrying Iranian crude oil abroad somewhat limited the downward pressure on oil prices but the impact of the move is yet to manifest in full.

“Oil prices saw some stability return this morning following a volatile session overnight, as traders react to news of U.S. sanctions on Iranian crude exports to China,” IG analyst Yeap Jun Rong told Reuters.

“Nevertheless, (today's) oil gains are limited, reflecting persistent concerns over supply and demand headwinds, including the potential for increased production from OPEC+ and the US, as well as tariff risks weighing on global oil demand,” he added.

ING commodity analysts, meanwhile, revised their general expectations about oil prices in 2025 this week, noting that “The supply risks facing the market due to sanctions mean that the floor for oil prices is probably a little higher than we had expected coming into this year. However, much will depend on how trade relations progress. A tougher stance from the US on trade will be a concern for global growth.”

BMI analysts pointed out the prospect of a full-blown trade war as a source of price pressure on oil as such a development could weaken demand for the commodity.

Source: OILPRICE

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Owen Li

Bond

Economic

UK bond syndication attracts biggest ever order book despite volatility

The UK Debt Management Office’s first public sale of the year impressed with an unprecedented level of demand despite a huge sell-off in gilts over recent months.

On 21 January, the UK DMO raised £8.5bn via a syndicated re-opening of the 4.4% 2040 gilt led by Deutsche Bank, JP Morgan, Morgan Stanley, Nomura and RBC Capital Markets. The deal closed with total orders of just over £119bn from 279 accounts, making it a record gilt sale from both the size of demand and the number of investors in the order book.

The record level of demand was particularly notable given the gilt market’s recent period of volatility, with yields reaching their highest level in decades. Gilt yields have been under pressure, not just from a global sell-off in government bonds driven in part by US inflationary concerns, but also issues pertaining to the UK itself, such as Labour’s spending ambition, higher borrowing and stagflation fears.

Highest yields in decades

Yields on 30-year gilts passed 5.5% in January 2025, reaching their highest level since 1998, while 10-year yields touched 4.9%. While the sell-off has eased in recent weeks, 30-year and 10-year gilts are still at elevated levels. The higher yields would have inevitably helped attract more demand, with the yield on the syndicated tap at just over 5%.

‘It is fair to say this transaction provides a clear and visible demonstration of the excellent support we continue to receive from our gilt market investor base,’ said Jessica Pulay, chief executive officer of the UK DMO. ‘It also sends a strong message about the ongoing smooth and efficient functioning of the gilt market.’

The deal was executed smoothly and quickly with the order book closing at 10:00am and the price setting at just before midday.

Strong support from international investors

Another notable feature of the transaction was the support from international investors, allocated 32% of the sale, which was also marginally a record for a UK syndication. The allocation to international accounts from the last two gilt syndications were at 27% and 13% respectively, with issuances in November and September.

‘We welcome the diversification of our investor base,’ said Pulay. Foreign investors have become the biggest segment of the overall gilt portfolio. The growth of international investors has occurred in parallel with gilts having a bigger share in global bond indices as well as an increased share of sterling in central bank reserves.

Following the latest syndication, total gilt sales for the 2024-25 financial year have reached £229.7bn. This is the second-highest annual issuance by the UK DMO after 2020-21, when extra funds were raised to support the economy during the Covid-19 pandemic. However, accounting for the fact that there is no quantitative easing stimulus but rather £100bn worth of quantitative tightening over the next year by the Bank of England, this will be a record amount of gilts entering the hands of private investors.

The UK’s penultimate syndication of the financial year will take place in the week commencing 10 February, with the launch of a new conventional gilt maturing in March 2035.

Reduced duration

On 20 January, officials from the UK DMO and the UK Treasury held their annual consultation meetings with gilt-edged market makers and gilts investors to review the financing remit of the current financial year and provide feedback for 2025-26.

The minutes published by the UK DMO showed that among GEMMs and gilt investors, there was strong support for a reduction in the duration of conventional gilt issuance in 2025-26 relative to the current year. Most who were present advocated for an increased proportion of short-term and medium-term gilts and a proportionate reduction in long-term gilts.

The financing remit for the UK DMO in 2025-26 is currently projected to be £299.6bn.

Source：omfif

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ING

Economic

Trump spurs haven demand

It is only February, and gold has already hit a series of fresh record highs this year. Tariff concerns that risk higher inflation and slower economic growth are spurring demand for safe haven assets like gold.

Tariffs on Canada and Mexico have been delayed by a month, but 10% tariffs on China went ahead. Beijing retaliated immediately by imposing a range of tariffs on US products.

Despite the US coming to a deal with Canada and Mexico, the uncertainty over trade and tariffs will continue to buoy gold prices. If trade tensions intensify and we see more retaliatory measures, safe haven demand for gold will continue.

US President Donald Trump's latest comments suggesting that the US takes over the Gaza strip and assumes responsibility for reconstructing the territory have added to this uncertainty, further boosting gold prices.

With Trump back in the White House, uncertainty and unpredictability are running high. And gold will continue to benefit from this environment.

Central banks are still bullion hungry

Gold’s rally in 2024 was driven by central bank buying, especially from China. Central banks are still buying and will probably continue to do so as geopolitical tensions and the economic climate continue to push them to increase their allocation towards safe haven assets.

Last year, central banks buying exceeded 1,000 tonnes for the third year in a row, accelerating sharply in the fourth quarter to 333 tonnes, bringing the net annual total to 1,045 tonnes, according to the latest data from the World Gold Council. The National Bank of Poland led the charge, adding 90 tonnes to its gold reserves last year, but demand was seen from a broad range of emerging market banks.

Central banks’ healthy appetite for gold is also driven by concerns from countries about Russian-style sanctions on their foreign assets in the wake of decisions made by the US and Europe to freeze Russian assets, as well as shifting strategies on currency reserves. Looking ahead, we expect central banks to remain buyers.

Central banks demand tops 1,000t for the third year in a row

Central banks’ appetite for gold likely to continue in 2025

Meanwhile, soaring gold stockpiles in America could further boost gold prices. Following Trump’s election win in November, Comex gold inventories surged to their highest level since 2022. Tariff fears and a profitable arbitrage – after gold prices on Comex moved to a premium over international prices in December – have caused a rush of gold to fly into New York. Gold’s exports to the US from Europe’s main refining hub in Switzerland have also jumped to the highest level since Russia’s invasion of Ukraine.

While the US president hasn’t specifically targeted gold in his tariff threats, traders have been concerned that gold could be included in potential blanket tariffs he has threatened to impose.

If tariffs on gold are applied, this would lead to higher and more volatile gold prices in the US and a potential reshuffle of trade routes. The US is reliant on imports of gold from both Mexico and Canada. In 2024, Mexico accounted for around 30% of US imports of gold, and Canada for around 15%.

This surge in demand from the US could provide a further boost for gold prices.

Trump sparks a huge gold rush

ETFs are ticking higher

Investor holdings in gold ETFs generally rise when gold prices gain, and vice versa. Global holdings in gold ETFs were effectively flat in the fourth quarter and ended the year very close to where they had started even as gold prices surged 27%. However, ETF holdings have been ticking higher over the past couple of sessions. If we see more additions, perhaps driven by geopolitical uncertainty, optimism about further US rate cuts and/or a stronger gold performance, this would give bullion prices a further tailwind.

More ETF flows would give gold prices further boost

US Fed cuts will boost gold

The main question for the gold market now is the pace at which the Federal Reserve will ease its policy. Lower borrowing costs are positive for gold as the metal doesn’t pay interest. After 100bp of interest rate cuts in the latter part of 2024, the Fed held policy steady in January and suggested it was in no hurry to cut again. The recent developments surrounding tariffs are likely to keep it that way through the first half of 2025, our US economist believes.

If the central bank is forced to maintain higher rates for longer, this could undermine gold’s appeal.

However, the central bank will still ease its policy over the course of the year, even if its path to easing is slower than previously expected. Our US economist now expects the Fed to cut rates twice in the second half of this year. What happens next is highly uncertain, but assuming a gradual de-escalation of tensions that sees tariffs being removed, he is forecasting one further rate cut in early 2026.

Lower borrowing costs are positive for gold

We believe gold will hit more record highs this year, with $3,000/z now in sight. The macro backdrop will remain favourable for gold as interest rates decline and foreign reserve diversification continues amid geopolitical tensions. A stronger USD and tighter monetary policy could eventually provide some headwinds to gold. However, increased trade friction could add to gold’s haven appeal. We see gold averaging $2,800/oz in the first quarter with prices likely to reach the $3,000/oz level this quarter. We see an average of $2,760/oz in 2025.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Warren Takunda

Stocks

London stocks were set to fall at the open on Friday following a record close a day earlier, as investors eyed the latest US non-farm payrolls report.

The FTSE 100 was called to open down around 30 points.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said: "This week’s US jobs data has so far given mixed signals with lower job openings in December, lower job cuts during the course of last year but a jump in terminations in January, weaker labour productivity, a weaker-than-expected jump in labour costs, and a stronger-than-expected ADP employment figures.

"Today, the official US jobs data is expected to print 169,000 new nonfarm jobs added last month, with a slightly slower wages growth and a stable unemployment rate near the 4.1%. But investors will also focus on the annual revisions to the jobs figures. Note that, the early estimates in August hinted that the US jobs numbers could see a downward revision of more than 800,000 jobs. Economists expect that the downward revision will rather be around 600-700,000 jobs.

"If that’s the case, the week will end with the narrative that the US jobs market is healthily slowing - a scenario that would allow the Fed to continue cutting the rates but not hurriedly, and keep the market sentiment at a sweet spot. A weaker-than-expected NFP figure, and/or rising wages would weigh on sentiment, while a stronger-than-expected NFP - if combined to softening wages would reinforce the goldilocks scenario."

The payrolls report for January is due at 1330 GMT, along with the unemployment rate and average earnings.

On home shores, industry data showed retail footfall jumped in January as shoppers braved winter weather to hit the January sales.

According to the latest BRC-Sensormatic footfall monitor, total UK footfall increased by 6.6% last month, comfortably reversing December’s 2.2% decline.

All types of destinations saw an uptick in footfall, led by retail parks and shopping centres.

Footfall had been flat in December in retail parks, but jumped 7.9% in January, while shopping centres saw a 7.4% increase following a 3.3% decline a month earlier.

On high streets, footfall rose by 4.5%, compared to a 2.7% dip in December.

Helen Dickinson, chief executive of the British Retail Consortium, said: "Store visits increased substantially in the first week of the month, as many consumers hit the January sales.

"Despite snowy weather and Storm Eowyn causing disruption in some areas, footfall was still positive across major UK cities over the whole month."

In corporate news, Victrex held guidance after a solid first-quarter performance saw revenues rise 9% but warned trading conditions remain mixed, with medical revenues continuing to be subdued on a year-to-date basis, driven by ongoing industry destocking among its customers.

The company said guidance remained for at least mid-single digit volume growth for fiscal 2025, with underlying pre-tax profit growth ahead of volume growth.

Legal & General said it will sell its US protection business to Japanese peer Meiji Yasuda, with the latter taking a 5% stake in L&G in a deal worth $2.3bn.

The transaction will kickstart a long-term strategic partnership between the two companies to support growth ambitions in US Pension Risk Transfer and asset management markets. L&G intends to launch a £1.0bn buyback following completion, which is expected towards the end of 2025.

Source: Sharecast

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Owen Li

Economic

Forex

Consensus forecasts predict an increase of 169,000 jobs, with the unemployment rate expected to remain at 4.1%.

Strong numbers (over 190,000 jobs) could strengthen the dollar, while weak numbers (less than 135,000 jobs) could weaken it.

(DXY) currently has support levels around 107.00, 106.13, and 105.76, and resistance levels at 108.00, 108.49, and 109.52.

The US Bureau of Labor Statistics is set to release the non-farm payroll and jobs data for January 2025 on Friday, February 7th, 2025.

NFP Report Expectations

The consensus forecast for January’s non-farm payroll is an increase of 169,000 jobs, following a robust gain of 256,000 jobs in December 2024. Recent jobs data has been strong, with the US economy adding an average of 186,000 jobs per month in 2024. This suggests that the labor market remains healthy heading into 2025.

Source: TradingEconomics

The unemployment rate is expected to stay at 4.1%, and wages are predicted to grow by 0.3% this month (3.8% over the past year). However, job growth could be higher than expected, with estimates ranging from 175,000 to 225,000 new jobs.

As always the average hourly earnings measure will play a key role. Any significant deviation away from the 3.8-4% range here could see an uptick in inflation expectations. This would then have a knock on effect on Fed policy regarding rate cuts which could see the US Dollar experience some volatility.

There are challenges ahead with concerns that tariff uncertainty and growth worries may lead to a cautious approach toward hiring in the first part of 2025. It will be interesting to see if these concerns come to fruition and we see any cooling of the labor market and a drop in hiring.

The Current State of the US Labor Market

The US labor market is slowing down gradually. A December report showed over 500,000 fewer job openings, bringing the total to 7.6 million. Professional services and healthcare saw the biggest drops, while leisure and hospitality stayed strong.

Hiring has been slower, and layoffs are balancing out new hires in some industries. However, wages have stayed steady, with average pay growth at 3.9-4.0% over the past five months, showing that demand for workers is still solid.

There have been some mixed signs in recent data releases however, with metrics like the manufacturing and services PMI employment components, pointing to sustained hiring momentum. The ISM Manufacturing Employment Index recently climbed to 50.3, signaling expansion, while the ADP private payrolls report showed 183,000 jobs added in January.

Given the above and with the geopolitical and trade developments one may understand why tomorrow’s report is so crucial.

Potential Impact and Scenarios

The NFP report plays a big role in shaping the US Dollar Index (DXY) and overall market mood. If the report shows strong numbers, especially over 190,000 new jobs, the US dollar could strengthen, especially since it’s close to support levels around 107.50. But if the report is weak, with less than 135,000 jobs added or wage growth under 0.2%, markets may expect the Fed to cut rates more aggressively, which could weaken the dollar.

For stocks, strong job numbers might raise concerns about stubborn inflation moving forward, which could slow down market gains. On the other hand, weak job data could signal easier monetary policies ahead and more rate cuts thus stoking market optimism. .

Potential Impact on the US Dollar Based on the Data Released

Technical Analysis – US Dollar Index (DXY)

Looking at the US Dollar Index and bulls have failed to kick on this week as price action has now printed a lower high but no lower low has materialized yet. Will the jobs data help the DXY continue its recent malaise or will it give bulls renewed impetus to push on?

Immediate support rests at 107.00 before the 106.13 and 105.76 handles come into focus.

A move higher from here will need to break above the 108.00 handle before resistance at 108.49 and 109.52 come into focus.

US Dollar Index (DXY) Daily Chart, February 6, 2025

Source: TradingView (click to enlarge)

Support

107.00

106.13

105.76 (100-day MA)

Resistance

108.00

108.49

109.52

Source: ACTIONFOREX

To stay updated on all economic events of today, please check out our Economic calendar

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Alex

Economic

Forex

Key Highlights

USD/JPY started a fresh decline below the 155.50 support zone.

A connecting bearish trend line is forming with resistance at 154.80 on the 4-hour chart.

EUR/USD recovered above 1.0400 before the bears appeared again.

The US nonfarm payrolls could change by 170K in Jan 2025, down from 256K.

USD/JPY Technical Analysis

The US Dollar started a fresh decline below 156.20 against the Japanese Yen. USD/JPY declined below 155.50 and 155.00 to enter a short-term bearish zone.

Looking at the 4-hour chart, the pair settled below the 154.20 level, the 100 simple moving average (red, 4-hour), and the 200 simple moving average (green, 4-hour). The bears seem to be in control and might aim for more losses.

On the downside, immediate support sits near the 151.80 level. The next key support sits near the 151.20 level. Any more losses could send the pair toward the 150.50 level.

On the upside, the pair seems to be facing hurdles near the 152.80 level. The next major resistance is near the 153.80 level. The main resistance is now forming near the 154.00 zone.

There is also a connecting bearish trend line forming with resistance at 154.80 and the 100 simple moving average (red, 4-hour). A close above the 154.80 level could set the tone for another increase. In the stated case, the pair could even clear the 155.50 resistance.

Looking at EUR/USD, the pair was able to recover above the 1.0400 resistance, but the bears are still active below 1.0450.

Upcoming Economic Events:

US nonfarm payrolls for Jan 2025 – Forecast 170K, versus 256K previous.

US Unemployment Rate for Jan 2025 – Forecast 4.1%, versus 4.1% previous.

Source: ACTIONFOREX

To stay updated on all economic events of today, please check out our Economic calendar

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Rates Spark: Bessent and Payrolls Key as We End a Tumultuous Week

Treasuries take a pause as they brace for a "not-half-bad" payrolls report

ECB staff forecasts of the neutral rate could in the end even help reopen the policy debate

The Bank of England delivers cut with dovish aftertaste

Oil Prices Remain Under Pressure from Trade War Fears

Source: OILPRICE

Record Bid ‘Sends a Strong Message’ About Gilt Market

Highest yields in decades

Strong support from international investors

Reduced duration

Source：omfif

Gold Monthly: $3,000 Is Now in Sight

Trump spurs haven demand

Central banks are still bullion hungry

Central banks demand tops 1,000t for the third year in a row

Central banks’ appetite for gold likely to continue in 2025

Trump sparks a huge gold rush

ETFs are ticking higher

More ETF flows would give gold prices further boost

US Fed cuts will boost gold

Lower borrowing costs are positive for gold

London Pre-Open: Stocks Seen Lower as Investors Eye Payrolls

Source: Sharecast

US Dollar Index (DXY) And The NFP Jobs Report: What To Expect

Source: ACTIONFOREX

USD/JPY Extends Decline as Markets Brace for US NFP Data

Key Highlights

USD/JPY Technical Analysis

Source: ACTIONFOREX

Risk Disclosure