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Daily Economic Update
26.01.2025US: Trump ‘demands’ lower interest rates and signals further softening in anti-China stance. President Trump in a virtual speech at the World Economic Forum, ‘demanded’ lower interest rates in the US as well as globally amid lower oil prices, likely putting him on a potential collision path with Fed. Meanwhile, in more signals of a milder stance on China, he described his earlier call with Chinese president Xi Jinping a “friendly conversation”, and hoped a trade deal could be reached and said he would rather not have to use tariffs. So far since taking office, Trump has stayed away from his pre-election pledges of imposing blanket tariffs of 10-20% on most goods and higher up to 60% on Chinese imports. Instead, last week, he said he was mulling subjecting imports from China to a 10% tariff, citing illegal imports of the drug-substance Fentanyl rather than on his earlier concerns about manufacturing job losses in the US due to rising imports. His seemingly softer approach on tariffs lifted many emerging equity markets on Friday, with the US dollar index dropping from its nearly two-year high to close at its lowest in about a month. On data news, business activity, based on the S&P Global composite PMI surveys, weakened to a nine-month low of 52.4 in January from 55.4 in December; manufacturing tentatively exited its slump for the first time in seven months (50.1 from 49.4) but the services measure slowed to 52.8 from 56.8.
Japan: Bank of Japan raises interest rates to 17-year high. The Bank of Japan (BoJ) raised its short-term policy rate to around 0.5%, the highest since 2008, by a majority of 8-1 votes while setting the complementary deposit facility and the basic loan rate at 0.5% and 0.75%, respectively. The BoJ also upgraded its outlook for core inflation for FY24 and FY25 to 2.7% and 2.4% respectively, from 2.5% and 1.9% in its October’s view, forecasting that core inflation will remain at or above its 2% target for three straight years as risks to the inflation outlook remain skewed to the upside amid intensifying labor shortages, rising prices of rice, and higher import costs due to a weak yen. Moreover, the bank slightly lowered its growth forecasts in FY24 to 0.5% (0.6% in October’s outlook) while maintaining 1.1% growth in FY25. The bank also pointed out that financial conditions remain broadly accommodative, providing support for economic growth with real interest rates remaining negative. BoJ governor Ueda, in the press conference, voiced his confidence that the economy and prices are moving in line with BoJ’s baseline forecasts, but without giving any solid hints related to the next rate hike. He pointed out that there were no major shocks to the markets since Trump’s inauguration, though signaled concerns about uncertainties related to Trump’s tariff policies. The yen rose by about 0.8% following the policy decision, but pared gains to stand at JPY155.9/$1. In addition, the 2-year JGBs yield briefly rose to 0.725%, a level last seen in October 2008, then closed at 0.715%. Inflation may cool starting January as the government re-introduces its energy subsidy program. However, solid wage increases in 2025 Shunto negotiations and a steady increase in services prices could push the BoJ to hike rates by a further 25bps this summer.
Eurozone: Business activity returns to growth in January. The Flash Eurozone PMI showed signs of stabilizing in January as the downturn in the manufacturing sector eased and services remained stable. Overall, the preliminary composite PMI rose to 50.2 from December's 49.6, inching just above the 50-mark separating growth from contraction. That said, the manufacturing PMI reached 46.1 from 45.1 in December, still in contraction territory though beating market forecasts of 45.3 and suggesting some improvement in the sector despite ongoing declines in output, new business and employment. Meanwhile, the services sector saw a slight decline in January at 51.4 from 51.6 previously, slightly missing market expectations of 51.5 but remaining in expansion territory as new business rose, but international demand declined.
UK: Business activity improves but details much weaker. The S&P Global composite flash PMI rose to a three-month high of 50.9 in January from 50.4 in December, as manufacturing continued to contract, albeit at a slower pace (48.2 versus 47), and services improved slightly (to 51.2 from 51.1). However, underlying details pointed to a weaker picture as firms cut employment for the fourth consecutive month and at the steepest rate since the 2008-09 financial crisis (outside the pandemic period) over the last two months amid higher employee insurance burdens and declining confidence. The subindex of future business activity was also at its lowest since December 2022, signaling a worsening demand outlook. Moreover, the input and output price gauges accelerated to their highest in over one and half years, clouding the Bank of England’s policy rate outlook over the coming months as the bank continues to grapple with a weakening economy and persistent inflationary pressures.
