Cooling cut expectations

Daily update

The January US employment report signaled sufficient strength to cool market expectations of an urgent US rate reduction. There is no evidence of political interference in the data. However, the data quality is questionable—survey response rates remain low, and the Bureau of Labor Statistics has lost staff. There was a surprise sharp increase in foreign-born US worker employment and a drop in US-born US worker employment in the past two months. The 2025 data showed a broad-based decline in manufacturing employment, even in sectors protected by tariffs.
The US affordability crisis is having a political impact, with several Republican members of Congress siding with Democrats to oppose tariffs on US importers of Canadian products. This is unlikely to change anything as US President Trump would presumably veto any anti-tariff legislation.
UK preliminary fourth quarter GDP was very slightly weaker than expected—consumers were fine but government spending and investment were softer. There is an interesting question about what the appropriate level of investment is, in an economy where changing working patterns mean existing capital stock is used more efficiently and office buildings and equipment are less necessary.
There are a few ECB speakers, which markets are likely to overlook. Eurozone inflation continues to be benign.