Global Markets Show Policy and Data Divergence (19- 23 January)

Global markets began the week with the US dollar holding its ground near 99.3, on track for a third consecutive weekly gain. Strong US economic indicators, including resilient manufacturing and labor data, have pushed market expectations for initial rate cuts out to June or later.

This strength has pressured the euro to a one-month low, even as Germany technically exited its prolonged downturn.

In commodities, silver experienced a sharp extension of its pullback, dropping over 4% after the US ruled out tariffs on critical minerals. Gold also retreated as the "higher-for-longer" narrative gained traction, though it remains elevated by historical standards. Meanwhile, fixed income markets are grappling with renewed political questions regarding Fed independence, pushing the US 10-year yield to its highest level in four months.

Market Drivers & Catalysts

• Resilient US Macro Profile: Firmer manufacturing and softer jobless claims have diminished the urgency for Fed easing, supporting a higher-for-longer rate outlook.
• Fed Independence Concerns: Speculation surrounding Chair Jerome Powell and potential leadership changes has introduced a risk premium into long-term yields.
• UK Growth Rebound: A 0.3% GDP rise in November reversed previous contractions, leading markets to scale back expectations for aggressive BoE easing to 46 bps by year-end.
• Critical Mineral Policy Shift: Silver’s pullback was intensified by the US decision to exclude critical minerals from new tariff regimes, removing a primary bullish catalyst.
• China’s Record Trade Surplus: China achieved a historic $1.189 trillion surplus in 2025 by successfully redirecting trade toward the EU and Southeast Asia.

Fixed Income

• United States 10‑Year Treasury: Yields rose to 4.23%, a four-month high. While US markets are closed Monday for MLK Jr. Day, the trend is driven by resilient industrial production and political uncertainty regarding the Fed's future leadership.
• United Kingdom 10‑Year Gilt: Yields climbed to 4.37%, rebounding from one-year lows. Stronger growth data (GDP +0.3%) has pushed expectations for the first rate cut to mid-year at the earliest. As a result, markets now price about 46 basis points of easing by year-end.
• Japan 10‑Year Government Bond: Yields hovered near 2.18%, a 27-year high. Investors are waiting on the BOJ’s June outlook while weighing the fiscal implications of a potential snap election and increased debt-funded spending.
• Germany 10‑Year Bund: Yields rose to 2.83%. While manufacturing remains a weak spot, the economy’s return to growth (+0.2% in 2025) and stabilized inflation have solidified expectations for steady ECB policy.

Commodities

Gold slipped roughly 1% to $4,560/oz. Fading hopes for imminent Fed cuts and a calming of certain geopolitical risks reduced safe-haven demand, though prices remain positioned for a weekly advance.

Silver dropped more than 4% to below $88.7/oz. The pullback was driven by profit-taking and the US government's decision not to move forward with tariffs on critical minerals.

Currencies

• U.S. Dollar Index (DXY): Held near 99.3. Markets are currently focused on upcoming PCE inflation and GDP data to confirm the Fed's likely path through the second half of 2026.
• Euro: Weakened to $1.163, a one-month low. Despite inflation returning to the 2% target, the euro struggled against the backdrop of strong US data and fragile German manufacturing.
• British Pound: Stabilized near $1.34. Positive growth surprises in November have lifted three-month growth into positive territory, supporting the currency against broad dollar strength.
• Japanese Yen: Appreciated toward 158 per dollar. Support is largely driven by intervention fears near the 160 level as the market prepares for Governor Ueda’s upcoming policy signals.

Economic Data Highlights

• U.S. Core Inflation (Dec): Held at 2.6% YoY, a multi-year low. However, shelter costs accelerated to 3.2%, highlighting an uneven disinflation process.
• U.S. Producer Price Inflation (Nov): Headline and core PPI both climbed to 3.0% YoY, exceeding forecasts and signaling persistent upstream price pressures.
• U.S. Existing Home Sales (Dec): Jumped 5.1% to an annualized 4.35 million, the strongest in three years. Inventory sits at 1.18 million units (3.3-month supply).
• China Balance of Trade (2025): Recorded a record surplus of $1.189 trillion. December alone saw a $114.1 billion surplus, with exports jumping 6.6% YoY.
• Germany GDP (2025): Expanded 0.2%, ending a prolonged downturn. Growth was primarily supported by domestic consumption, offsetting the 0.0% flat growth in industrial sectors.

Macro Calendar Highlights

• U.S. Personal Consumption Expenditures (PCE) Index
• U.S. Fourth Quarter GDP Preliminary Release
• Bank of Japan (BOJ) Policy Meeting & Outlook
• U.K. Three-Month GDP Growth Summary
• China Customs Trade Balance Detailed Report