Tech stocks help Nikkei eke out small gain

TOKYO – Japan’s Nikkei share average closed slightly higher on Friday as technology stocks tracked Wall Street’s overnight gains, while a stronger yen weighed on market sentiment and US tariff worries lingered.

The Nikkei rose 0.15% to 39,572.49 to post its third straight session of gains. It, however, fell 1% for the week in its fourth weekly drop in five.

The broader Topix gained 0.24% to 2,788.66 on Friday.

Chip-making equipment maker Tokyo Electron rose 3.33% to provide the biggest boost to the Nikkei.

Fujikura, which makes fibres used by data centres and is a gauge for AI-related investments, jumped 4%.

“Gains in Japanese equities were limited as the yen strengthened and the market was also concerned about US President Donald Trump’s tariff policy and its impact on Japanese firms,” said Kentaro Hayashi, a senior strategist at Daiwa Securities.

Trump has said Feb. 1 would be the date that he imposes 25% tariffs on imports from Canada and Mexico.

The yen was on track for its best monthly start to the year since 2018 on Friday, helped by the view that the Bank of Japan (BOJ) is likely to keep raising rates this year while its global peers elsewhere look to ease policy.

A stronger Japanese currency tends to hurt shares of exporters, as it decreases the value of overseas profits in yen terms when firms repatriate them to Japan.

“Although the market was not totally pessimistic. Investors became selective and bought stocks with a positive outlook and returns,” Hayashi said.

NEC surged 18% after the computer maker raised its annual operating profit forecast and announced a 5-for-1 stock split.

Among losers, scandal-hit Fuji Media fell 4% after the television network operator slashed its annual net profit forecast by two-thirds citing a sharp drop in advertising revenue.

Truck maker Hino Motors tumbled 12% to become the worst percentage loser on the Nikkei.

(Reporting by Junko Fujita; Editing by Subhranshu Sahu)

Yields rise as White House says tariffs will start on Saturday

US Treasury yields rose on Friday, a day ahead of new US tariffs due to be levied on imports from Mexico, Canada, and China, and as traders weighed data showing strong consumer spending and a moderate increase in inflation in December.

President Donald Trump on Saturday implemented tariffs of 25% on Canadian and Mexican imports and 10% on Chinese goods with immediate effect, White House spokesperson Karoline Leavitt said on Friday.

Uncertainty over the impact of tariffs is muddying the outlook on the economy, with details on the implementation, including whether there will be exemptions, also unsure.

“There’s a lot of uncertainty about tariffs and really what comes next on that front,” said Gennadiy Goldberg, head of US rates strategy at TD Securities in New York.

The 2-year note yield, which typically moves in step with Fed interest rate expectations, was last up 3.5 basis points on the day at 4.232%.

The yield on benchmark US 10-year notes rose 5.9 basis points to 4.571%.

The yield curve between two-year and 10-year notes steepened by around 2 basis points to 33.7 basis points.

Yields briefly jumped earlier on Friday after data showed that consumer spending, which accounts for more than two-thirds of US economic activity, beat estimates with a 0.7% jump during December.

Meanwhile, the core personal consumption expenditures (PCE) price index rose 0.2% last month, in line with economists’ expectations, for an annual gain of 2.8%. The headline PCE price index rose 0.3% last month for an annual gain of 2.6%.

“The very strong personal income spending data continues to suggest that the consumer remains resilient. At the same time, you do have inflationary pressures continuing to fade,” Goldberg said. “It really underscores that the Fed can keep rates on hold, at least for the next meeting or so if data like this continues.”

Fed Chairman Jerome Powell said on Wednesday that the US central bank wants to see further progress in inflation before cutting rates, but also expressed confidence that it remains on the right path to ease back closer to the Fed’s 2% annual target.

Chicago Fed President Austan Goolsbee said Friday’s inflation data was a bit better than expected and gives him comfort that inflation is on a path to the 2% target, adding that he still expects the US central bank’s policy rate to be “a fair bit” lower in 12 to 18 months.

Fed governor Michelle Bowman said on Friday she still expects declining inflation to allow further interest rate cuts this year, but feels rising wages, buoyant financial markets, geopolitical risks, and upcoming administration policies could slow the process and keep price pressures elevated.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) rose above 2.60% to its highest since March 2023 and was last at 2.596% after closing at 2.535% on Thursday. The 10-year TIPS breakeven rate was last at 2.429%, indicating the market sees inflation averaging above 2.4% a year for the next decade.

Annual inflation data should cool in the coming months due to favorable comparisons with hot readings from a year ago, weighing in favor of lower interest rates, said Stan Shipley, macro research analyst at Evercore ISI.

The Treasury will also release its refunding estimate for the coming quarters next week, with its broad borrowing estimate due on Monday and its more detailed estimate due on Wednesday.

(Reporting by Karen Brettell in New York and Douglas Gillison in Washington, Editing by Nick Zieminski, Deepa Babington, Will Dunham, and Matthew Lewis)

Wall St ends lower as White House says Trump to implement tariffs

NEW YORK – US stocks ended lower on Friday, with indexes losing ground after the White House said US President Donald Trump will implement tariffs of 25% on Canadian and Mexican imports and 10% on Chinese goods.

Investors have been bracing for further tariff news after Trump has repeatedly warned about using the measure. Uncertainty over the impact of tariffs has muddled the outlook for the economy and inflation.

“I would have thought the market would be down more,” said Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey. “It’s not just the announcement itself, which I think probably impacts a select number of industries. It’s whatever retaliation moves are taken.”

Stocks turned lower on Friday afternoon after the White House said the tariffs against Canada, Mexico and China would take effect on Saturday.

Friday capped a heavy week of quarterly results from US companies as well. Apple shares ended down 0.7%. They were higher early in the session after the company gave upbeat executive comments in its earnings on Thursday, in a sign it expects to recover from a dip in iPhone sales as it rolls out artificial intelligence features.

Energy led declines among S&P 500 sectors on Friday, with Chevron shares falling 4.6% after the company reported fourth-quarter earnings below estimates and Exxon Mobil easing 2.5% after its quarterly results.

The Dow Jones Industrial Average fell 337.47 points, or 0.75%, to 44,544.66, the S&P 500 lost 30.64 points, or 0.50%, to 6,040.53 and the Nasdaq Composite lost 54.31 points, or 0.28%, to 19,627.44.

Indexes registered gains for the month of January, with the Dow up 4.7%, the S&P 500 up 2.7%, and the Nasdaq up 1.6%.

For the week, the Dow was up 0.3%, but the S&P 500 declined 1% and the Nasdaq fell 1.6%. Tech shares sold off on Monday after Chinese startup DeepSeek unveiled a breakthrough in cheap AI models.

Early in Friday’s session, economic data reinforced expectations that the Federal Reserve would keep interest rates unchanged for longer.

Reports showed strong US consumer spending and a moderate increase in inflation in December.

“Clearly, it makes total sense that the Fed didn’t do anything this week, and it makes sense (Fed Chair) Jay Powell would say they’re not in a hurry to lower rates,” said Scott Wren, senior global market strategist at Wells Fargo Investment Institute in St. Louis, Missouri.

The Fed left rates unchanged in its policy announcement on Wednesday, and Powell said the US central bank wants to see further progress in inflation before cutting rates.

After the closing bell, Trump said he expects his administration to impose tariffs related to oil and gas around Feb. 18. But he did not name a specific country to which the tariffs would apply or specify any more details about the plans.

Declining issues outnumbered advancers by a 2.3-to-1 ratio on the NYSE. There were 231 new highs and 54 new lows on the NYSE.

On the Nasdaq, 1,491 stocks rose and 2,913 fell as declining issues outnumbered advancers by a 1.95-to-1 ratio.

Volume on US exchanges was 15.78 billion shares, compared with the 15.5 billion average for the full session over the last 20 trading days.

(Reporting by Caroline Valetkevitch in New York; Additional reporting by Shashwat Chauhan and Sukriti Gupta in Bengaluru; Editing by Arun Koyyur and Matthew Lewis)

Gold surges past USD 2,800 as tariff threats reignite record rally

Gold prices surpassed the key USD 2,800 mark for the first time on Friday, fuelled by a rush to safety following US President Donald Trump’s tariff threats, which heightened concerns about global economic growth and inflationary pressures.

Spot gold rose 0.3% to USD 2,801.29 per ounce by 01:41 p.m. ET (1841 GMT), after hitting a record peak of USD 2,817.23 earlier in the session.

US gold futures settled 0.4% lower at USD 2,835, trading a premium to spot gold rates.

“There’s a lot of uncertainty out there right now and also wait-and-see attitude on the geopolitical stage with tariffs,” said Bob Haberkorn, senior market strategist at RJO Futures.

Trump has set a Saturday deadline to slap a 25% tariff on imports from Canada and Mexico and said he was still considering new tariffs on Chinese goods.

Bullion, a preferred asset during times of economic and geopolitical turmoil, is on track to record its best monthly performance since March 2024, rising nearly 7% so far. The metal surpassed multiple record peaks last year.

Additionally, “the mixed signals we’re getting from the Fed and the Trump administration right now is causing uncertainty in the market … Trump wants to cut interest rates, while the Fed wants to hold them steady,” Haberkorn added.

Earlier this week, Federal Reserve Chair Jerome Powell said there would be no rush to cut interest rates again, contradicting Trump’s earlier calls saying he wants borrowing costs to be lowered.

US prices increased in December while consumer spending surged, suggesting that the Fed could delay cutting interest rates for some time this year.

Among other metals, spot silver fell 0.8% to USD 31.42 after hitting an over one-month high on Thursday.

“We expect this strength in (silver) prices to attract subsequent discretionary trader interest, given this cohort remained nearly flat as of last week, with gold printing new all-time highs and the (gold-to-silver) ratio remaining at elevated levels,” TD Securities said in a note.

Platinum firmed 1% to USD 975.80, while palladium rose 2.2% to USD 1,011.

All three metals were headed for monthly gains.

(Reporting by Anmol Choubey and Swati Verma in Bengaluru; Editing by Shailesh Kuber, Tasim Zahid, and Mohammed Safi Shamsi)

Trump tariff uncertainties push gold to record high

Jan 31 (Reuters) – Safe-haven demand due to geopolitical uncertainties and concerns over global economic growth amid US President Donald Trump’s tariff plans have hoisted gold prices to a record high, once again bringing the key USD 3,000 threshold onto investors’ radar.

Spot gold climbed to a record high of USD 2,798.40 a troy ounce on Thursday, starting 2025 with fresh vigor after logging its strongest annual performance since 2010 last year.

“There’s concerns that some of the (economic) growth may come down because of the policies and tariffs that the current administration is looking to implement,” said Phillip Streible, chief market strategist at Blue Line Futures.

“So when you’ve got higher inflation and lower growth, stagflation becomes the economic theme. Gold tends to work very well in that particular environment.”

Trump’s tariff plans are widely perceived as inflationary and with potential to trigger trade wars, driving up safe-haven demand for bullion as it is traditionally seen as a hedge against price pressures and geopolitical uncertainty.

“I can see (gold) trying to reach up to that USD 2,900 level at some point during the first quarter; after we breach that, we’ll set new levels,” said Bob Haberkorn, senior market strategist at RJO Futures.

“At some point this year, gold could ultimately trade north of USD 3,000.”

The US market

Amid concerns about the U.S. import tariff plans, the U.S. gold futures have been trading at a premium to the spot price for several months and widened the price spread again on Thursday.

In a sign of these concerns, 12.9 million troy ounces of gold were delivered to COMEX-approved warehouses GC-STX-COMEX since late November, raising stocks there by 73.5% to 30.4 million ounces, the highest since July 2022.

The deliveries came from London, Switzerland and other major gold-trading hubs.

The London Bullion Market Association said on Thursday that it was monitoring the situation and liaising with CME Group and US authorities.

London gold market stocks and liquidity remain strong with the average daily trade volume since the start of January is 47.1 million ounces, the association added.

Gold and the US rate expectations

Gold hit multiple record peaks last year, bolstered by the Federal Reserve’s rate-cutting cycle, safe-haven demand and robust central bank buying.

The Fed, in its January meeting kept benchmark interest rates unchanged as widely expected, after easing a full basis point in 2024. This marks the first pause since the start of its easing cycle in September.

The non-yielding bullion tends to thrive in a low-interest rate environment.

As to purchases by central banks, the People’s Bank of China has been a key driver of gold demand as it kept on adding bullion to its reserves over the past year despite the price growth – in what analysts see as the PBOC’s broader strategy to diversify the reserves.

Analysts suggest that continued purchases by China’s central bank could provide further support to gold prices in the coming months.

Editing by Lisa Shumaker)

Weak growth, ECB boost traders’ euro area rate cut confidence

LONDON, Jan 30 (Reuters) – Traders grew more confident on Thursday that the European Central Bank would deliver three more rate cuts this year, as weak growth data followed by the bank’s latest rate reduction highlighted the need for more easing.

The ECB cut rates by 25 basis points (bps) to 2.75%, as expected, and kept the door open to further policy easing, helping push two-year German bond yields to three-week lows around 2.18%.

The decision came hot on the heels of data showing the euro zone economy unexpectedly stagnated last quarter, falling short of expectations for a 0.1% expansion, as two straight years of contraction in Germany weighed on the bloc as a whole.

That added to the gloom as US President Donald Trump’s tariff threats cast a shadow over an already sluggish euro zone economy, though he has so far not imposed blanket tariffs as feared.

Traders became more confident that the ECB would deliver three more rate cuts this year, now expecting around 70 bps of cuts by year-end, meaning more than an 80% chance of three cuts.

Last Friday, markets priced around a 60% chance of three moves.

“The ECB meeting was a tad dovish, with the mention of headwinds to growth, or at least it was not hawkish,” said Barclays’ head of euro rates strategy Rohan Khanna, adding that Thursday’s growth data was also below the ECB’s expectations.

Euro zone bond yields were broadly lower. Germany’s two-year yield, sensitive to rate expectations, was set for its biggest daily fall since late November, down around 8 bps in late trade.

Ten-year Bund yields fell 6 bps to 2.52%, while Italy’s 10-year yields dropped to 3.58%, the lowest in a week.

The euro, which usually takes a hit from rising rate-cut bets, was 0.1% higher on the day as the dollar weakened on the back of weaker-than-expected US growth data.

Europe’s STOXX 600 equity index was up 0.8%, relatively unmoved by the growth data or the ECB. An index of euro zone bank stocks held near the highest since 2011 it rose to earlier.

Bleak outlook

With the bloc facing a bleak outlook, some analysts said the ECB would have to cut rates below the 2% that markets expect to see by year-end. A 2% deposit rate falls in line with estimates for the so-called neutral rate in the euro zone, which neither restricts nor boosts growth.

“We expect to see developments on the tariff front in coming weeks. This will be a critical driver of ECB policy going forward,” said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, who expects the ECB to cut rates to 1.5% by year-end, as concerns around global trade tensions weigh.

“But what happens after that… we still have to see,” he said.

A further ECB cut is likely to go through in March without much resistance among policymakers before the debate between them on further easing becomes more heated, possibly implying an April pause, three of them told Reuters on Thursday.

Traders see an April move as a coin toss, assuming the ECB cuts rates in March.

The bank’s Thursday move also reinforced policy divergence between the euro zone and the United States, where the Federal Reserve held rates steady on Wednesday and said there was no rush to cut them again.

The closely-watched premium 10-year US Treasury yields pay over German peers, which signals the difference in economic outlook between the two regions, rose back above 200 bps.

It dropped below that level for the first time since November earlier this week as German bond yields have risen in January while Treasury yields fell.

(Reporting by Yoruk Bahceli, Samuel Indyk, Dhara Ranasinghe, and Stefano Rebaudo, writing by Yoruk Bahceli; Editing by Amanda Cooper, Dhara Ranasinghe and Alex Richardson)

Trump tariff grenade threatens market calm

Jan 31 (Reuters) – A look at the day ahead in Asian markets.

A tumultuous week rounds off with investors in Asia taking their cue from more US ‘Big Tech’ earnings, digesting Fed Chair Jerome Powell’s guidance from earlier in the week, but bracing for US tariff-related volatility.

The global macro backdrop is broadly supportive, after the European Central Bank‘s rate cut and indication of more to come, the Bank of Canada‘s cut earlier this week, and expectations the Bank of England will ease next week.

But just before the Wall Street close on Thursday President Donald Trump said the US could slap 25% tariffs on Mexico and Canada. Trump had said Saturday would be tariff decision day – could China be targeted too?

On the corporate front, Apple shares were under pressure in volatile after-hours trading on Thursday after the company announced its latest results. The direction they eventually take could give Asian markets a cue on Friday.

It’s been a mixed bag for the ‘Magnificent 7’ this week. Nvidia shares got hammered on Monday by the DeepSeek news, shares in Microsoft fell sharply on Thursday after the firm’s results, while shares in Tesla and Meta rose in the wake of their earnings releases.

Another plank of the US tech story took an Asian twist on Thursday after the Wall Street Journal reported that Japan’s Softbank is in talks to invest USD 40 billion in OpenAI, more than had previously been mooted.

Markets in China are closed on Friday for the Chinese New Year holidays, and markets in South Korea and Taiwan are closed too. Liquidity across Asia will be lighter than normal.

Japanese markets will be more active though. After the Bank of Japan last week raised rates to a 17-year high of 0.5% and upped its inflation forecast, domestic assets will be sensitive to the latest retail sales, industrial production, unemployment and Tokyo inflation data on Friday.

In general, the mood music across markets is pretty upbeat, especially bearing in mind how discordant it was after the Deepseek-fueled turmoil on Monday.

The S&P 500 is only down 0.5% on the week and the Nasdaq is off 1.3% – hardly disastrous moves given the nervousness on Monday that a much more severe correction was on the cards. Indeed, the equal-weighted Nasdaq is in the green.

The global picture is even brighter. The MSCI World index goes into Friday flat on the week and hovering around its all-time high, the MSCI Asia ex-Japan is also steady, while euro and UK stocks are roaring to record highs.

Monday’s turmoil and rebound is reminiscent of the yen volatility shock from last August – fears of a yen carry trade unwind slammed stock markets on Aug. 5, yet they recovered within days. Many haven’t looked back since.

Here are key developments that could provide more direction to markets on Friday:

– Japan retail sales, industrial production, Tokyo CPI

– Australia producer price inflation (Q4)

– Thailand trade (December)

(By Jamie McGeever
Editing by Deepa Babington)

Wall Street ends down; Fed holds rates steady

NEW YORK – US stocks ended lower on Wednesday, but off their lows of the day, with the Federal Reserve holding interest rates steady as expected and Fed Chair Jerome Powell offering soothing comments for investors.

Technology shares were the biggest drag on the S&P 500. Nvidia shares fell 4.1% and Microsoft finished 1.1% lower on Wednesday, two days after a tech selloff sparked by Chinese startup DeepSeek‘s launch of AI models it said were cost-effective and ran on less advanced chips compared to US-based OpenAI.

Stocks initially extended losses after the Fed statement, with the Nasdaq at one point down more than 1% in afternoon trading.

The US central bank dropped language saying inflation “has made progress” towards the Fed’s 2% inflation goal, noting only the pace of price increases “remains elevated.”

Its decision to hold the policy rate steady was widely anticipated following three consecutive rate cuts in 2024 that reduced the Fed’s benchmark rate by a full percentage point.

Indexes pared losses as Powell began to speak at a press conference following the release of the policy statement. He said, “we do not need to be in a hurry to adjust our policy stance” and monetary policy is “well positioned” for the challenges at hand.

“Powell does a great job of calming markets,” said Jake Dollarhide, chief executive officer of Longbow Asset Management in Tulsa, Oklahoma, adding that “a strong economy gives the Fed plenty of wiggle room.”

The Dow Jones Industrial Average fell 136.83 points, or 0.31%, to 44,713.52, the S&P 500 lost 28.39 points, or 0.47%, to 6,039.31 and the Nasdaq Composite lost 101.26 points, or 0.51%, to 19,632.32.

“The Fed didn’t hit the markets with any surprises,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

Powell also said it is too soon to say what President Donald Trump’s policies will do and the central bank will take its time assessing what the new government policy regime means.

Investors have been worried about Trump’s proposed tariffs, which could exacerbate inflationary pressures and slow the pace of rate cuts.

The Fed gave little insight into when further reductions in borrowing costs may take place.

Traders are pricing in around 44 basis points of cuts by year-end, down from around 48 basis points before the Fed statement. That reflects falling confidence that the US central bank will make two 25 basis point rate reductions this year.

The December reading of the personal consumption expenditures price index, a crucial metric in assessing the inflation trajectory, is due on Friday.

After the closing bell, Microsoft reported slower-than-expected growth in its crucial Azure cloud business despite beating estimates for overall quarterly revenue. Its shares were down 1.5% in after-hours trading.

During the regular session, shares of cloud services company F5 jumped 11.4% after it forecast second-quarter revenue above estimates and reported a first-quarter revenue beat.

Declining issues outnumbered advancers by a 1.6-to-1 ratio on the NYSE. There were 151 new highs and 68 new lows on the NYSE.

On the Nasdaq, 1,829 stocks rose and 2,548 fell as declining issues outnumbered advancers by a 1.39-to-1 ratio.

Volume on US exchanges was 13.00 billion shares, compared with the 15.5 billion average for the full session over the last 20 trading days.

(Reporting by Caroline Valetkevitch; additional reporting by Shashwat Chauhan and Sukriti Gupta in Bengaluru; Editing by Shounak Dasgupta, Arun Koyyur, Pooja Desai and Aurora Ellis)

Oil prices settle down as US stockpile grows, tariffs still in focus

Oil prices fell on Wednesday, with the US benchmark settling at its lowest year to date, after domestic crude stockpiles in the world’s top petroleum producer and consumer rose more than expected last week.

Brent crude futures settled down 91 cents, or 1.2%, at USD 76.58 a barrel. US crude futures fell USD 1.15, or 1.6%, to USD 72.62, their lowest settlement price so far this year.

Crude oil stockpiles in the US rose by 3.46 million barrels last week as refiner intake slumped for a third consecutive week, data from the Energy Information Administration showed.

Analysts polled by Reuters had expected a 3.19-million-barrel increase.

The White House on Tuesday reaffirmed President Donald Trump’s plan to impose 25% tariffs on imports from Canada and Mexico from Feb. 1. Near-term oil trade should remain choppy as investors digest the tariff threats, sanctions on Russian energy flows, and economic growth concerns in top consuming nations, UBS analyst Giovanni Staunovo wrote to clients on Wednesday.

“Considering the many prevailing uncertainties, we think a prudent approach is still warranted,” Staunovo wrote. “While we expect prices to stay supported at current levels, news flow related to Trump is likely to drive volatility in the near term.”

The US Federal Reserve held interest rates steady on Wednesday. The Fed gave little insight on when it plans to lower borrowing costs, which could boost economic activity and oil demand.

Traders are also looking ahead to an OPEC+ ministerial meeting scheduled for Feb. 3, with the group’s plan to increase supply from April in focus.

Trump last week called on OPEC+ to lower oil prices. The group has yet to respond, but delegates said policy changes are unlikely at the February meeting.

Supply concerns have eased after Libya’s National Oil Corp said on Tuesday that export activity was running normally after it held talks with protesters who had demanded a halt to loadings at one of the country’s main oil ports.

“Libyan supplies will remain a risk as the country remains engaged in a civil war, but for now, the risk has been mitigated temporarily,” StoneX analyst Alex Hodes said.

(Reporting by Shariq Khan
Additional reporting by Arunima Kumar, Naveen Thukral and Yuka Obayashi
Editing by Jason Neely, David Goodman, Christina Fincher, Nia Williams, Leslie Adler and David Gregorio)

ECB to cut interest rates, keep door open to further easing

FRANKFURT – The European Central Bank is all but certain to cut interest rates on Thursday and is likely to keep open the door to further policy easing as concerns over lackluster economic growth supersede worries about persistent inflation.

The ECB lowered borrowing costs four times last year and up to four moves are anticipated in 2025, driven by arguments that the biggest inflation surge in generations is nearly defeated while the economy demands relief.

With the euro zone suffering through an industrial recession and weak consumption, the case for a cut is so clear that none of the ECB’s 26 policymakers have publicly pushed back.

That could mean a unanimous vote for a 25 basis point cut to take the deposit rate to 2.75%, its lowest since early 2023, even after the U.S. Federal Reserve, the world’s largest central bank, paused its own easing cycle on Wednesday.

While ECB President Christine Lagarde is unlikely to commit explicitly to more cuts, she is likely to argue that the direction of policy remains clear and that the risk of a trade war with the United States could sap weak growth even more.

“Inflation is approaching the target in a more sustainable manner, the economic outlook remains challenging, while rates clearly remain in restrictive territory,” Nordea economist Jan von Gerich said. “The process of gradual normalization thus remains incomplete.”

Inflation, which rose to 2.4% in December, could still take a few months to ease back to the ECB’s 2% goal but there is little to challenge the narrative that all is on track.

Wage growth is easing, the labour market is softening, oil prices have come off early-year highs and the dollar’s relentless firming seems to have stopped for now.

A few voices are still likely to argue that pressure on services costs remains too high for comfort but that is more an argument for gradualism than for a pause.

Complications

But with a debate already starting on where the ECB’s rate cuts should end, consensus may be more difficult to maintain with each future cut.

New U.S. President Donald Trump’s policies could also make the environment more volatile. His threatened trade tariffs would weigh on growth but any retaliatory measures by the European Union would risk pushing up inflation.

Trump last week demanded that the Fed cut interest rates but the bank resisted on Wednesday, arguing that inflation was still elevated and it was not in a hurry to cut borrowing costs, a signal taken by markets to suggest that a longer pause may be ahead.

Any escalation of the war of words between them might rattle financial markets.

At 2.75% the ECB’s deposit rate would be approaching the 1.75% to 2.50% range considered “neutral”, neither fueling nor dampening economic activity. But any Trump-induced volatility could intensify calls for the ECB to go below this rate and start stimulating growth.

“There is a strong case to take official rates to the lower end of the range of estimates for neutral by mid-2025, with risks tilted towards the potential impact of trade frictions leading to considering even slightly lower rates,” economist Antonio Villarroya at Santander CIB said.

A trade war would shake already weak confidence.

Consumers are saving up cash, industry is shrinking, governments have modest buffers to spend and exports – long the driving force behind growth – are barely expanding.

“In an environment characterized by weak domestic demand, elevated uncertainty, and still-restrictive monetary policy, firms are likely to continue holding back on investment, which we expect to contract further in the first half of 2025,” Barclays economist Mariano Cena said.

But inflation is still above the ECB’s target and poor productivity growth along with labour shortages could keep up price pressures, likely limiting just how far the bank can go.

Foreshadowing the upcoming debate on pausing, board member Isabel Schnabel, an outspoken policy hawk, said the ECB was getting closer and closer to the point where it must debate how much more it can cut.

(Editing by Catherine Evans)

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