2026 Weekly Update

Market update

The S&P 500 closed the week at 6,915.61, -0.35% lower. The Dow Jones closed at 49,098.71, -0.53%, with the Nasdaq lower by -0.06%. The volatility index VIX closed the week at 16.09, up from 15.86. The Euro Stoxx 600 fell -0.98%.

The 10-year UST closed at 4.23%, up from 4.22% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 55bps. US Corporate Bond spreads: Investment Grade spreads narrowed -3bps at 73bps and High Yield spreads narrowed -5bps at 304bps. German 10-year Bunds yield closed at +2.91% up from +2.83% a week before. In Europe, Corporate Investment Grade spreads narrowed -2bps at 85bps and High Yield narrowed -5bps at 293bps.

The US Dollar Index (DXY) depreciated -1.80% last week and closed at 97.6. The Euro closed at 1.1828 (+1.98%); the Yen appreciated +1.53%, closing at 155.7 and the Swiss Franc appreciated +2.88%, closing at 0.7799. Gold closed at $4987.49, appreciating +8.52%. Oil was higher, Brent closed at $65.88 (+2.73%) and WTI at $61.07 (+2.74%).

Macroeconomy

FOMC preview

Investors expect the Federal Reserve to leave policy unchanged at 3.5-3.75% while striking a slightly firmer tone on the underlying economic backdrop. Although the usual focus would be on the policy outlook, circumstances this time mean that Chair Powell’s press conference is likely to dwell heavily on non-economic matters. Questions will inevitably surface around the recent DoJ subpoena, the situation involving Governor Cook, and the broader issue of future Fed leadership. Powell will probably lean on the themes of his recorded statement from 11 January, emphasizing the importance of institutional independence and resisting political pressure — a message he is unlikely to dilute given the current environment. On the policy statement itself, analysts expect the Fed to upgrade its description of growth from the previous “moderate pace” to something closer to a “solid pace,” consistent with Vice Chair Jefferson’s comments on 16 January. They also expect the Committee to acknowledge a somewhat steadier labor market, reflecting the more recent data flow available since the November meeting. Inflation is trickier: with core PCE still running at 2.8% y-o-y into November, progress has been limited, and the Committee may simply reiterate that inflation remains “somewhat elevated,” echoing Jefferson’s framing of recent developments. Over the past several meetings, the Fed has justified its easing bias by pointing to rising labor market risks. In terms of the next Fed Chair, Warsh and Rieder are the front-runners as President Trump inches closer to his Fed chair pick. Both are likely seen as independently minded when making monetary policy decisions.

US data

PCE inflation data for October and November was in line with expectations, with both headline and core PCE running at +0.2% for both months. The weekly initial jobless claims were at just 200k in the week ending January 17 (vs. 209k expected), which in turn pushed the 4-week moving average to a 2-year low of just 201.5k. The Q3 GDP print was also revised up a tenth, now showing growth at an annualized +4.4% before the government shutdown began.

Global PMIs

The US January flash manufacturing PMI came in at 51.9, missing the forecast of 52.0. However, University of Michigan consumer sentiment reached 56.4, surpassing the forecast of 54.0. The Euro Area Flash Composite PMI remained unchanged at 51.5 in January, below expectations of 51.9. Services activity softened to 51.9, while manufacturing output returned to expansion territory, rising by 1.3 points to 50.2. New orders and output increased, employment declined, and business sentiment about future output reached a 20-month high. Germany saw acceleration in both manufacturing and services, while France reported its most optimistic outlook for activity in coming year, reaching the highest level in almost 18 months. The data supports no change to current ECB policy, with rates expected to remain on hold. The UK Flash PMI showed strong momentum, with the January Composite PMI at 53.9. Improvements in manufacturing orders and a robust services sector contributed. Businesses reported increased optimism, as post-Budget clarity spurred investment. Data indicated a Q1 rebound after the budget, but risks of a Q2 slowdown remained due to weak jobs, sluggish real income growth, and rising output prices. Japan’s composite PMI moved up to a 17-month high of 52.8, Australia’s hit a 5-month high of 55.5, whilst India’s moved up to 59.5.

Global data

The IMF also released their latest growth forecasts, upgrading global growth in 2026 by two-tenths to +3.3%, with 2027 unchanged at +3.2%. Euro Area CPI reading for December was revised down very slightly to +1.9%, having been at +2.0% on the flash print. Canada’s CPI print was higher than expected, with headline inflation picking up to +2.4% (vs. +2.2% expected). However, the two measures of core inflation tracked by the Bank of Canada both fell back, with the median core measure down to +2.5% (vs. +2.7% expected), whilst the trim core measure fell to +2.7% as expected. In Australia, the unemployment rate has decreased to a seven-month low of 4.1% from 4.3% in November, better than market expectations of 4.4%. Net employment surged by 65,200 in December compared to November, which saw a revised drop of 28,700. This figure significantly exceeded market forecasts of a 27,000 increase, while full-time employment rebounded by 54,800, in contrast to a decline of 56,500 in the preceding month. Meanwhile, markets are anticipating a 61% probability of a rate hike from the RBA on February 3rd, an increase from 26% prior to the data release. Exports in Japan increased for the fourth month in a row, rising by +5.1% y-o-y in December. This marks a decrease from the +6.1% increase observed in November and fell short of the median prediction of a +6.1% gain. Meanwhile, imports grew +5.3% y-o-y, surpassing the anticipated rise of +3.6%. This indicates stronger domestic demand and elevated input costs. Consequently, Japan reported a trade surplus of ¥105.7bn, which is considerably less than the expected surplus of approximately ¥360.0bn.

French budget

Prime Minister Lecornu announced his intention to invoke Article 49.3 of the Constitution to pass the 2026 Budget without a parliamentary vote, unless most MPs support a no-confidence motion. He plans to use Article 49.3 three times during the budget process: for the “revenues” section, the “expenditures” section, and the final reading after the bill returns from the Senate. Each invocation could trigger one or more motions of no confidence. However, the likelihood of the government being toppled remains low, as both the Socialist Party and the center-right Les Républicains are not expected to back no-confidence motions. If the budget passes, the next key political events will be the local elections in March, followed by preparations for the 2027 presidential election. The government aims to reduce the public deficit to 5.0% of GDP in 2026. The need for compromise has led to increased public spending, and to finance these measures, savings will be required from most ministries. Additionally, the corporate surtax on large companies, initially intended as a one-year measure, has been extended. The likely conclusion of the budget process brings some relief by reducing political uncertainty, even though the budget is not considered business friendly.

Highlights

Japan rates

JGBs soared last week with the 30yr yield spiking +26.6bps on Tuesday to 3.84%, its biggest daily increase since 1999. The moves later moderated, with 30yr JGB yields ending the week +14.6bps higher and 10yr yields +6.7bps higher. It was an eventful week. Prime Minister Takaichi dissolved parliament with elections to be held on February 8th. Markets see the prospect of a greater coalition majority as an opportunity for more fiscal stimulus. Also, the Bank of Japan delivered a somewhat hawkish-leaning decision. They left their policy rate at 0.75% as expected, after hiking at the previous meeting. However, it was an 8-1 vote, with a dissent in favor of another 25bp hike, whilst the outlook report raised their inflation outlook as well. So, the median expectation for core-core CPI has risen by two-tenths to +3.0% in fiscal 2025, whilst the fiscal 2026 forecast is also up two-tenths to +2.2%, with fiscal 2027 up a tenth to +2.1%. And looking forward, the outlook report reiterated their desire to keep hiking rates, saying that “real interest rates are at significantly low levels”, and that if the forecast were realized then they would “continue to raise the policy interest rate”. Market inflation expectations - measured with the 10-year breakeven rate - have risen to around 2%, demonstrating how inflation expectations have become entrenched in the economy. The market sees two rate hikes from the Bank of Japan (BoJ) in 2026. The inflation goes hand in hand with a weaker Yen, as the JPYUSD tests the 160 level, prompting speculation of direct intervention in the foreign exchange markets. While in the bond market, the BoJ and insurance and pension funds have continued to decrease their JGB exposure in 2025, in a context of thin market liquidity even if long-dated bonds consist of 30% of all outstanding JGBs.

On rates

Global rates came up last week, driven mainly by Japan. In Europe, 10yr German Bunds (+7.1bps) and UK Gilts (+11.2bps) also sold off as geopolitical volatility heightened concerns about increased European defense spending and the resulting fiscal pressure. US Treasuries initially slumped on geopolitical noise and firm data but ended the week little changed. The 2yr yield rose +0.7bps to 3.95%, while the 10yr yield edged up +0.2bps to 4.23%. The stronger US data included initial jobless claims falling to 200k (vs 209k expected), which pushed the 4-week moving average to a 2 year low of 201.5k, and Friday’s stronger than expected University of Michigan final consumer sentiment reading (56.4 vs 54.0 expected). Despite that, yields rallied late on Friday, supported by rising expectations that Rick Rieder would be chosen as the next Fed Chair. In credit markets, spreads remain tight with EUR and USD High Yield (HY) and Investment Grade (IG) both tightening further to start the year. Ratings drift in Europe remained positive at the end of 2025 as upgrades have been driven by sovereign upgrades (notably in Italy and Spain) spilling over into sectors like banking, insurance, and energy. This rating improvement has been noticeable in European IG primarily, as the share of BBB-rated bonds in the index pushed to 2-year lows. Ratings drift is also reflected in CCC-spreads as they refuse to follow the broader index lower as investors continue to be selective in their HY allocations. Strong liquidity and refinancing activity demonstrate how the US is further along in the credit cycle than Europe, with default rates in the US on a continued downtrend in late 2025 in both loans and bonds.

Earnings season

Following another light week, 64 S&P 500 companies (18% of index earnings) have now reported. Headline stats are little changed from last week: 70% of companies beat on EPS, better than the week 2 average of 64% but below last quarter's 79%. Reported earnings beat by 7% vs. 8% at this time last quarter. 4Q consensus EPS (blended measure of actuals & consensus) is on pace to rise 7% y-o-y (same as last week). Like the EPS beat rate, the revenue beat rate of 67% is also weaker than last quarter's 79% but above the week 2 average of 60%, but still early in the season. Moreover, despite more companies beating on EPS than revenue so far, 2026 revenue revisions have been stronger than EPS revisions ytd. Guidance was unusually strong heading into the quarter, with 1.9x more above- than below-consensus EPS guidance instances from Oct.-Dec. (best since 2021). This ratio is tracking a much lower 0.7x in Jan., slightly below the avg. of 0.8x. Weaker guidance is not alone a reason to worry about earnings, as the sample size is still small (~20 companies), and Jan.-Feb. is typically the weakest period for guidance. Over 100 S&P 500 companies representing a third of index earnings are slated to report this week (second busiest week of earnings behind week 4). Results from four Magnificent 7 stocks – Microsoft, Meta and Tesla on Wednesday and Apple on Thursday are expected. The four make up 16% of the S&P 500 by market cap, with the overall list of firms reporting next week totaling 32% of aggregate capitalization. Other tech highlights include ASML, Samsung, IBM and SAP. The focus will also be on defense firms RTX, Northrop Grumman and Lockheed Martin. On Friday, big oil firms Exxon and Chevron will also report. In Europe, highlights also include LVMH, Roche and Sanofi.

What to watch

• Monday: US Durable Goods Orders; Germany IFO Business; Japan Leading Index Composite
• Tuesday: US Conference Board Confidence and ADP Employment; China's December Industrial Profits; HK Exports
• Wednesday: US FOMC; Germany Gfk Consumer Confidence; Australia CPI
• Thursday: US Initial Jobless Claims; Sweden Riksbank Policy Rate
• Friday: US PPI; Eurozone Q4 GDP; Germany CPI; Tokyo CPI, Japan's Retail Sales, Industrial Production, Jobless Rate; Taiwan & HK Q4 GDP