2026 Weekly Update

Market update

The S&P 500 closed the week at 6,939.03, +0.34% higher. The Dow Jones closed at 48,892.47, -0.42%, with the Nasdaq lower by -0.17%. The volatility index VIX closed the week at 17.44, up from 16.09. The Euro Stoxx 600 rose +0.44%.

The 10-year UST closed at 4.24%, up from 4.23% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 57bps. US Corporate Bond spreads: Investment Grade spreads widened +2bps at 75bps and High Yield spreads widened +11bps at 315bps. German 10-year Bunds yield closed at +2.84% down from +2.91% a week before. In Europe, Corporate Investment Grade spreads narrowed -1bp at 84bps and High Yield widened +10bps at 303bps.

The US Dollar Index (DXY) depreciated -0.62% last week and closed at 96.99. The Euro closed at 1.1851 (+0.19%); the Yen appreciated +0.59%, closing at 154.78 and the Swiss Franc appreciated +0.88%, closing at 0.773. Gold closed at $4,894.23, depreciating -1.87%. Oil was higher, Brent closed at $70.69 (+7.30%) and WTI at $65.21 (+6.78%).

Macroeconomy

FOMC on hold

FOMC kept rates on hold at 3.50-3.75%. Governors Miran and Waller dissented in favor of a 25bps cut but there was “broad support” for keeping rates steady according to Chair Powell, who said the Committee was “well positioned” after delivering 75bps of rate cuts in late 2025. The pause came amid a more upbeat tone on the economy, with the statement noting the “solid pace” of economic activity and “some signs of stabilization” in the unemployment rate. Powell emphasized the “clear improvement” in the economic outlook since the last meeting, but any hawkish read-across was offset by a more sanguine tone on inflation. The Chair suggested that services disinflation was continuing, with most of the current inflation overshoot coming due to tariffs, the effect of which is expected to peak around the “middle quarters of the year”. Powell offered little near-term guidance but suggested the next move is likely to be a cut, noting that “it isn’t anybody’s base case right now the next move will be a rate hike”. Away from policy, Powell mostly deflected questions on the Lisa Cook hearing and whether he’d stay on as Governor after his term ends in May, while reiterating that he was “strongly committed to (Fed independence) and so are my colleagues”.

Fed nomination

President Trump has nominated Kevin Warsh to be the next Fed Chair. Despite Warsh’s hawkish reputation, markets are still pricing two rate cuts later this year. Warsh is often labelled a hawk due to his criticism of the inflationary impact of QE during his tenure on the Fed Board from 2006 to 2011. However, Warsh has actually been dovish under President Trump. He argued for interest rate cuts as he thinks the FOMC is overreacting to mistakes made during the pandemic era inflation period and that the Fed should look through tariff-driven inflation. Warsh has advocated for a "new Treasury-Fed accord" modeled after the 1951 agreement, which ended the Fed's wartime obligation to peg low interest rates for Treasury borrowing and restored central bank independence. He argues that the current setup—where the Fed's bloated balance sheet and Treasury's debt issuance operate at "cross purposes" - leads to blurred responsibilities between the Fed and Treasury. Warsh's proposal emphasizes coordination to reducing the balance sheet while allowing for lower interest rates. Under his proposal, the Fed Chair and Treasury Secretary would publicly outline objectives, such as the target size for the Fed's balance sheet and Treasury's debt-issuance calendar. This would refocus the Fed on core functions like inflation control, while the Treasury handles fiscal matters. As Warsh himself said in an op-ed “Many on Wall Street and in Washington are focused on whether the Fed will raise interest rates another quarter-point. It matters little when compared with changes in the benchmark Treasury rate—the most consequential price of the most important asset anywhere in the world”. In terms of the currency, Warsh generally supports a sound dollar, saying recently “Not only is inflation a choice, but a sound dollar is also a choice”. He critiqued the Fed's post-2008 quantitative easing legacy for contributing to inflationary pressures that weaken the currency, arguing that reducing the Fed's balance sheet could enable lower rates without compromising dollar value. Warsh would need to be confirmed by the Senate. Warsh was unanimously confirmed by the Senate in 2006 as a Fed Governor. While he will face tough questions from senators over his calls for a "regime change" at the Fed, including overhauling its structure and monetary policy approach, enough Republican senators are expected to support him for confirmation. However, President Trump would likely need to de-escalate the ongoing investigation into Powell for Warsh's nomination to advance smoothly out of the Senate Banking Committee. Retiring Sen. Thom Tillis, has vowed to block any Fed Chair nomination until the legal matter is resolved, potentially creating a deadlock given the committee's narrow 13-11 Republican majority.

Global central banks

Last week, the Bank of Canada held its policy rate at 2.25% as expected. Governor Macklem kept their options open, saying that “elevated uncertainty makes it difficult to predict the timing or direction of the next change in the policy rate”. Markets are still pricing in a rate hike as most likely by year-end, which is priced in as a 42% probability. This week, the focus will be on rate decisions from the BOE (UK), ECB (Euro zone), RBA (Australia), and RBI (India). The ECB and Bank of England both meet on Thursday, and neither is expected to adjust policy, with the ECB likely extending its on hold stance for a fifth straight meeting and the BoE seen keeping Bank Rate unchanged once again. The Reserve Bank of Australia is also expected to stand put.

Japan data

The headline Tokyo CPI inflation decreased to +1.5% y-o-y in January (compared to +1.7% expected), marking its lowest level since February 2022. This represents a slowdown from +2.0% in the previous month. Core inflation, which excludes fresh food, also moderated, rising by +2.0% y-o-y (versus +2.2% expected) and a previous reading of 2.3%. This moderation aligns core inflation with the Bank of Japan's 2% target after several months of stronger outcomes. The data alleviates pressure on the BOJ to raise rates again in the near future, despite a still tight labor market.

China data

China's official PMI for January fell back below 50 again at 49.3, down from December's 50.1, and below expectations. The Manufacturing PMI has been in contraction for nine of the past ten months, reinforcing concerns that December's data may have been an anomaly rather than the beginning of a sustained recovery. Simultaneously, the official non-manufacturing PMI decreased to 49.4 in January (compared to the expected 50.3), down from 50.2 the previous month, marking the lowest level since December 2022. This decline was attributed to weak post-holiday demand, cautious consumer spending, and ongoing challenges in the property sector. Conversely, a private survey presented a more positive outlook, indicating that China’s manufacturing activity improved to 50.3 in January (compared to 50.1 in December), and marking the strongest level since October.

Highlights

On rates

The nomination of Warsh added to the steepening in the US Treasuries curve. While 2yr yields fell -3.7bps on Friday (-7.1bps over the week) amid the risk-off mood, 10yr (+0.4bps, +1.1bps over the week) and 30yr (+1.9bps, +4.6bps over the week) moved higher. On Wednesday, the FOMC held rates steady at 3.50%-3.75% as expected, with Chair Powell offering little near-term guidance but suggesting that the next move is still likely to be a cut. Fed Funds futures indicate expectations for two rate cuts through 2026, with the first anticipated in June or July and the second in December.

FX moves

We have seen strong currency moves so far this year. This has triggered comments from officials across the world. For example, Japan PM Takaichi declared the government was prepared to “take all necessary measures to address speculative and highly abnormal movements”. In Europe, the Euro appreciation raised questions about whether the ECB would need to think about another interest rate cut given the downward pressure on inflation. Indeed, Austrian central bank governor Kocher said in an FT interview out that continued euro appreciation could mean the ECB has to react. During the week, we saw some signs of the dollar stabilizing after Treasury Secretary Scott Bessent reiterated the “strong dollar policy” a day after Trump had seemed more relaxed about its direction. That came in a CNBC appearance, where he said that the US “always has a strong dollar policy, but a strong dollar policy means setting the right fundamentals”. He also commented that the US was “absolutely not” intervening in FX markets, which helped drive a dollar rebound against several other currencies. The dollar did give up some of its rebound later on, in part after Powell said that questions on the recent weakening in the dollar were in the purview of the Treasury not the Fed.

Earnings season

With over 30% of S&P 500 companies having reported so far, earnings results remain robust. Average earnings surprises are well above the 15-year average and higher than the previous quarter, despite a lower beat rate. Sales performance has softened compared to the prior quarter but remains above the long-term average. Technology continues to be the strongest sector in terms of both revenues and earnings results. The earnings revision ratio (the breadth of upgrades) has turned positive and is likely to improve further before typically easing towards the end of the quarter. In terms of overall Q4 expectations, the strong reporting results have sharply lifted them. If current trends persist, fourth-quarter 2025 earnings growth could exceed 12%, although consensus expectations for future quarters may be overly optimistic. In Europe, the earnings season is at an early stage, with the average positive surprise broadly in line with historical averages - a pattern that typically strengthens as reporting progresses. Sales results have been more encouraging, with most companies exceeding expectations despite below-average positive surprises. The earnings revision ratio in Europe is improving and is expected to continue strengthening as the quarter advances. Improvements in earnings revisions in both the US and Europe are being driven primarily by technology and financials, while defensives are mixed and cyclicals continue to weaken across both regions.

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