Week ahead: Japan election, US NFP, CPI, UK politics GDP, China CPI

Weekly recap:

U.S. stocks finished another volatile week mixed, as a rotation out of tech and growth stocks led to the Nasdaq’s worst weekly performance since November, while small-cap and value stocks gained, and the Dow Jones hit another record high.

Concerns about AI’s impact on software companies and worries about substantial capital expenditure on AI hurt tech stocks, although dip buying on Friday returned, fueling a strong rally. Despite the late rally, the Nasdaq still lost 1.9% for the week, while the Dow gained 2.6% and rose above 50,000 to a fresh record high.

Volatility in the precious metal markets remained. Despite some wild swings again this week, Gold finished 2% higher, while Silver plunged 19% on Thursday and bounced 9% on Friday to end the week 7% lower. The so-called safe havens are trading more like risk assets.

U.S. data also raised concerns over the labour market, with job openings falling by 386,000 in December, the lowest level since September 2022, and well below market expectations. Initial jobless claims also jumped to 231,000, an eight-week high.

Separately, the ECB and the BoE left interest rates unchanged.

Japanese election (Sunday)

Japan’s Prime Minister Sanae Takaichi, the leader of the Liberal Democratic Party, is on course to win a landslide victory in the weekend’s snap election. The LDP are set to win over 315 of 465 seats, more than a two-thirds majority, which will give the party control of the lower house and the ability to override Japan’s less powerful upper house.

In short, the landslide victory gives Takaichi a stronger mandate to implement her substantial stimulus spending and expansionist fiscal policies. The Nikkei is extending its rally on Monday, and the Japanese yen is rising after recent declines, pulling away from the 160 intervention level. However, the yen is vulnerable to further volatility.

Non-farm payroll (Wednesday)

The NFP report was initially scheduled for Friday, 6 February, but was postponed to Wednesday, 11 February, owing to the partial US government shutdown. In December, the US economy added just 50,000 jobs, well short of expectations of a gain of 60,000 and below November’s downwardly revised figure of 56,000. However, the unemployment rate also edged lower to 4.4% from 4.5% in in in November.

The market looked past the softer job creation figures and focused on the lower unemployment rate as evidence of labour market stabilisation. This was also highlighted by Federal Reserve chair Jerome Powell, who said the labour market is showing signs of stabilisation. Expectations are for 70,000 jobs to be added in January; the unemployment rate is expected to increase to 4.5%. Stronger-than-expected jobs data could add to signs of a stabilisation, meaning rates could remain on pause for longer. However, following the weak jobs data last week, any signs of a slower labour market could worry the market, pulling USD lower and boosting Gold.

China CPI (Wednesday)

China’s CPI inflation ticked higher to 0.8% year on year in December, up from 0.7%, marking the strongest reading since February 2023. Food prices have been a key driver, increasing 1.1% and posting the biggest monthly gain in 14 months. Meanwhile, core CPI, which excludes food and fuel, remained at 1.2%, a 20-month high. For January, expectations for headline CPI are to ease to 0.5%, amid the effects of the Chinese Lunar New Year.

PPI is expected to show that factory-gate inflation remained negative for the 40th consecutive month, but is projected to improve to around -1.5% YoY from -1.9% amid firmer commodity prices. However, the data are unlikely to alter expectations regarding further policy support this year. Signs of improving inflation could help support the Hang Seng higher.

UK GDP (Thursday)

UK GDP data is due to be released for the fourth quarter alongside the December monthly output. Expectations are for Q4 GDP share growth of 0.1% quarter-on-quarter, down from 0.2% in Q3, while December GDP is expected to rise 0.1% month-on-month. There was a strong 0.3% rebound in November, owing to a recovery in car production following Jaguar Land Rover’s cyberattack and stronger retail sales.

While most of the production bounce likely occurred in November, some strength from auto backlogs and services output could support December’s activity. A stronger-than-forecast GDP could boost the pound.

However, the political landscape in the UK is also deteriorating, with Prime Minister Sir Keir Starmer under pressure over the scandal involving Peter Mandelson and Epstein. Any sense the PM could be on his way out could pull GBP/USD lower.

US CPI (Friday)

The January CPI report, initially scheduled for 11 February, was postponed to 13 February due to the partial U.S. government shutdown. In its January statement, the Federal Reserve upgraded its economic assessment and noted that inflation remains somewhat elevated. Powell said that core PCE has shown little improvement, mainly due to goods prices, which he considers to be 1-offs rather than a demand-led effect.

Fed Chair Powell also noted that tariff price increases had already passed through the economy and expects tariff-related inflation to peak around mid-year. Expectations are for CPI to ease to 2.5% YoY in January, down from 2.7% in December. On a monthly basis, CPI is expected to rise 0.3%, up from 0.2% in December. Cooler-than-forecast inflation could boost expectations of Federal Reserve rate cuts and lift stock indices such as the S&P 500, while pulling the U.S. dollar lower.

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