FRANKFURT (Reuters) – European Central Bank policymaker Klaas Knot on Wednesday backed market bets on interest rate cuts at the ECB’s next two meetings but said the path further ahead was more uncertain, also given a likely new U.S. trade policy under President Donald Trump.

The ECB is expected to continue lowering the cost of borrowing this year as the euro zone economy remains weak and inflation just above its 2% target, with traders even increasing those expectations this week after Trump failed to announce much feared trade tariffs against the bloc.

Knot — traditionally a supporter of a tighter policy stance — appeared to throw his weight behind rate cuts on Jan. 30 and March 6 in light of “encouraging” economic data.

“I’m pretty comfortable with the market expectations for the upcoming two meetings and farther than that I find it’s too early to comment,” the Dutch governor said on Bloomberg TV.

“The data is encouraging, it confirms the broad picture that we will return to target in the remainder of the year and hopefully the economy will also finally recover a bit,” he added.

But he flagged “risks that will play out in the more medium to long term”, including “the great many channels through which his (Trump’s trade) policy might affect the global economy and the global inflation outlook”.

Money markets almost fully price in four further ECB cuts this year, leaving the rate the central bank pays on euro zone banks’ deposits at 2%.

This is near the lower end of a range that ECB economists consider neutral, which is neither stimulating nor restraining the economy.

While some of his colleagues have raised the prospect of going below such level, Knot remained to be convinced.

“If the recovery proceeds, if we approach target by the middle of the year then I’m not convinced yet we need to get into stimulative mode,” he said. “Then again, there’s a range for neutral…that gives us some leeway. Let’s not get head over heels here, the data will tell us where to go.”

A look at the day ahead in European and global markets from Stella Qiu

Day two of Donald Trump’s second presidency culminated in an announcement that OpenAI, SoftBank (TYO:9984) Group and Oracle (NYSE:ORCL) will form a venture called Stargate and invest $500 billion in AI infrastructure across the United States, though how much of that was already long planned is anyone’s guess.

It shares its name with a 1994 sci-fi movie and long-running TV series, in which Stargate is a device providing instantaneous travel between distant planets.

Though its goals are likely more modest than interstellar teleportation, the project could help consolidate America’s lead over China in the race to develop AI. Investors are not shy to agree, pushing SoftBank shares up 10% in Asia, helping lift the Nikkei 1.7%. Taiwan stocks gained 1.3%. (T)

The region’s under performers were China and Hong Kong, with the former’s blue-chip index falling 1% and the latter’s Hang Seng sliding 1.6%.

To be sure, that was in part due to Trump saying a 10% tariff on Chinese goods would commence on Feb. 1.

Still, that’s much lower than the 60% pledged during his election campaign. And it remains to be seen if the 10% tariff will happen at all now that Trump needs to negotiate with Beijing for the sale of part of TikTok to either Tesla (NASDAQ:TSLA) CEO Elon Musk or Oracle Chairman Larry Ellison.

In Europe, stock markets are set for a slightly higher open, with pan-European STOXX 50 futures up 0.2% and UK FTSE futures rising 0.1%.

European Central Bank President Christine Lagarde will be at the World Economic Forum in Davos, Switzerland. Appearances by other ECB officials include Governing Council member Francois Villeroy de Galhau who will be speaking about interest rates.

Market participants reckon the bank is all but certain to lower its policy interest rate by 25 basis points next week, but the question for many is how low can it go. Predicting the terminal rate won’t be easy given inflation is still above the ECB’s target but growth headwind is strengthening due to Trump putting friends and foes alike in his America-first firing line.

So far, swaps imply four rate cuts this year to 2%.

Over on Wall Street, Nasdaq futures gained 0.7%, lifted by a 14% jump in Netflix (NASDAQ:NFLX), which boasted a record gain in subscribers last quarter.

Still, with Stargate becoming reality in one form or another, there will perhaps be less need to stream sci-fi in the coming years.

Key developments that could influence markets on Wednesday: * Participation by ECB President Christine Lagarde in adialogue during the World Economic Forum in Davos * ECB Governing Council member and Bank of France governorFrancois Villeroy de Galhau to speak on Davos panel aboutinterest rates; ECB policymaker Klaas Knot speaks in Davos * Earnings from Johnson & Johnson (NYSE:JNJ), Halliburton (NYSE:HAL)

(By Stella Qiu; Editing by Christopher Cushing)

By Makiko Yamazaki and Kentaro Sugiyama

TOKYO (Reuters) – Japan’s retailers, typically among the most tight-fisted of employers, are offering big pay increases for a second year in a row, meaning squeezed profits for companies, more spending money for workers, and a green light for more central bank rate hikes.

Japan’s labour-intensive service sector had long managed to avoid making big or sustained pay raises, by tapping a vast pool of part-time, lower-paid retirees and housewives.

But that began to change last year as a rapidly shrinking working-age population and rising inflation made it harder for retailers – who employ 10% of Japan’s workers – to attract and retain staff.

Their acquiescence to successive wage hikes, marking a breakthrough among low-wage service businesses and small manufacturers, has not escaped the notice of policymakers, including central bankers keen for signs that wage growth is taking hold after 25 years of stagnation.

“There was a lot of positive talk on the wage outlook,” Bank of Japan Governor Kazuo Ueda said at a gathering of regional bank executives last week, referencing a meeting of BOJ branch managers the week before.

The central bank has predicated its latest cycle of interest rate hikes, including another expected at a policy meeting later this week, on a sustained “virtuous circle” of higher wages that support higher prices, for services as well as for manufactured goods.

UA Zensen, a group representing retail, restaurant, textile and other industry unions, is seeking wage hikes of 6% for full-time workers and 7% for part-timers for 2025, outpacing the baseline 5% target set by Rengo, the nation’s largest union.

Talks over 2025 wage levels typically conclude around March, and go into effect up to a few months afterwards.

“Solid wage hikes will help put the Japanese economy on a growth track,” said Tamon Nishio, UA Zensen’s general secretary.

“Many of our union members are from small and medium-sized firms and are part-time workers. We want wage hike momentum to spread broadly to our members to achieve real wage growth and create a positive cycle for the economy.”

Economists and executives, however, point to a number of doubts and potential downsides with this momentum, including rising costs for retailers and uncertainty whether workers would be willing to spend their windfall.

“The big pay hikes will boost our cost burden,” Takaharu Iwasaki, president of Japan’s largest food supermarket chain Life Corp, told reporters.

“But with competition to hire and retain workers intensifying, we want to reward them with solid pay.”

The company is targeting wage hikes in 2025 similar to the previous year’s 5% for regular employees and 6% for part-timers.

Retail conglomerate Aeon is also considering raising hourly pay for the group’s 420,000 part-timers by 7%, the same pace as last year.

“We want to continue raising pay mainly for part-timers as we did last year and the year before,” Executive Officer Motoyuki Shikata said on an earnings call on Jan. 10.

“We’re hearing from field managers that pay hikes over the last two years have helped hire workers.”

DOUBTS AND DOWNSIDES

These wage increases are beginning to make themselves felt in retailers’ bottom line.

At Life, labour costs rose 7.9% and net profit fell 3.4% in the nine months through November. Aeon slipped into a net loss in the same nine-month period, with wage hikes increasing its labour costs by 42.7 billion yen ($270.6 million).

The retailers have had little choice, as Japan’s working-age population continues to shrink from its peak of 86 million marked in 1995. A government think tank projects the population between the ages of 15 and 64 will drop about 20%, to 62 million, in the two decades through 2040. The pool of potential part-time female and older workers is also shrinking.

Additionally, there are doubts as to whether wage increases would translate into higher spending, especially with inflation tending to outpace wage growth. Without higher spending, companies would find it difficult to raise prices.

“Retailers are raising wages to retain workers, but it’s questionable whether they can keep doing so beyond this year,” said Shinichiro Kobayashi, principal economist at Mitsubishi UFJ (NYSE:MUFG) Research and Consulting.

“Consumers did accept a certain degree of post-pandemic price hikes at retailers. But there are emerging signs they are getting tired of unabated price rises and shifting to discount stores for shopping,” he said.

Indeed, workers do not appear to be in a spending mood.

“Our cost-saving mindset is so strong, I don’t think higher pay would change people’s spending pattern that much,” said Miwako, a part-time worker at a major supermarket chain in Tokyo who asked to be identified only by her first name.

She said that, while she is hopeful her pay will keep rising, she would plan to save any pay raise rather than spend it.

By Makiko Yamazaki

TOKYO (Reuters) – Japan’s biggest business lobby Keidanren and trade unions kicked off annual labour talks on Wednesday that are likely to lead to another year of bumper wage hikes, though policymakers will be mainly focused on how far the momentum spreads to smaller firms.

With some of the biggest firms already promising to raise pay substantially for this year, the prospect of large wage hikes is seen supporting the case for the Bank of Japan to increase interest rates later this week.

Japan’s big firms are expected to offer their unions wage hikes of 4.74% on average this year, according to a poll of 35 economists conducted Dec. 23-Jan. 8 by Japan Centre for Economic Research, a private think tank.

The estimate, although lower than last year’s 5.33% average, is considered solid in a country where wages were stagnant for decades until 2022, when rising inflation and structural labour shortages piled pressure on firms to compensate employees with higher pay.

Japanese companies agreed to an average 5.1% wage hike in 2024, the biggest increase in three decades, according to Rengo, the nation’s largest union.

Rengo is seeking wage hikes of at least 5% in 2025, while setting a target of at least 6% for smaller firms to narrow the income gap with workers at large firms.

“We want the strong momentum from the last two years to take hold this year,” Keidanren chief Masakazu Tokura said at a meeting of executives from the business lobby and Rengo, the nation’s largest union.

He also emphasised that it’s crucial for employees at small and medium-sized firms and non-regular workers, which account for about 70% and 40% of total employment respectively, to receive higher wages.

Japan’s small firms are already spending far more of their profits on wages than their bigger counterparts and could struggle to keep hiking pay.

“Large firms will continue to lead the wage growth momentum this year, but smaller firms are finding it hard to pass on rising labour costs to prices and having their profits squeezed,” said Satoshi Fujii at research firm Teikoku Databank.

Investing.com– U.S. President Donald Trump said on Tuesday he is considering imposing 10% tariffs on Chinese imports from February 1, as he raised the possibility of increased duties on several major economies. 

Speaking at a White House event on his second day in office, Trump said he was considering the Chinese tariffs on concerns over the flow of illicit drugs, specifically fentanyl, from China to Mexico and Canada, and into the U.S. 

He raised the possibility of tariffs against Mexico and Canada on similar grounds, of around 25%. 

Trump also raised the possibility of tariffs against the European Union, on the grounds that they had trade imbalances with the U.S.

 Trump had campaigned on promises of steep tariffs to further the U.S.’ trade dominance, and had threatened to impose 60% tariffs on China and potentially 100% tariffs on Mexico and Canada. 

But he did not impose any tariffs through executive orders on his first day in office, as widely expected. The 10% tariffs threatened by Trump against China are also much lower than what he had promised when campaigning. 

By Kevin Buckland

TOKYO (Reuters) – The dollar drifted slightly lower on Wednesday in indecisive trading as a lack of clarity on President Donald Trump’s plans for tariffs kept financial markets guessing.

Trump said late Tuesday at the White House that his administration was discussing imposing a 10% tariff on goods imported from China on Feb. 1, the same day that he previously said Mexico and Canada would face levies of around 25%.

He also vowed duties on European imports without providing further details.

Despite those threats, a lack of specific plans from Trump’s first day in office saw the dollar start the week with a 1.2% slide against a basket of major peers. It stabilized on Tuesday, ending flat after an attempted rebound fizzled, with U.S. officials saying any new taxes would be imposed in a measured way.

The dollar index, which tracks the currency against the euro, yen and four other top rivals, was down 0.14% at 108 as of 0054 GMT.

The euro slipped 0.07% to $1.0420, while the yen edged up slightly to 155.40 per dollar.

“While Trump threatened tariffs up to 25% on Mexico and Canada, he refrained from enacting them despite signing several executive orders,” said Tony Sycamore, an analyst at IG.

“His decision not to target China is being taken as a possible sign of a more cautious approach to tariffs than promised during his campaign, reducing inflation risks and potential hawkish Federal Reserve actions.”

Traders expect a quarter-point Fed interest rate cut by July, while another reduction by year-end is considered a coin toss.

Elsewhere, expectations have been growing that the Bank of Japan will raise rates by a quarter point on Friday, supporting the yen.

China’s yuan was flat at 7.2735 per dollar in offshore trading, after pushing to the strongest level since Dec. 11 on Tuesday at 7.2530.

“10% tariffs on China imports would be far below the 60% rate he mentioned in his campaign,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

“On top of this is the general sense that Trump is not pursuing maximalist trade protectionism in his early actions, but appears to be positioning for trade negotiations,” Tan said.

“Altogether these suggest that the U.S. dollar could drop further.”

The Canadian dollar eased about 0.1% to C$1.4335 per greenback, following a volatile week that saw it tumble as low as C$1.4520 overnight for the first time since March 2020, feeling additional pressure from cooling inflation last month.

The Mexican peso also edged 0.1% lower to 20.6350 per dollar.

By Davide Barbuscia

NEW YORK (Reuters) – The U.S. sovereign debt profile remains on an unsustainable path with deficits likely to widen more than what has been recently projected by the Congressional Budget Office, an analyst at investment firm DoubleLine said on Tuesday.

The CBO, a non-partisan budget agency, last week issued fresh forecasts for the U.S. budget deficits for the next 10 years. They showed a slightly improved fiscal picture compared to its previous outlook published in June 2024.

Debt to gross domestic product, a key metric of a country’s fiscal health, is now estimated to grow to 118.5% by 2035 from about 98% last year, the CBO said on Friday, lower than the 122% debt-to-GDP ratio by 2034 it had forecast last year.

Those projections, however, are “very optimistic,” said Ryan Kimmel, an analyst at the bond-focused investment firm DoubleLine, given expectations of tax cuts by President Donald Trump. They are also based on dovish views on the level of interest rates, he said.

“If you tweak those rate assumptions by very small amounts, the debt dynamic deteriorates quite dramatically … the unsustainable debt dynamics still remain in place,” he said in an interview.

The CBO’s estimates are based on existing laws and assume that the tax cuts Trump signed into law when he was president in 2017 will expire as planned at the end of this year.

If Trump, who returned to the White House on Monday, and Republicans in Congress succeed in extending the current individual and small business tax rates, this could increase deficits by over $4 trillion over the next 10 years, the CBO has previously estimated.

The CBO projects that the effective federal funds rate, as well as yields on three-month Treasury bills and 10-year Treasury notes will remain below 4% from next year until 2035.

“Given that the entire (yield) curve right now is above 4%, it might be a bit challenging to get there, especially if you have this more optimistic growth outlook that should feed through into higher interest rates,” said Kimmel. Benchmark 10-year yields were last at about 4.6%, while interest rates are currently in a 4.25%-4.5% range.

To be sure, Trump’s pick for Treasury Secretary Scott Bessent said last week that high deficits in recent years were due to a “spending problem” – an acknowledgment that Kimmel said was a positive signal. But there was still little clarity from the Trump administration on the fiscal front, he added.

Given expectations of a deteriorating fiscal outlook, which will likely require the U.S. government to issue more debt, DoubleLine is betting long-term Treasury yields will keep rising, said Kimmel.

“We don’t think that the debt dynamic is positive for the long end of the yield curve … We’ve seen the curve steepen quite a bit, but we think that there’s still some room for the curve to steepen.”

(Reuters) – U.S. President Donald Trump said on Tuesday he will issue an executive order to increase the availability of water in California, following disastrous wildfires that recently tore through several Los Angeles neighborhoods.

By Jamie McGeever

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

Day two of the second Donald Trump administration, and exchange rates are in the global market crosshairs as investors nervously try to figure out how to trade the immediate fog shrouding the U.S. president’s trade policy.

That Trump will impose tariffs on imports from many of America’s major trading partners seems almost certain. On what products and countries, and to what degree, are unknown right now, leaving the dollar and other currencies vulnerable to choppy and volatile trading.

The same applies to other asset classes too, although the immediate impact is being felt more acutely in FX. Implied volatility across G10 currencies as measured by Deutsche Bank (ETR:DBKGn)’s ‘DBCVIX’ index remains relatively high, although it did pull back late on Tuesday.

Investors will be relieved that Trump chose not to hit major trading partners with tariffs on his first day in office. They will be hoping his approach to tariffs follows the path SocGen analysts sketched out last week – “talk tough, aim high, but act gradually.” 

But the president’s off-the-cuff remarks to reporters late on Monday that some tariffs could come on Feb. 1 triggered an immediate reversal in the dollar, and served a timely reminder of how difficult the market terrain will be for investors to navigate in the coming weeks and months.

The dollar looks stretched on positioning, sentiment and valuation metrics – hedge funds last week held the biggest net long dollar position in nine years; ‘long dollar’ is one of investors’ most crowded trades, according to Bank of America’s latest fund manager survey; and Citi analysts reckon the currency is overvalued by 3%.

But that doesn’t mean it can’t go even higher, which is likely if Trump follows through with his more extreme protectionist measures and fiscal policies, Citi analysts warn. Rising Treasury yields and term premiums have tended to be dollar positive in recent years, they note.

Meanwhile, the outlook for markets in Asia on Wednesday is fairly positive following a day of calm on global FX markets, falling Treasury yields and solid gains on Wall Street. Nikkei futures are pointing to a rise of around 0.75% for Japanese stocks at the open in Tokyo.

China’s markets will be under scrutiny following their decent start to the week on the back of Trump’s initial ‘go slow’ signals on tariffs. The yuan on Tuesday rose the most since early November, as per the central bank’s daily fixing, and on Monday registered its best day in spot market trading since August. 

The main economic events in Asia on Wednesday are the release of New Zealand’s latest consumer inflation figures and an interest rate decision and guidance from Malaysia’s central bank. 

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

– New Zealand inflation (December)

– Malaysia interest rate decision

– World Economic Forum in Davos 

Canada’s Consumer Price Index (CPI) in December came in at 1.8% year-over-year (yoy), lower than the expected 1.9%, and a decrease from the previous month’s 1.9%. According to Bank of America, the drop was attributed in part to the GST/HST tax holiday, which began on December 14 and is set to continue until February 15.

This tax break, which temporarily removes the Goods and Services Tax/Harmonized Sales Tax on certain items, affects around 10% of the CPI basket, including food purchased in restaurants and store-bought alcoholic beverages.

Core inflation measures also experienced a decline, with the average of the trimmed and median core measures falling to 2.45% yoy from November’s 2.60%. The median core inflation led at 2.4% yoy, followed by the trimmed mean at 2.5%. Despite the decreases, the core measures, which are adjusted for taxes, suggest some underlying easing, with services inflation remaining steady at 3.5% yoy and shelter inflation slowing slightly.

In light of the recent inflation data, BofA’s inflation forecasts remain largely unchanged, with expectations for inflation to stabilize at 2.0% yoy by the end of 2025 and 2026. However, the Bank of Canada (BoC) is now anticipated to cut interest rates by 25 basis points at its upcoming meeting on January 29, a shift from the previous stance of holding rates steady.

This expectation is driven by the continued fall in inflation, anchored inflation expectations, and weaker economic indicators from November 2024. Additionally, potential tariffs proposed by President Trump could influence the BoC to cut rates to support the Canadian economy and allow the Canadian dollar to act as a buffer.

Canadian rates rose across the yield curve following the CPI announcement, reflecting the market’s reaction to the likelihood of rate cuts and the potential imposition of tariffs. The market is currently pricing in an 84% chance of a BoC rate cut at the next meeting.

Furthermore, the risk of tariffs is leading to expectations of further BoC rate cuts to mitigate the impact on Canadian economic growth.

In the foreign exchange market, the Canadian dollar saw little movement post-CPI release, as the anticipated BoC rate cut was already factored in. However, the possibility of the US implementing a 25% tariff has brought volatility to the USDCAD exchange rate, which remains below 1.45.

The outcome of the tariff situation and the BoC’s response could influence the USDCAD pair to break above this level and potentially move towards a 1.50 range, depending on further policy rate adjustments by the BoC.

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