Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 27/01/26
The Federal Reserve is expected to keep interest rates on hold
The Federal Reserve is expected to keep the Federal Funds Rate unchanged at 3.50%-3.75% on Wednesday, in order to assess the effects on (future) output and inflation of the insofar monetary policy easing. The Fed has cut short-term rates by -75 bps since September 2025.
Financial markets price in less than 10 basis points of cumulative cuts in the first three FOMC meetings (January, March and April), implying that the new Fed Chair post Powell is more likely to proceed with anew rate cuts even without a significant deterioration in activity. However, this increases the risk of the repricing of Fed cuts in H2:2026 assuming (i) the economy advances above trend; and (ii) the FOMC operates with the same degree of independence.
At the same time, as liquidity in the banking system has been decreasing amid the Fed’s Quantitative Tightening, the Fed terminated its balance sheet run-off. The Fed will reinvest agency MBSs proceeds into Treasury Bills and will embark on purchases of short-term Treasury securities for reserve management purposes. Currently, Treasury Bills represent close to 5% of the Fed’s balance sheet and circa 22% of the marketable federal debt, suggesting a less flat yield curve compared with a counterfactual scenario.
The euro area composite PMI (51.5) suggests that business output grew for the 13th consecutive month, pointing to positive real GDP growth rate in Q1.2026. The rate of expansion remained broadly unchanged. PMIs diverged further sector-wise in January, albeit the difference between the index in the manufacturing sector (+0.6 pts to 49.4) and its services counterpart (-0.5 pts to 51.9) narrowed.
Global equity markets exhibited sizable volatility in the past week due to tensions over Greenland with the VIX reaching 20.1% before easing by the end of the week. Having said that, all majors entered the current week on a positive footing, with the S&P500 trading at 6950 (-0.4% from its all-time highs) ahead of earnings reports from mega caps.
Overall, the S&P500 trades at a forward price to earnings ratio of 22.2x versus a 5-year moving average of 20.3x, while euro area equities trade at 15.4x (5-year average of 13.9x). Among US sectors, Energy stocks have over-performed (+10% YtD) due to renewed tensions in the Middle East (Iran) and developments in Venezuela, with analysts (consensus) expecting Energy EPS growth of +1% in 2026.
Gold prices continue to march higher (>$5000 per ounce) due to elevated geopolitical uncertainty, including the rising risk of another US government shutdown by month-end and a weakening US Dollar. The latter has depreciated by -2.4% to $1.188, its lowest level against the euro since September 2021. At the same time, the Japanese Yen appreciated against the US dollar to $/¥154.2 from $/¥158.1, as there is growing speculation that the Japanese Ministry of Finance will intervene in the currency market to halt the Yen’s depreciation (by 4.5% in the prior 3 months).
On Friday, the Bank of Japan stood pat, with the policy rate remaining at +0.75%. Long-term government bond yields have moved significantly higher due to expectations of further policy tightening and rising term premia amid an expansionary fiscal policy. Financial markets began to price-in further policy rate hikes in the next twelve months (+68 bps cumulatively), with 10-Year and 30-Year JGB yields up by 17 bps and 23 bps to 2.24% and 3.63%, respectively year-to-date.
The Federal Reserve is expected to keep the Federal Funds Rate unchanged at 3.50%-3.75% on Wednesday, in order to assess the effects on (future) output and inflation of the insofar monetary policy easing. The Fed has cut short-term rates by -75 bps since September 2025.
Financial markets price in less than 10 basis points of cumulative cuts in the first three FOMC meetings (January, March and April), implying that the new Fed Chair post Powell is more likely to proceed with anew rate cuts even without a significant deterioration in activity. However, this increases the risk of the repricing of Fed cuts in H2:2026 assuming (i) the economy advances above trend; and (ii) the FOMC operates with the same degree of independence.
At the same time, as liquidity in the banking system has been decreasing amid the Fed’s Quantitative Tightening, the Fed terminated its balance sheet run-off. The Fed will reinvest agency MBSs proceeds into Treasury Bills and will embark on purchases of short-term Treasury securities for reserve management purposes. Currently, Treasury Bills represent close to 5% of the Fed’s balance sheet and circa 22% of the marketable federal debt, suggesting a less flat yield curve compared with a counterfactual scenario.
The euro area composite PMI (51.5) suggests that business output grew for the 13th consecutive month, pointing to positive real GDP growth rate in Q1.2026. The rate of expansion remained broadly unchanged. PMIs diverged further sector-wise in January, albeit the difference between the index in the manufacturing sector (+0.6 pts to 49.4) and its services counterpart (-0.5 pts to 51.9) narrowed.
Global equity markets exhibited sizable volatility in the past week due to tensions over Greenland with the VIX reaching 20.1% before easing by the end of the week. Having said that, all majors entered the current week on a positive footing, with the S&P500 trading at 6950 (-0.4% from its all-time highs) ahead of earnings reports from mega caps.
Overall, the S&P500 trades at a forward price to earnings ratio of 22.2x versus a 5-year moving average of 20.3x, while euro area equities trade at 15.4x (5-year average of 13.9x). Among US sectors, Energy stocks have over-performed (+10% YtD) due to renewed tensions in the Middle East (Iran) and developments in Venezuela, with analysts (consensus) expecting Energy EPS growth of +1% in 2026.
Gold prices continue to march higher (>$5000 per ounce) due to elevated geopolitical uncertainty, including the rising risk of another US government shutdown by month-end and a weakening US Dollar. The latter has depreciated by -2.4% to $1.188, its lowest level against the euro since September 2021. At the same time, the Japanese Yen appreciated against the US dollar to $/¥154.2 from $/¥158.1, as there is growing speculation that the Japanese Ministry of Finance will intervene in the currency market to halt the Yen’s depreciation (by 4.5% in the prior 3 months).
On Friday, the Bank of Japan stood pat, with the policy rate remaining at +0.75%. Long-term government bond yields have moved significantly higher due to expectations of further policy tightening and rising term premia amid an expansionary fiscal policy. Financial markets began to price-in further policy rate hikes in the next twelve months (+68 bps cumulatively), with 10-Year and 30-Year JGB yields up by 17 bps and 23 bps to 2.24% and 3.63%, respectively year-to-date.