Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is chief European economist at T Rowe PriceAfter the re-election of President Donald Trump, bond investors looked to the US for signs of the next large sell-off in their market. But are they looking in the wrong place? Investors should consider whether reform of Germany’s so-called “debt brake” rules on government spending could be a catalyst behind the next market sell-off.The Bund is the bedrock of the Eurozone, acting as a benchmark rate for the region. Indeed, during fears of a euro area recession in 2019, the demand for Bunds was so strong that yields dipped paradoxically into negative territory, even before pandemic-era support for global bond markets by central banks. Bund yields are also an anchor of global bond markets. Germany has by far the best fiscal fundamentals not just in Europe, but among large markets globally. That makes Bunds, like Treasuries, a haven in times of stress.The conventional theory suggests that long-term US Treasury yields just reflect expectations of US benchmark interest rates. Monetary policy and estimates of the neutral rate, where monetary policy is neither tight nor loose, are all that matters. But an alternative perspective is to value bonds in part through their relative supplies. Bunds are very scarce, while Treasuries are abundant. A standard measure of net excess bond supply is the free float — the share of bonds that are available for the private sector to buy. This has been significantly affected by central bank activity in the past couple of years, with free floats first falling and now rising again. But in the past decade, there has been a clear correlation between the US and German free floats and the spread between the US and German 10-year bond yields.Some content could not load. Check your internet connection or browser settings.Investors tend to focus more on the Treasuries when predicting the next bond market sell-off. But I argue that a sudden rise in real Bund yields would add to any pressure on Treasuries, catching the market off guard. The German debt brake is one of the most stringent fiscal rules in the world. It keeps the supply of Bunds very limited. Even when markets offer Germany the opportunity of deeply negative yields on long-term debt, the government cannot borrow. But running such a tight fiscal rule is not without consequence. The significant under-investment in public infrastructure has now led to a consensus for change: even the president of the fiscally hawkish Bundesbank now supports reform. Joachim Nagel told the Financial Times that more fiscal space to address structural threats — such as boosting defence spending and modernising the country’s infrastructure — would mark a “very smart approach”.The debt brake can be reformed in two ways. At the moment, the government can only run a structural deficit of 0.35 per cent of GDP. This could be expanded to 1 per cent of GDP. The government also has the option to suspend the debt brake in crisis times. But Germany’s constitutional court has recently challenged the government on this approach, making it significantly harder to use the opt-out clause in practice. A reform could also change the rules about when this opt-out clause can be used. In theory, this second type of reform could raise future Bund supply by a lot more. Yet German governments tend to be fiscally conservative in practice. Whichever changes are made, debt brake reform is crossing the fiscal Rubicon for Germany.Some content could not load. Check your internet connection or browser settings.While reform will raise net Bund supply, it will be moderate by international standards. But even modest supply rises can lead to significant market repricing. After all, this is relaxing the constraints of a very scarce security. Indeed, headlines announcing the German election coincided with a 0.20 percentage point Bund sell-off against rates used in swaps — a form of derivatives. These rates are a reflection of market views on monetary policy. This means that the recent sell-off in Bunds reflected the expectation of more issuance.But debt brake reform requires a two-thirds parliamentary majority to amend the constitution. In an age of political surprises, it remains unclear if this can happen. Despite this large degree of uncertainty, Bunds have already sold off significantly. This suggests that a debt brake reform would have a significant impact on Bund yields and therefore global bond markets.Many advanced economies face significant fiscal challenges. Political action to return debt to a sustainable path is hard to come by, as the current situation in France shows. Debt brake reform, if implemented, may lift other government bond yields, making the challenge of returning public debts to sustainable paths harder. Even the US might feel the ripple effects. More

Many databases from the U.S. Census Bureau appeared to be unavailable to the public on Thursday.
Several economists told CNBC’s Steve Liesman that they were unable to access data from the main Census Bureau website on Thursday, though some were able to access the information through various workarounds.

Many databases from the U.S. Census Bureau appeared to be unavailable to the public on Thursday, with users being told access was “forbidden” when attempting to download common datasets.
Several data experts told CNBC that they were receiving the same error message on files that are routinely available.

“My staff tried numerous economic releases, and we could not access them through Census.gov,” said Maurine Haver, founder of Haver Analytics. The company is a leading global data provider, including to CNBC.
Data experts were able to download some files through various workarounds.
A few of the datasets that were unavailable to CNBC late Thursday include information on voter demographics, population changes by state and small businesses.
Economists were concerned that there could be wider implications.
“When was the last time that Census just stopped publishing data? That just doesn’t happen,” said Michael Horrigan, president of the W.E. Upjohn Institute for Employment Research. Two data experts at the institute were also unable to download data from Census.gov.

“It suggests that there may be internal pressures not to publish data that we rely on, and we need to figure out if that’s true,” Horrigan said.
Some databases were still accessible to the public. It is unclear if the restricted data was due to a technical issue or as part of the changes around information and communication under President Donald Trump.
Erica Groshen, former commissioner of the U.S. Bureau of Labor Statistics in the Obama administration, said the Census data is vital to decision-making across government and business.
“Monetary policy, fiscal policy and investment decisions will all be worse when data quality declines, or reports are delayed or absent,” Groshen told CNBC.
The Census Bureau did not respond to CNBC’s request for comment Thursday afternoon.
The Census Bureau website was one of several government webpages that briefly went dark last Friday following the White House order to remove certain language around diversity, equity and inclusion.

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When the Bureau of Labor Statistics releases its nonfarm payrolls count for January, it is projected to show growth of 169,000, down from 256,000 in December, but nearly in line with the three-month average.
Also, annual benchmark revisions are projected to show a record increase of 3.5 million in the population and 2.3 million in household employment.
Recent indicators show that while hiring has leveled off, layoffs aren’t increasing and workers aren’t quitting, though job openings are on the decline.

A hiring sign is posted on the door of a Taco Bell in Alexandria, Virginia, on Aug. 22, 2024.
Anna Rose Layden | Getty Images

The U.S. labor market likely began 2025 in solid fashion, in a bit of a step down from where it closed the previous year.
When the Bureau of Labor Statistics releases its nonfarm payrolls count for January, it is projected to show growth of 169,000, down from 256,000 in December, but nearly in line with the past three-month average. The unemployment rate is projected to stay at 4.1%, according to the Dow Jones consensus for the report, which will be out Friday at 8:30 a.m. ET.

While the takeaway could be that job creation is slowing, the broader view is that the employment picture is holding solid, and it’s not likely to be a problem for the Federal Reserve any time in the near future.
“With inflation at least for now at tolerable levels and firms very comfortable making sustained investment, there’s no reason why we shouldn’t continue to see job growth around 150,000 per month, which is the upper end of what’s needed to keep the labor market stable,” said Joseph Brusuelas, chief economist at RSM. “In other words, we’re at full employment. This is a good problem to have.”
By the time the Fed concluded its final three meetings of 2024, it had cut its key borrowing rate by a full percentage point. In good part, this was because policymakers sought to support a labor market that showed signs of weakening.
However, recent indicators show that while hiring has leveled off, layoffs aren’t increasing and workers aren’t quitting, though job openings are on the decline.
Such relative stability is a welcome sign with the likelihood that the Fed will be on hold, possibly until summer, while officials wait to see the fallout of President Donald Trump’s fiscal agenda that includes aggressive tariffs against the largest U.S. trading partners.

“The economy is still going to roll on, people are going to make investment decisions, they’re going to get up each morning and go to work,” Brusuelas said.

Annual revisions to take focus

Though the usual payroll number is expected to show more or less status quo conditions, markets also will be watching annual benchmark revisions to both the establishment and household surveys that the BLS compiles.
When the initial revisions were released in August 2024, they showed a stunning 818,000 fewer jobs created than previously reported in the establishment count from April 2023 to March 2024. That total is expected to come down considerably as adjustments are made for immigration and population.
The revisions also are projected to show a record increase of 3.5 million in the population and 2.3 million in household employment, according to Goldman Sachs. The firm sees more modest adjustments upward in labor force participation and unemployment.
The two BLS surveys have differed sharply in the post-Covid years. The establishment survey is used to calculate the nonfarm payrolls number while the BLS derives the unemployment rate from the household count. The latter has shown a less optimistic view of employment conditions that could be corrected with the revisions.
In any event, if the report comes in anywhere near expectations, it’s unlikely to move the needle for the Fed even with the tariff question lingering.
“The labor market is a lot more important to the Fed than what’s going on with tariffs,” said Eric Winograd, director of developed market economic research at AllianceBernstein. “The payrolls numbers are volatile. Anything can happen in any given month. But there’s nothing in particular that makes me think that this month’s print will look meaningfully different than the past few, and that’s enough to keep the Fed on hold.”
In addition to the headline payroll numbers and revisions, the BLS will also release data on average hourly earnings.
The estimate is for January to show a 0.3% increase in wages and a 3.7% 12-month increase. If the annual figure is correct, it will be the lowest level since July 2024.

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Even if the U.K. is not the “direct recipient” of potential tariffs imposed by the U.S., “it will have an effect,” Bank of England Governor Andrew Bailey said Thursday.
The Bank of England on Thursday cut its benchmark interest rates by 25 basis points to to 4.5%.

Even if the U.K. is not the “direct recipient” of potential tariffs imposed by the U.S., “it will have an effect,” Bank of England Governor Andrew Bailey said Thursday.
If tariffs are announced, their effect on the global economic growth and inflation would need to be looked at, Bailey told CNBC’s Steve Sedgwick.

“Now I think that in terms of growth in the world economy, if this will lead to a, you know, fragmentation of the world economy, that is not good for growth,” Bailey said. “The impact on inflation is more ambiguous, because it depends upon what other countries do in response, it depends on what the consequences of those actions and reactions are for trade,” he added.
U.S. President Donald Trump has warned that the U.K. could be in line for tariffs, but has also indicated a deal could potentially be struck. Trump last week announced tariffs on goods imported from China, Canada and Mexico, before pausing planned duties on imports from the two latter economies.
Bailey on Thursday also noted that the U.K. “does not have a substantial trade imbalance with the U.S.”
The U.S. was the U.K.’s biggest trading partner in the year to September 2024, accounting for over 17% of total U.K. trade, according to official data.
Depending on which figures you look at, the two countries either have a small trade deficit or surplus. What’s important for Trump, though — who has expressed dissatisfaction when the U.S. exports less to a country than it imports — is the numbers are almost balanced.

Bailey also pointed out that services are a large part of U.K. trade, which classic tariffs do not affect in the same way as other goods.

A ‘gradual’ and ‘careful’ BOE decision

The Bank of England on Thursday cut its benchmark interest rate by 25 basis points to to 4.5%. Seven members out of the nine-strong monetary policy committee (MPC) voted in favor of the cut, while two members voted for a larger 50 basis-point reduction.
After the announcement, Bailey said in a press conference that the MPC expected to be able to cut interest rates further as disinflation progressed, but noted that these decisions would be taken on a meeting-by-meeting basis.
Speaking to CNBC, Bailey described the cut as “careful” and “gradual,” adding that the central bankers were using those words “very deliberately.”
The word “gradual” referred to the disinflation process, while “careful” was a nod toward “risks and uncertainties,” he said.
Such uncertainties, “could lead to us having, frankly, you know, higher inflation, which we will have to deal with. We’re going to have this sort of uptick in inflation.” He added that this inflation is unlikely to persist.
The BOE on Thursday also halved its growth expectation for the U.K. for 2025, from 1.5% to 0.75%.
The economy flatlined in the third quarter, according to data released in December, while the latest monthly GDP reading showed the economy expanded just 0.1% in November, after shrinking by 0.1% in October. 
— CNBC’s Chloe Taylor and Holly Ellyatt contributed to this report. More