EUROZONE DATA: Unit Labour Cost Growth Weaker Than Expected In Q4
Eurozone GDP deflator growth eased to 2.44% in Q4, down from 2.72% in Q3 for the seventh consecutive deceleration from a high of 6.51% in Q1 2023. This was in line with the ECB’s March macroeconomic projections. Decelerations were seen in Germany, Spain and France, but accelerated in Italy. The deceleration came as unit labour cost (ULC) growth eased to 3.8% Y/Y (vs 4.5% prior), below the ECB’s 4.1% projection. Although the March ECB decision signalled a more cautious approach to monetary policy going forward (with policy now "meaningfully less restrictive"), the ULC developments underscore that more rate cuts are in the pipeline. However, the regularity of future cuts will be determined by more timely economic data alongside trade, geopolitical and fiscal developments.
- Unit labour costs contributed 1.80pp to the annual GDP deflator print, down from 2.14pp in Q3. The deceleration in the annual rate was largely due to weaker-than-expected compensation per employee growth (4.09% Y/Y vs 4.46% prior and 4.3% expected by the ECB). Meanwhile, there were offsetting contributions from real productivity per hour worked (0.1% Y/Y vs 0.4% prior) and total hours worked (1.1% Y/Y vs 0.6% prior).
- The ECB expects unit labour cost growth to continue decelerating, particularly in 2026/2027 as a result of falling wage and rising productivity growth.
- Unit profit growth remained soft at -0.4% Y/Y for the third consecutive quarter, pulling deflator growth down by 0.18pp (vs -0.15pp contribution prior). The quarterly reading at least picked up a little to 0.3% Q/Q (vs 0.0% prior).
- This is reflective of weak corporate pricing power in the Eurozone – particularly in manufacturing – which has been a running theme in recent PMI reports.
- The ECB expect unit profit growth to “recover somewhat from 2025, aided by the economic recovery, strengthening productivity growth and a temporary boost in 2027 related to the statistical treatment of ETS2”
- Unit taxes and subsidies added 0.81pp to deflator growth.
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US 10YR FUTURE TECHS: (H5) Challenging Resistance
- RES 4: 110-25 High Dec 12
- RES 3: 110-19 76.4% retracement of the Dec 6 - Jan 13 bear leg.
- RES 2: 109-31 High Dec 18
- RES 1: 109-10/15+ 50-day EMA / High Feb 3
- PRICE: 109-14+ @ 11:32 GMT Feb 5
- SUP 1: 108-20+ Low Feb 4
- SUP 2: 108-06/107-06 Low Jan 23 / 13 and the bear trigger
- SUP 3: 107-04 Low Apr 25 ‘24 and a key support
- SUP 4: 106-11 2.00 proj of the Oct 1 - 14 - 16 price swing
Treasury futures are trading higher today. The contract is also holding on to its recent gains and price has once again pierced resistance at the 50-day EMA, at 109-10. A clear break of the average would strengthen a short-term bullish case and highlight a stronger reversal. This would open 109.30, a Fibonacci retracement. On the downside, initial support to watch is 108-20+, Tuesday’s low. Clearance of it would signal a reversal.
BONDS: OAT vs BTP block trade
- OATH5 bought for 124.56 in ~1.7k.
- IKH5 sold at 120.66 in 750 and 120.65 in 750.
OUTLOOK: Price Signal Summary - GBPUSD Clears Resistance
- In FX, gains in EURUSD are considered corrective. A strong reversal from Monday’s low does highlight a potential hammer candle formation on that day. However, additional reinforcing price evidence is required to signal a turn in the trend. MA studies are in a bear-mode position, highlighting a downtrend. 1.0386 (pierced) to 1.0443, the area between the 20-and 50-days EMAs, marks an important resistance zone. A clear break of it would be a bullish development.
- Resistance in GBPUSD at 1.2503, the 50-day EMA, and 1.2523, the Jan 27 high, has been cleared. This cancels a recent bearish threat and instead reinstates the bull cycle that started Jan 13. The break higher paves the way for a climb towards 1.2610, a Fibonacci retracement. Key short-term support has been defined at 1.2249, the Jan 3 low. A break of this level would highlight a reversal.
- USDJPY is trading lower today and this has resulted in a break of short-term support at 153.72, the Jan 27 low. The move marks an extension of the bear cycle that started Jan 10 and clears the way for 152.55 next, 61.8% of the Dec 3 - Jan 10 bull leg. Clearance of this level would open 151.81, the Dec 12 low. On the upside, initial firm resistance is seen at 155.59, the 20-day EMA.
