We had some dodgy US labour market data early on, but the turn of the knife came from the risk-off tone. Day two of these things is typically pivotal. We also update on the ECB and BoE – even though no changes, lots going on.

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A sense of rot sets in and gives a bid to Treasuries

Quite the reaction to some weak labour market data out of the US on Thursday. In fact, one could argue, quite the overreaction. The Challenger job cuts were high, and the reference to it being the highest January number since 2009 set off alarm bells for sure. But we did see a higher number in October 2025, and these data are quite volatile.

Lower yields were, of course, the correct reaction. And the extent of the reaction was amplified by the subsequent JOLTS data, which saw a bigger-than-expected fall in job openings. There are still some 6.5m job openings. But that's down from 7.2m. And jobless claims were up, although not dramatically, and still low in the big scheme of things.

But the background noise has contributed too. A material risk-off tone, laced with concern about the private credit space, in particular, typically is the type of environment that manifests in a bid to Treasuries. Key levels were broken too. The 10yr US yield managed to breach below 4.2%, and the 2yr to 3.45%. Not wildly away from where they have been in the past number of months, but still quite the move.

Tough to stand in the way of it, especially should the risk-off reassessment have legs.

ECB meeting secondary to global risk sentiment

A dovish twist by the Bank of England, weaker US jobs indicators and continued jitters in equity markets have left more of an impression on markets than the European Central Bank, with the 2s10s Bund curve reflattening somewhat in a bullish fashion – all well within recent ranges. The VIX remains elevated, suggesting markets are still cautious about more upcoming equity volatility. So far, we are not facing a widespread equity sell-off, but investors are turning more critical about the potential of AI per business model.

Meanwhile, ECB President Lagarde was generally seen as downplaying the impact of the exchange rate for its policy assessment, but our economists conclude that it remains a vulnerability of the ECB’s 'good place'. Near-term, the tail risk remains skewed towards further easing, even if the bar for a cut remains high. Markets price in a 25% probability of a cut later this year, which therefore seems fair in our view. This positioning keeps the front end of the euro curve well-anchored. In effect, that also means a further deterioration in global risk sentiment due to factors outside the eurozone can continue to flatten the curve. Unless, of course, paired with a further strengthening of the euro, then the curve story becomes more complex.

A dovish Bank of England is not enough to offset for political risks

Markets were a lot more excited about the Bank of England meeting than about the ECB, with suddenly a March cut turning into the base case pricing. The BoE tends to provide less communication between meetings, which means that surprises on the day itself can trigger larger market swings. And indeed, the 2Y swap rate fell by some 7bp on a more dovish meeting than markets had positioned for. We agree much more with the new pricing and see plenty of room for easing as inflation numbers come in lower. Governor Bailey also seemed to agree and later in the day described the current pricing for a March cut as “not a bad place to be”.

More interesting may be the long end of the curve, where upward pressure on 30Y gilt yields can continue on the back of political risks. In contrast to 2Y rates, the 30Y gilt yield actually rose by 3bp on Thursday, despite the dovish turn from the BoE. Starmer’s role as prime minister is clearly under pressure, which adds uncertainty about future fiscal policy measures. Before November’s budget announcement, we estimated that the risk premium for 10Y gilts topped around 25bp, highlighting the sensitivity of investors about the UK’s fiscal situation. For now, we therefore don’t see a lot of room for 10Y GBP rates to test lower.

Friday’s events and market view

Weaker US jobs indicators did their part, shaking risk sentiment on Thursday. While we won't get the official jobs report on Friday, we will get the preliminary University of Michigan consumer sentiment indicator. While the consensus is looking for a softer figure, any accelerated deterioration of sentiment would only add to the markets' current concerns. Consumer credit is another relevant data point released on Friday.

In the eurozone the ECB will release the results of its Survey of Professional Forecasters. Following the ECB meeting, markets will also again focus on commentary from ECB officials with Kocher and Cipollone scheduled to speak. Elsewhere, we have the BoE’s Chief Economist Huw Pill speaking.

The only government primary market supply today comes in the form of a €0.5bn ORI auction from Belgium.

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