Canada Manufacturing Rebounds, But Tariffs and Costs Bite

What happened last week

Markets in focus

as of 31 January 2026. Past performance is not a reliable indicator of future performance.

as of 31 January 2026. Past performance is not a reliable indicator of future performance.

as of 31 January 2026. Past performance is not a reliable indicator of future performance.

The week ahead

Source: ig

The U.S. Treasury is poised to keep its auction sizes for notes and bonds unchanged for the eighth consecutive quarter this week, signaling a continued reliance on short-term bills to manage the nation's fiscal deficit.

While stability is the baseline expectation, investors are closely watching for any hints about future strategy. Key questions revolve around potential increases in coupon issuance down the road or any surprising cuts to long-dated debt auctions, a move that would align with the Trump administration's goal of lowering long-term borrowing costs.

Guneet Dhingra, head of U.S. rates strategy at BNP Paribas, anticipates that any initial increase in coupon auction sizes will be concentrated at the shorter end of the curve. "If they increase the coupon auction sizes, it's probably going to be in 2027 and it's going to focus on twos and threes," he noted, referring to two- and three-year notes.

This aligns with the Treasury's statement from its November refunding announcement, which mentioned that it was starting to consider future increases in auction sizes for notes and bonds but did not specify which maturities.

What to Watch in This Week's Announcements

The Treasury will release two key documents this week:

• Quarterly borrowing estimates on Monday at 3 p.m. EST (2000 GMT).

• Quarterly refunding details on Wednesday at 8:30 a.m. EST (1330 GMT).

The refunding announcement will detail financing plans for the first and second quarters, setting the auction sizes for three-year notes, 10-year notes, and 30-year bonds. These forecasts will also provide crucial insight into the Treasury's assumptions for April tax receipts and clarify how the Federal Reserve's recent bill purchases are factoring into the government's debt issuance strategy.

Factors Easing US Borrowing Pressure

In November, the Treasury projected it would need to borrow $578 billion in the first quarter of 2026, assuming an end-of-March cash balance of $850 billion.

However, analysts at J.P. Morgan recently forecast that financing needs for the quarter could be lower, at just $498 billion. This revised outlook is partly due to the Federal Reserve's reserve management purchases (RMPs), a program involving the purchase of $40 billion in short-term bills per month. By buying these bills, the Fed reduces the amount of debt the Treasury needs to sell to the private market.

While the Fed's bill-buying is expected to remain high until April before slowing, the potential nomination of former Fed Governor Kevin Warsh as the next central bank chief could lead to a reassessment of the program, as Warsh has previously advocated for shrinking the Fed's balance sheet.

Furthermore, Morgan Stanley analysts point to smaller-than-expected fiscal deficits projected for 2025–2027, driven by higher-than-forecast tariff revenues. A smaller deficit reduces the pressure on the Treasury to issue more debt, giving it greater flexibility to maintain current auction sizes for longer.

The Strategy Behind Prioritizing Short-Term Debt

The Treasury's preference for T-bills over long-term bonds is a strategic response to current market conditions. With the Federal Reserve holding its benchmark interest rate in a 3.50%-3.75% range, the opportunity cost of holding longer-dated bonds has risen, forcing investors to demand higher yields for that part of the curve.

By issuing more short-term T-bills, which carry lower yields than long-term bonds, the Treasury can borrow money at a cheaper rate and reduce its immediate interest expenses. Treasury Secretary Scott Bessent has stated that increasing the issuance of long-term bonds at today's elevated yields is simply not cost-effective.

"I think the Treasury is particularly sensitive to making any adjustments to long-end issuance anytime soon," said Zachary Griffiths, head of investment grade and macro strategy at CreditSights. He added that the Treasury will likely "wait as long as possible as they explore these other avenues to finance what's ultimately an elevated deficit."

Will the Treasury Cut Long-End Bond Issuance?

While unlikely, some market participants have speculated that the Treasury could take a more aggressive approach by cutting long-term bond auctions. The goal of such a move would be to reduce yields on the long end of the curve and, by extension, lower rates for things like mortgages.

However, analysts from J.P. Morgan and Morgan Stanley view this scenario as improbable. J.P. Morgan noted that such a decision "would be a significant pivot from last quarter's guidance" and that a "swift 180-degree pivot would not be consistent with a 'regular and predictable' approach to debt management strategy." For now, the focus remains on funding the government's needs through a steady and predictable supply of debt, heavily weighted toward the short end.

With 'hard' data sustaining signs of solid growth (e.g. factory orders and jobless claims), 'soft' survey data has been bouncing back since the start of the year

This morning we get the final Manufacturing PMI data from S&P Global and ISM for January.

A solid and stronger improvement in US manufacturing sector operating conditions (52.4 vs 52.0 exp) was signaled by January's S&P Global PMI data amid the joint-sharpest upturn in production since May 2022.

However, growth was in part driven by inventory building as new orders, despite returning to expansion in January, increased only modestly.

ISM's Manufacturing was expected to rise from 47.9 to 48.5 in January but instead it soared to 52.6 - its highest since Aug 2022. This is the first print above 50 since January 2025.

Source: Bloomberg

This was the biggest MoM surge in the ISM print since April 2020 (COVID rebound), led by a huge surge in new orders and rise in employment (highest in a year) and prices (though elevated) are stable...

"News of the joint largest rise in factory production since May 2022 is tainted by reports of ongoing subdued sales growth," says Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.

"Production growth consequently significantly outpaced that of new orders at the start of the year, resulting in a further accumulation of unsold warehouse inventory."

"Over the past three months, the survey indicates that factories have typically produced more goods than they have sold to a degree we have not previously seen since the global financial crisis back in early 2009."

This highly unusual situation is clearly unsustainable, hinting at risks of a production slowdown and a potential knock-on effect on employment, unless demand improves markedly in the coming months.

Williamson adds that "sluggish sales and order book growth are being commonly linked to customer resistance to high prices, in turn often blamed on tariffs, as well as increased uncertainty over the economic outlook."

While just below trend, business growth expectations for the year ahead are, however, holding up as firms anticipate improving demand, "thanks in part to lower interest rates, reduced import competition due to tariffs, and more government support."

However, as Williamson concludes, "political uncertainty remains a key drag on business sentiment."

Source: Zero Hedge

The European Union's shift away from Russian gas was meant to secure its energy future. Instead, it has created a new and unsettling dependency on U.S. liquefied natural gas (LNG), and officials in Brussels are starting to sound the alarm.

EU Energy Commissioner Dan Jorgensen recently voiced the growing consensus among European leaders, stating, "I definitely hear this when speaking to energy ministers and heads of state from all over Europe that there is a growing concern." This anxiety marks a stark reversal from just a few years ago when the bloc celebrated its pivot to American energy.

From Russian Gas to American Dependency

In 2022, the EU made a decisive move to punish Russia for its invasion of eastern Ukraine by replacing Russian pipeline gas with U.S. LNG. At the time, officials hailed American suppliers as reliable partners and framed the decision as a major step toward energy independence.

That strategy has made the European Union the single largest regional buyer of U.S. liquefied gas. But this reliance comes at a high price, and with a different U.S. administration, the perception of America as a steadfast supplier has fundamentally changed.

Figure 1: LNG carriers have become a critical lifeline for Europe's energy supply, facilitating record imports from the United States following the shift away from Russian pipeline gas.

Policy Collisions: Methane Rules Clash with Reality

A major complication comes from the EU's own climate policies. A new regulation requires strict monitoring, tracking, and reporting of methane leaks across the entire LNG supply chain. This policy is now clashing with the operational realities of the world's biggest gas producers.

U.S. Secretary of Energy Chris Wright has stated plainly that American LNG producers do not intend to comply with the EU's stringent rules. QatarEnergy has taken the same position, repeatedly signaling it will not invest in the required methane tracking.

With the world's two largest LNG exporters unwilling to meet its standards, the EU is finding its options severely limited.

The Trump Factor: A Political Wake-Up Call

The political landscape has also shifted dramatically, shattering the myth of a predictable transatlantic partnership. The "Greenland affair" served as a stark wake-up call for Brussels, demonstrating that the U.S. under President Trump operates on a different set of assumptions regarding trade and security guarantees.

European leaders had previously assumed business would continue as usual. Trump, however, has prioritized collecting on what he sees as debts, demanding higher NATO spending and imposing import tariffs. This transactional approach has eroded confidence in the U.S. as a stable, long-term energy partner.

The Search for Alternatives: A Dead End?

As concerns mount, the EU is scrambling to find other sources. Commissioner Jorgensen mentioned exploring deals with Qatar, Canada, and Algeria. However, the path to diversification is filled with obstacles:

• Qatar remains non-compliant with the EU's methane regulations.

• Russia is off the table due to sanctions, with a full ban on Russian gas imports approved to begin next year.

• No other single supplier has the capacity to replace the sheer volume of LNG currently coming from the United States.

This leaves European gas buyers with the difficult task of scouring global markets for smaller volumes to piece together a diversification strategy, a far cry from the security they once sought.

Locked In: The $250 Billion Energy Deal

Compounding the problem is a trade deal signed by Commission President Ursula von der Leyen and President Trump, which commits the EU to importing $250 billion worth of U.S. energy annually until 2027.

While the EU has not physically been able to purchase this amount, the deal has successfully pushed the bloc to buy record-high volumes of American LNG and oil. This agreement locks Europe into its U.S. dependency, leaving it with little room to maneuver. As President Trump has repeatedly shown, he plays by his own rules, leaving the EU to navigate an increasingly uncertain energy future.

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Source: investinglive

The Trump administration is launching a nearly $12 billion initiative to build a strategic reserve of rare-earth elements, a direct move to challenge China's dominance over minerals critical to modern technology and defense.

The White House confirmed on Monday that "Project Vault" is underway, aiming to shield American manufacturers from supply chain vulnerabilities. This stockpile is designed to protect key industries, including automotive, electronics, and defense, from potential disruptions.

Inside "Project Vault": A Plan to Secure Critical Minerals

The project will be funded by a combination of public and private financing:

• A $10 billion loan from the U.S. Export-Import Bank, structured over a 15-year period.

• Nearly $1.67 billion in private capital.

This initiative follows previous U.S. government efforts to foster a domestic rare-earths industry, which included taking stakes in miner MP Materials and providing financial support to companies like Vulcan Elements and USA Rare Earth.

The creation of the reserve was first reported by Bloomberg News. Signaling the plan's significance, President Trump is scheduled to meet with General Motors CEO Mary Barra and mining billionaire Robert Friedland on Monday.

Breaking China's Stranglehold on the Supply Chain

The move comes after China demonstrated its leverage during trade talks last year by restricting exports of rare earths. These elements are indispensable for producing a wide range of products, from electric vehicles, laptops, and phones to advanced jet engines and radar systems.

China's overwhelming market position gives it a strategic chokehold:

• It accounts for approximately 70% of the world's rare-earths mining.

• It controls 90% of global rare-earths processing.

By creating a national stockpile, similar to the strategic reserve for petroleum, the U.S. aims to nurture alternative sources and reduce its dependency on China for these essential materials.