German Inflation Rises Despite ECB Rate Cut

Source: Reuters

The European Union is preparing for a significant escalation in its economic pressure on Russia, targeting the core of its oil trade with a potentially simpler and more forceful mechanism.

According to Bloomberg sources, Brussels is considering a move to abandon its Russian oil price cap in favor of a complete ban on maritime services. If enacted, this would prohibit European companies from providing insurance, shipping, and transport for any Russian oil cargoes, regardless of price, effectively closing a major loophole in the current sanctions regime.

From Price Cap to Outright Ban

The existing price cap was designed as a dual-purpose tool: to keep Russian oil on the global market to prevent price shocks while simultaneously cutting into the Kremlin's revenue. While elegant in theory, its real-world implementation has proven messy and difficult to enforce.

The system's effectiveness relies heavily on documentation and declarations in a global oil trade where such oversight is notoriously challenging, making it easy for traders to circumvent the rules.

A blanket ban on services would be a much blunter instrument, simplifying enforcement and making it significantly harder for Russia to work around the sanctions. European officials believe this shift would tighten economic pressure at a critical time, as Russia's oil and gas revenues have already hit a five-year low due to weak prices and an expanding web of sanctions.

Why the Current Sanctions Model Is Failing

The push for a new strategy comes as the EU recognizes the limitations of its current approach. The price cap is scheduled to drop to $44.10 per barrel on February 1, but there is growing awareness within the bloc that merely adjusting the price does little to curb Moscow's income as long as oil continues to move through shadow fleets and opaque channels.

Recent EU measures targeting refined products made from Russian crude have already compelled refiners in Turkey and India to reduce their purchases. Although China has absorbed some of this supply, it has primarily been through smaller "teapot" refineries that demand steep discounts.

While these actions have squeezed Russia's revenues, they have not stopped its oil from reaching the market. A full services ban would push even more of Russia's oil into these high-friction, discounted trade routes and make it more difficult for sanctioned barrels to re-enter Europe through blending or relabeling.

Securing Unanimity Remains a Hurdle

Despite the strategic appeal, implementing a services ban is not a straightforward process. The move requires unanimous consent from all EU member states, and some nations remain hesitant.

Concerns about potential market disruption and Russian retaliation are significant obstacles. The debate is further complicated by Europe's own energy reality: while the continent’s crude oil imports fell by nearly 9% last year, its reliance on expensive liquefied natural gas (LNG) imports surged.

Warsh Nomination Buzz Shakes Bond Market

U.S. long-term Treasury prices fell on Friday after President Donald Trump indicated he would nominate former Federal Reserve Governor Kevin Warsh to lead the central bank. The potential appointment is viewed as a bearish signal for bonds, given Warsh's known preference for a smaller Fed balance sheet.

Bond yields, which move opposite to prices, initially pared some of their declines in afternoon trading as volume thinned. However, the prospect of Warsh at the helm prompted a reassessment of future policy support, putting upward pressure on longer-dated Treasury yields.

Warsh has previously advocated for a "regime change" at the Fed, including a reduction in quantitative easing. A push to shrink the central bank's bond portfolio would increase the supply of Treasuries on the market, directly impacting their yields.

Why a Smaller Balance Sheet Matters

A more aggressive approach to reducing the Fed's balance sheet is a primary concern for bond investors.

"If the smaller balance sheet becomes a primary focus, then keeping all things equal, that would put upward pressure on your longer-term bond yields just because you would have that extra supply out there in the Treasury market," explained Jim Barnes, director of fixed income at Bryn Mawr Trust.

However, Barnes suggested this may not be an immediate priority. "I just don't think that's going to be the focus coming out of the gate," he noted. "There's going to be other things that's going to be reviewed, most notably the inflation side and the labor market side of the dual mandate, and trying to figure out what to do with short-term rates."

Some analysts also believe Warsh's previously hawkish positions could counterbalance concerns that he might simply align with President Trump's calls for rate cuts.

A Look at the Market Reaction

The news triggered noticeable shifts across the Treasury yield curve:

• 30-Year Treasury Yields: The long bond yield (US30YT=RR) jumped by as much as 6 basis points (bps) to a session high of 4.914%. It later settled at 4.872%, up 1.7 bps on the day. This puts it on pace for its largest weekly rise since late December and marks its third consecutive monthly increase.

• 10-Year Treasury Yields: The benchmark 10-year yield rose 1.2 bps to 4.239%, contributing to a 9-bp rise for the month of January.

• Yield Curve: The spread between the two-year and 10-year yields steepened to 71.50 bps, its widest in over a week. The curve was last at 71.3 bps.

• Two-Year Treasury Yields: In contrast, the two-year yield (US2YT=RR) fell 2.5 bps to 3.527%, recording its largest weekly drop since mid-November.

Inflation Data and Fed Independence in Focus

Adding to the pressure on bonds, new data showed U.S. producer prices increased more than anticipated in December. The Producer Price Index (PPI) rose 0.5% for the month, well above the 0.2% forecast by economists polled by Reuters. On an annual basis, the PPI was up 3.0%.

Beyond the data, investors are also weighing the implications for Federal Reserve independence. While Warsh is a Trump nominee, analysts caution against overstating his potential immediate impact on monetary policy.

"We remind investors that one vote will not be enough to change the course of monetary policy," said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions. He noted that with only two policymakers voting for a cut at the last meeting, "Warsh would require significant sway to bring other voting members in line."

Following the week's events, U.S. rate futures are now pricing in approximately 51 bps of monetary easing this year, equivalent to about two 25-bps rate cuts. This is an increase from the 44 bps priced in after the Fed's decision last week to hold rates steady.

Source: Yahoo Finance

Iran has revealed a network of underwater missile tunnels, issuing a stark warning that the strategically vital Strait of Hormuz will "not be safe" if the country is attacked by the United States. The announcement, broadcast on Iranian state television, significantly raises tensions in the region.

Footage featured Alireza Tangsiri, commander of the Islamic Revolutionary Guard Corps (IRGC) Navy, showcasing submarine missile facilities. The broadcast displayed rows of cruise missiles reportedly equipped with smart guidance systems and capable of hitting targets over 1,000 kilometers (621 miles) away.

"Our capabilities are constantly developing," Tangsiri stated, emphasizing that Iranian forces are prepared to counter any threat "at any level and in any geography."

The Strategic Chokepoint of Hormuz

This development follows earlier warnings from Mohammed Akbarzadeh, the political deputy of the IRGC Navy, who stated that Tehran could disrupt international shipping through the Strait of Hormuz. Iran has consistently signaled that a blockade of the strait is a potential response to any future attack, though it did not implement one during a 12-day US-Israeli conflict in June.

The strait is a critical artery for the global economy, with approximately 37% of the world's daily oil traffic passing through it. Akbarzadeh claimed that Iran possesses real-time intelligence "from the sky, the surface and under the water of the Strait."

Diplomatic Maneuvers and US Military Posturing

Amid the rising military rhetoric, diplomatic efforts are underway. Iranian Foreign Minister Abbas Araghchi visited Turkiye on Friday for talks aimed at preventing a US attack and averting a broader regional conflict. Tehran has cautioned Gulf states and Ankara that while it does not seek war, it will target US bases across the region if attacked.

In response, Washington has increased its military presence in West Asia. The aircraft carrier USS Abraham Lincoln, accompanied by several warships, has arrived in the area, and the US has also deployed additional fighter jet squadrons.

Earlier this week, President Trump described a "beautiful armada" heading toward Iran and called on Tehran to accept US terms at the negotiating table. Washington's demands include the destruction of Iran's enriched uranium, limitations on its missile program, and an end to its support for regional resistance groups.

Tehran's Firm Stance on Potential Conflict

Iran has met the US pressure with defiance. "Our brave Armed Forces are prepared – with their fingers on the trigger – to immediately and powerfully respond to ANY aggression against our beloved land, air, and sea," Araghchi stated on Wednesday. He added, "The valuable lessons learned from the 12-Day War have enabled us to respond even more strongly, rapidly, and profoundly."

Reinforcing this position, Iran's mission to the United Nations declared this week that Tehran is prepared to respond "like never before" should the country come under attack.

The Canadian economy likely shrank in the fourth quarter of 2025, capping a year of significant trade uncertainty. After Gross Domestic Product (GDP) growth flatlined in November, early estimates point to a contraction, signaling that hefty US tariffs have taken a toll on the nation's economic momentum.

While Canada's service industries posted modest gains in November, these were offset by weakness in goods-producing sectors, particularly manufacturing. This slowdown follows a period of intense pressure from the Trump Administration's trade policies.

A Timeline of 2025 US Tariffs on Canada

Throughout 2025, the US implemented a series of escalating tariffs that directly impacted Canadian industries:

• March: A 25% tariff was placed on all Canadian products, which later rose to 35% in August.

• April: A 25% tariff was imposed on auto imports.

• June: Tariffs on steel and aluminum imports, initially set at 25%, were increased to 50%.

• Energy: A 10% tariff was applied to energy resources, including oil and critical minerals.

These measures hit Canada's manufacturing sector especially hard, contributing directly to the weakened industrial data seen toward the end of the year.

A Volatile Year for Canadian Growth

Historically, Canada's economic health has been closely tied to its partnership with the United States. The introduction of tariffs in 2025 caused immediate disruption.

From the first to the second quarter of 2025, Canada's real GDP fell by 1.6%. During this period, the value of Canadian exports plummeted by 10.8%, while imports declined by 3.5%.

However, the third quarter delivered a surprising turnaround. Against many expert predictions, the Canadian economy demonstrated resilience, with real GDP growing by 2.6%. This recovery was driven by a successful pivot toward non-US markets, which pushed export values up by 1.8% while import values continued to fall by another 1.6%.

Despite this mid-year rebound, the economy appeared to run out of steam as the year closed. The Bank of Canada projects that full-year real GDP growth for 2025 will be approximately 1.2%, a significant drop from the 2.3% growth recorded in 2024.

The 2026 Outlook: Diversification and Stimulus

Looking ahead, Canada's economic forecast remains cautious. Real GDP growth for 2026 is projected at 1.1%, suggesting a year of modest expansion as the country continues to navigate US trade barriers.

To counter these pressures, Canada is pursuing a multi-pronged strategy focused on diversifying its trade relationships and stimulating domestic activity.

Pivoting to New Export Markets

A key element of Canada's plan is to reduce its reliance on the US market. The country recently secured a major trade deal with China, aiming to boost exports to the nation by 50% by 2030.

Furthermore, the completion of the Trans Mountain Expansion (TMX) pipeline in 2024 has opened up new channels for Canada to export its oil—one of its most critical commodities—to previously untapped energy markets across the Pacific and Asia.

Domestic Fiscal Support

The government is also set to implement the largest fiscal stimulus package in six years. This plan includes large-scale, deficit-financed capital spending, nation-building projects, and initiatives to promote internal free trade.

According to Oxford Economics, 2026 will be a year of adjustment and opportunity for Canada. However, beyond the trade conflict, several domestic challenges pose risks to growth, including high household debt, a declining population, and an overvalued housing market.