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Eurozone inflation slowed to 2.0% in December, precisely meeting the European Central Bank's long-standing target. The figure, down from 2.1% in November, was confirmed by data from Eurostat and aligned with economists' forecasts.

This reading marks a significant milestone for the currency bloc, showing that price growth has moderated to the ECB's desired level.

Energy Prices Pull Inflation Down as Food Costs Rise

The primary driver behind the cooling inflation rate was a continued decline in energy prices. This drop successfully counteracted a simultaneous increase in the cost of food across the Eurozone during the month.

The dynamic suggests that falling energy costs are the main force helping to control the headline inflation number, even as other domestic price pressures persist.

What's Next for Eurozone Inflation?

The latest data indicates that the downward trend in inflation could continue into the coming months. As long as the decline in energy costs continues, it is expected to keep offsetting price pressures from other parts of the economy. This could potentially push the headline inflation rate even lower.

Market Focus Shifts to US Economic Indicators

Euro Softens Following German Inflation Data

Source: Reuters

German government bonds extended their gains Wednesday as weak economic data fueled investor bets on future interest rate cuts, overpowering concerns about a coming surge in government debt sales.

The yield on Germany's benchmark 10-year bond is near its lowest level since December 5, marking its most significant three-day gain since September. The 30-year yield has also dropped to 3.42%, retreating from a 14-year high reached last month.

Weak Economic Data Fuels Rate Cut Speculation

The rally is being driven by signs of trouble in Europe's largest economy. Recent reports revealed weaker-than-expected retail sales and slowing inflation, prompting traders to reassess the outlook for monetary policy.

Money markets have increased wagers on rate reductions from the European Central Bank (ECB). As recently as Monday, investors were predicting an interest-rate hike in December, but they now expect the first move to be delayed until early next year.

Adding to the bearish sentiment, Citi's Economic Surprise Index for the eurozone, which tracks how economic data performs relative to market expectations, has fallen to its lowest point in over a month. This suggests investors may have become too optimistic about the region's growth prospects.

Technicals and Investor Positioning

According to Mohit Kumar, chief economist and strategist for Jefferies International, a build-up of short positions against bunds is now "looking stretched," based on the firm's proprietary indices. He recommended positioning for short-dated German notes to outperform longer-dated U.S. Treasuries.

A Wednesday sale of new German 10-year bonds was oversubscribed 1.29 times, a rate considerably lower than the previous offering. However, the amount sold nearly doubled to €4.5 billion ($5.3 billion).

Germany's Record Debt Issuance Looms

While economic concerns are currently driving the market, a major increase in government borrowing could limit how far bunds can rally, especially at longer maturities.

German Chancellor Friedrich Merz has described "certain sectors" of the economy as being in a "very critical" condition, pledging that reviving growth is his government's top priority this year. To tackle the country's economic challenges, Merz plans a massive, long-term spending program to update infrastructure and modernize the military.

This initiative will be funded by a significant increase in borrowing. Germany is set to raise federal debt sales by a fifth to a record €512 billion in 2026.

Outlook for Bund Yields and European Markets

Some analysts believe the market has already factored in this government spending. "Bunds have priced in the fiscal impulse from Germany," said Axel Botte, head of market strategy at Ostrum Asset Management. He added that yields on German 10-year notes "should hover around 2.80%" through 2026.

The rally in German debt has pulled other European bonds along with it. In the U.K., the 10-year gilt yield fell seven basis points to 4.41%, on track for its biggest daily drop since November. The 30-year yield declined eight basis points to 5.15%.

Bank of America economists see a low probability of Bank Negara Malaysia (BNM) raising interest rates, according to a recent research note. The financial institution’s base case is that Malaysia's central bank will continue its extended pause on interest rate adjustments.

Despite growing market chatter about potential policy changes, BofA analysts argue that the odds of near-term monetary tightening remain minimal in the current economic environment.

Extended Pause Remains the Most Likely Scenario

While speculation about Malaysia's monetary policy has been increasing, Bank of America is holding firm on its forecast. The bank's team believes that an extended pause is the most probable trajectory for BNM's interest rates.

The analysts emphasize that the overall probability of any rate change—either a hike or a cut—is currently low.

A Hike Is More Probable Than a Cut, If a Change Occurs

In the unlikely event that BNM does make an adjustment, BofA suggests a rate hike would be more plausible than a rate cut. This view is based on the bank's "broadly favorable growth outlook for Malaysia."

However, the report reiterates that this is a hypothetical scenario, as their primary assessment points toward policy stability.

What to Watch: BNM's Annual Report

For investors seeking clues about future policy, BofA analysts recommend closely monitoring the upcoming BNM Annual Report 2025. This document will be critical for gaining insight into the central bank's thinking.

Traders should look for two key elements in the report:

• Updated macroeconomic forecasts for 2026.

• Any shifts in the central bank's official policy tone or stance that could signal future rate movements.

Valero Energy Corp. is expecting to increase gasoline imports to the San Francisco Bay Area, as the company moves forward with plans to close a refinery in the region but stops short of fully exiting Northern California for now.

"Valero remains committed to fulfilling its contractual supply obligations in the California market and anticipates importing additional gasoline volumes to the Bay Area in the near term," the company said in a Tuesday statement.

California Governor Gavin Newsom said Valero's decision marked a "constructive development from an earlier announcement that included the possibility of full closure and exit from the Northern California market in early 2026," according to a statement sent by the governor's press office.

Valero plans to begin shutting some of the Benicia refinery operating units in February before fully winding it down by the end of April. Valero is evaluating all options for the plant and remains in close communications with the state of California, the company said in the statement.

"I appreciate the company planning responsibly, including planning for imports of refined products to supply the market in the meantime," Newsom said.

Newsom's praising of Valero is emblematic of a shift in tone for the California governor. He all but abandoned a yearslong crusade against fossil fuels and started courting Big Oil last year, under threat of spiking gas prices in California. The Democratic governor and possible presidential candidate has tried negotiating with Valero to dissuade the company from closing its refinery in Northern California, while state lawmakers considered pledging it hundreds of millions of dollars to cover maintenance costs.

Source: Bloomberg Europe

India's economy is projected to expand by 7.4% in the fiscal year ending March 2026, a significant increase from the 6.5% growth seen in the previous year. This forecast, based on the government's first advance estimates, comes as the nation navigates persistent global trade uncertainties.

The projection reflects renewed momentum for the world's fastest-growing major economy. For fiscal year 2025, initial estimates had pegged growth at 6.4%—the lowest since the pandemic—before being revised upward to 6.5% in May.

Surprising Resilience in Early Performance

Despite external pressures, the Indian economy demonstrated remarkable strength in the first half of fiscal 2026. Growth outpaced expectations, hitting 7.8% in the June quarter and accelerating to 8.2% in the three months ending in September.

This strong performance has bolstered confidence, leading to upgraded forecasts from key institutions.

Navigating US Trade Tensions

A key challenge remains the trade relationship with the United States, India's largest trading partner. Indian exports have faced 50% tariffs since August of last year. While negotiations for a trade agreement are underway, the prolonged tariffs are expected to create economic headwinds.

Reflecting these concerns, the International Monetary Fund (IMF) projected in a recent report that India's real GDP would grow by 6.6% in fiscal 2026. The IMF's model, which assumes a continued delay in a U.S.-India trade deal, sees growth moderating further to 6.2% in fiscal 2027.

Central Bank Adjusts Forecasts on Easing Inflation

The Reserve Bank of India (RBI) has also taken note of the shifting economic landscape. Last month, India's central bank raised its real GDP growth forecast for fiscal 2026 to 7.3%, up from its previous estimate of 6.8%.

The RBI attributed this optimistic revision to easing price pressures. The bank lowered its consumer price inflation forecast for the current fiscal year from 2.6% to 2.0%. This improved inflation outlook provided the RBI with the necessary room to cut its policy rate by 25 basis points to 5.25%, even as it cautioned about weakness in certain key economic indicators.