Germany's Bunds were little changed on Tuesday despite a more upbeat German ZEW investor survey, said Daiwa Capital Markets.

With an otherwise quiet day ahead for eurozone economic data, the first estimates for eurozone labor costs and job vacancies in Q4 should be Wednesday's focus, noted the bank. As policymakers continue to expect wage growth to soften over the coming year to support underlying disinflation, further signs of normalization in labor market conditions should help to reinforce their confidence.

Daiwa expects job vacancies to continue their downtrend in Q4, consistent with both the deceleration in employment growth towards the end of last year and business survey indicators of willingness to hire. Despite unemployment having remained close to historical lows (6.3%) over this period, gradual loosening in the labor market should also be expected to translate into further moderation in labor cost growth.

Gilts made losses on Tuesday as United Kingdom pay growth picked up towards year-end while the labor market appeared to remain broadly resilient despite soft economic growth, stated Daiwa.

Just as Tuesday's labor market data are likely to have reinforced the Bank of England's case for a gradual pace of policy easing, January's consumer price index report on Wednesday will also likely justify a cautious response.

Despite a softer December print -- with both headline (2.5% year over year) and services (4.4% year over year) inflation surprising to the downside -- the bank, like the BoE, expects a rebound in January. In particular, Daiwa predicts the headline rate to jump 0.3ppt to 2.8% year over year. Core inflation should rise 0.4ppt to 3.6% year over year, with services inflation once again accelerating to above 5.0% year over year, at least in part driven by the recent softness of certain components -- including airfares and accommodation -- as well as firmer increases in regulated price components at the start of the year.

In addition, while food prices also seem likely to increase their contribution to the headline rate, energy should have provided more of a headwind as base effects likely offset higher gasoline prices in January. While higher fuel costs may apply upward pressure to input costs, these aren't expected to have materially affected producer output prices at the factory gate, accoridng to Daiwa.