Daily Market Pulse

Markets are relatively unchanged on this “Super Bowl Monday,” traditionally a day of low volumes and activity. All eyes are on tomorrow’s US CPI figures that are expected to show the first sub-3% reading since March of 2021.

While US equity markets continued to make new all-time highs last week, foreign exchange has been in somewhat of a holding pattern with the Bloomberg Dollar Index straddling its 200-day moving average. Given the current disinterest in “safe havens,” the support of the USD has been primarily driven by the changes in forward-looking Fed policy that have reverberated since January’s hawkish FOMC meeting and strong Non-Farm Payrolls print. The odds for a March cut are now at 15% (down from 100%) and May’s odds have dropped to 75%. In addition, numerous Fed speakers have been supporting Chair Powell’s comments implying no rush to ease monetary conditions.

The Fed-speak continues this week with 6 Fed Governors/Presidents making statements, with schedules evenly spread around tomorrow’s CPI release. It is likely that the latter half of these speeches are yet to be finalized given the significance of the headline inflation reading that precedes them, particularly if the YoY print is below 3% as the survey indicates (2.9% expected).

While the PCE Deflater is the preferred inflation metric of the Fed, CPI tends to lead sentiment and mid-January's stronger-than-expected print of 3.4% certainly spooked not only the markets but likely members of the Fed as well. If it turns out that last month’s reading was an outlier and we see the first “2 handle” on the headline reading in almost 3 years tomorrow, it is fair to expect some market volatility as this would be a significant turnaround.

Additional thematic highlights as well as this week’s event calendar:

• The conflict between Israel and Hamas has spread farther south in Gaza near the Egyptian border. While essentially unchanged versus Friday’s close, oil futures are approximately 6% higher from this time last week. In addition, Israel’s sovereign credit rating was downgraded for the first time by Moody’s on Friday due to economic concerns stemming from the war. USD/ILS has not reacted significantly.
• Jeff Bezos, Amazon’s founder, sold approximately $2 billion of shares last week according to a filing.
• China’s CSI 300 stock index has stabilized somewhat after last week’s turmoil after continued support by various government agencies, having recovered over 8% from lows.

Event Calendar:

• Monday: Fed’s Bowman, Barkin, & Kashkari speak; ECB’s Cipollone & Lane speak
• Tuesday: US CPI; UK Unemployment
• Wednesday: Eurozone 4Q GDP & Industrial Production; UK CPI; Bank of England’s Bailey speaks; Fed’s Goolsbee speaks
• Thursday: US Retail Sales & Weekly Initial Jobless Claims; Eurozone Commission Economic Forecasts; Canada Housing Starts; UK Industrial Production & 4Q GDP; ECB’s Lagarde speaks; Fed’s Waller speaks
• Friday: US PPI, Housing Starts, & UMich Indices; Brazil Inflation; UK Retail Sales; Feds Daly speaks

EUR/USD is marginally lower on the day and week. The pair has been rather quiet since last week trading within a 0.75% range ahead of tomorrow’s US data as well as Wednesday’s Eurozone 4Q GDP release with the latter expected to be unchanged on both a YoY and QoQ basis. Overnight EUR/USD implied volatility into the US CPI release has come off significantly, with only a 40 pip breakeven.

USD/CAD is slightly higher on the day, essentially unchanged from this time last week but still .55% below last week’s highs. Brief CAD strength was seen on Friday morning after strong Canadian jobs data but quickly retreated to the midpoint of the week’s trading range. The unemployment rate dropped by 0.1% to 5.7% in January versus an expected gain to 5.9% and 37k jobs were added versus an expectation of a 15k gain. Bank of Canada Governor Macklem also made some hawkish comments last week reiterating that monetary policy “needs more time,” in line with his counterparts at the US Fed.

GBP/USD is marginally lower on the day and week, although still trading 0.75% above last week’s low. This is a busy week for UK data with employment, CPI, Industrial Production, GDP, and retail sales all due to be released and the BoE’s Bailey making a speech. CPI is expected to have grown 0.1% on a YoY basis but GDP to have fallen by 0.2% on the same timeline, not a promising combination.

USD/MXN is unchanged on the day and slightly lower than this time last week. Last week’s Banxico rate decision was in line with expectations, unchanged at 11.25%. The central bank’s commitment to taming inflation has made it one of the best performing currencies in the past year, down over 8% versus the USD.

USD/BRL is closed today due to the local Carnival holiday.