Daily Market Pulse

The first full week in February starts slightly on the back-foot, as the Bloomberg Dollar index approaches a 2-month high, US equity futures tick lower, and the 10-year Treasury firmly regains the 4% level. These moves come on the back of last week’s hawkish FOMC and very strong US Jobs numbers, further emboldened by a re-affirming interview by Fed Chair Powell over the weekend.

“Probably not the most likely case,” is what the head of the US Federal Reserve, Jerome Powell, said about a March rate hike during the press conference that followed the FOMC rate decision last Wednesday. Up until that point the statement and press conference were seen as slightly dovish and March rate cut bets implied a 60% chance of cuts. While the initial move lower in US equities has since been fully reversed and then some, the USD took note and began to strengthen.

The state of the US jobs market was also a metric that Powell mentioned the Fed is factoring into their thinking. As such, last Friday’s blowout jobs numbers and significant strength in average hourly earnings further reduced the odds of a March cut and emboldened dollar bulls to extend the move higher with momentum continuing into this morning. In particular, in an interview conducted on Thursday but airing yesterday, Powell doubled down saying he did not see the Fed reaching a level of confidence in their inflation fight that would lead to a March cut. The USD is now 3% above December’s lows, almost 3% below October’s highs, and the market odds for a March hike have fallen to ~17%.

The week ahead is light on economic data but somewhat heavy on central bank-speak with Fed, Treasury, ECB, BoE, and RBA officials all speaking.

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

• China’s CSI 300 Index closed at a 5-year low on Friday but closed higher today during a volatile session during which the China Securities Regulatory Commission announced measures restricting some short selling. The turmoil in the Chinese economy shows no signs of easing and a 10 trillion yuan+ market stabilization fund was suggested by the head of a government think tank over the weekend
• US equities once gain reached all-time highs last week as earnings led by most of the so-called “magnificent 7” buoyed investor sentiment and shrugged off hawkish Fed comments
• Crude Oil reached lows this morning not seen since mid-January even as the US military launched strikes in Iraq, Syria, and Yemen against Iranian proxies last week as retaliation for recent strikes on its bases and merchant ships
• A bi-partisan bill in the Senate tackling illegal immigration as well as Ukranian and Israeli aid is being called “dead-on-arrival" by the speaker of the house
• A ban on purchases of Canadian homes by foreigners was extended through 2026

Event Calendar:

• Monday: US ISM Indices; Fed’s Goolsbee & Bostic speak
• Tuesday: Canada Building Permits; Eurozone Retail Sales; Brazil FGV Inflation, BCB Meeting Minutes; Australia RBA Rate Decision; Fed’s Mester & Harker speak
• Wednesday: Brazil Retail Sales; Fed’s Kugler & Barking speak; BoE’s Breeden speaks
• Thursday: US Weekly Initial Jobless Claims; ECB Economic Bulletin; Mexico CPI, Banxico Rate Decision; China CPI/PPI; ECB’s Lane & Wunsch speak; Treasury’s Yellen speaks
• Friday: Canada Employment Figures; Germany CPI; Mexico Industrial Production; RBA’s Bullock speaks

EUR/USD’s slide continues bringing the pair 1% lower from this time last week. Current levels have not been seen since early December and are 3.6% lower from the late December peak. Recent ECB hawkishness as well as last week’s higher-than-expected Core CPI reading have done little to counter the strong Fed-driven USD move being felt across FX. It is worth noting that 1-year implied volatility is now at a 3-month high.

USD/CAD is higher on the day, climbing as high as 1.2% above last week’s lows. While this move is primarily USD based given last week’s events, the market is eying this Friday’s Canadian employment figures as the next local catalyst, particularly after Friday’s blowout US jobs figures. Canada is expected to have added 15k jobs in January, a rise from the near-zero figure for December, while the unemployment rate is expected to tick higher to 5.9%. A stronger-than-expected print may give the BoC room to follow the Fed’s lead given last week’s Canadian GDP was stronger than expected.

GBP/USD is lower on the day, down about 1.1% from this time last week and at levels not seen since mid-December. While last week’s rate decision was unchanged as expected, the BoE’s chief economist Huw Pill reiterated last week that they are a way off from ensuring inflation is falling and that rates will remain restrictive until inflation is squeezed out. Nonetheless, the pair is lower primarily due to US strength.

USD/MXN is higher on the day in line with peers and about 1.2% above last week’s lows. The next catalyst for the pair is the Banxico rate decision on Thursday, expected to be unchanged at 11.25%. Also Thursday is January CPI, expected to increase to 4.88% from the prior 4.66% figure.

USD/BRL is higher on the day and about 1.8% higher from this time last week. While last week’s 50bp rate cut by the Brazilian Central Bank to 11.25% was widely expected, when combined with the FOMC’s hawkishness, the picture is bleak for BRL longs. Today’s move brings the pair to levels most recently seen briefly in mid-January, but any extension will lead to level not seen since early November.