Markets start off the week on a slightly positive tone, with the USD and Treasury yields a hair lower while the 3 top US equity indices extend last week’s all-time highs. The timing and scale of rate cuts by the Federal Reserve remains the primary driver of most market moves but correlations have shown some signs of breaking down.

The overly optimistic expectations of dovish Fed policy seen in Q4 2023 have now been significantly pared back, with swaps markets pricing the odds of a cut in March at 46%, down from 70% as recently as a week ago. The USD has rebounded 2% from the lows of late December, although it remains 3.5% below the highs seen in October. Treasury yields have climbed as well, with the 10-year graph consistently holding above 4%. Equities, however, have relentlessly moved higher as enthusiasm for AI-related growth surpassed concern over higher for longer FOMC rate policy.

Even the European Central Bank, which at times has appeared less serious than its peers in tackling inflation with contractionary monetary policy, has pushed back expectations of its own cut, leading into this Thursday’s rate decision. The consensus for the first cut is now June of this year, essentially confirmed by president Lagarde last week. It is hard to see the ECB cutting earlier or even at the same time as the Fed considering the US is leading the race to tackle its domestic inflation.

The slowly burning ember of China’s economic woes may derail both the Fed and ECB’s soft-landing scenarios if contagion spreads into a brush fire. The subject of property-led slowdowns has been well covered but that hasn’t stopped Hong Kong shares of Chinese-listed companies falling to a 15 year low versus their mainland peers this morning. Given the level of government interference in the domestic equity market, the more freely traded shares in HK are considered a better gauge of sentiment. Western markets have been too punch-drunk over AI to take much notice but the health differential between the 3 largest global economic blocs cannot continue indefinitely.

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

• US Florida Governor Ron DeSantis has officially dropped out of the US Presidential race and endorsed former President Trump who now only has former US Ambassador to the UN, Nikki Haley, to compete against
• The spread between Italian and German sovereign debt, a major barometer of economic risk in the European Union, has narrowed to the lowest level since April 2022
• Hong Kong-listed Chinese shares dropped 2.4% to a 2005 low

Event Calendar:

Monday: US Leading Indicators

Tuesday: US Philadelphia & Richmond Fed Indices; Bank of Japan Rate Decision

Wednesday: US S&P PMIs; Canada Rate Decision; United Kingdom S&P PMIs; Mexico Bi-Weekly CPI

Thursday: US GDP, Inventories, Weekly Initial Jobless Claims; European Central Bank Decision; Mexico Unemployment; US Treasury Secretary Yellen Speaks

Friday: US PCE Deflator, Pending Home Sales

EUR/USD starts the week relatively unchanged after last week’s tepid range. Thursday’s European Central Bank rate decision is expected to be unchanged across all 3 published interest rates.

USD/CAD is slightly lower on the day, off almost 0.85% from last week’s highs. Wednesday’s Bank of Canada rate decision is expected to remain unchanged at 5.0%.

GBP/USD is slightly higher on the day yet again, extending the gain from last week’s low to 1% and bucking the USD-strengthening trend of its peers on positive growth sentiment. This marks a strong reversal for the Pound which had been beaten down significantly in 2023.

USD/MXN is essentially unchanged on the day as and lower by 1.7% from last week’s highs. Note that continued strength in polling by former President Trump may create volatility in the pair as the border crisis is a cornerstone of his most vocal views and he would be prepared to act on it using tariffs as he has done in the past.

USD/BRL is marginally higher on the day and 1.5% higher from last week’s lows. The head of the Brazilian Development bank will be presenting a 3-year plan for industrial growth today with President Lula da Silva in attendance.