Markets start off the week relatively unchanged ahead of a big data week in the US with the Federal Reserve rate decision on Wednesday and Non-Farm Payrolls on Friday. Earnings releases by 5 of the “Magnificent 7” tech companies as well as Wednesday’s Quarterly Refunding statement by the US Treasury may also add volatility to an already action-packed calendar.

The Federal Reserve is coming under additional pressure to cut rates as soon as March given last week’s lower than expected release of the PCE Core Deflator, considered their favorite inflation metric. December’s drop to 2.9% YoY from the prior reading of 3.2% is 0.1% lower than the survey expected and still far above the Fed’s 2% target, yet the large rate differential between this release and the fed’s 5.25-5.50% policy band has increased calls to curtail the “higher for longer” mantra as early as 2 months from now. Indeed, the odds of a March cut remain close to 50% but given the state of market risk, near-term Fed dovishness may be already priced in.

Equities remain at or near all-time highs whereas both the US Dollar and 10-year Treasury yields have retraced off their late-December lows. The USD is about 2.5% higher according to the Bloomberg Dollar Index and the 10-year sits comfortably at 4.1%, about 32 basis points higher. As per our Daily Market Update this time last week, it is possible that the equity market is now being driven more by the AI craze than economic data while the Dollar and Treasuries, traditionally more sensitive to the latter, are seeing the PCE data for what it is: a single bit of slightly dovish news that contrasts heavily with most of the other data released in January.

This month’s Non-Farm Payrolls, CPI, and most recently GDP all came in higher than survey expectations, signaling a strong economy that is far from “needing” central bank accommodation. The Fed likes to remind the market that not only are they data-dependent but that no one data point influences their decision-making so one could argue that last week’s PCE should be no exception. January’s Non-Farm payrolls report is due Friday, 2 days after the Fed meeting, hurting the odds of strong policy indications at the FOMC on Wednesday. Regardless, there will likely be plenty of questions during the press conference about what exactly the Fed is waiting for with respect to rate cuts: a sustained drop in inflation or for something in the economy to break.

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

• An attack on a US military base by proxies of Iran has killed 3 troops, injured others, and sent oil prices surging to their highest levels since November before retracing.
• Chinese property developer Evergrande has been ordered by a Hong Kong court to liquidate in what is yet another blow to Chinese markets. Curbs on short selling of Chinese equities have been instituted by authorities.

Event Calendar:

• Monday: ----
• Tuesday: US JOLTS Job Openings; Eurozone Confidence Indices & GDP; Mexico GDP; Brazil FGV Inflation; ECB’s Vucic & Lane speak; Microsoft & Alphabet Earnings
• Wednesday: US ADP Employment Change & FOMC Rate decision; Canada GDP; Brazil Selic Rate Decision; China PMIs; US Treasury Quarterly Refunding Statement
• Thursday: US Initial Jobless Claims & ISM Indices; Eurozone CPI; United Kingdom Manufacturing PMI & Bank of England Rate Decision; ECB’s Centeno speaks; Apple, Amazon, & Meta earnings
• Friday: US Non-Farm Payrolls & UMich Indices; Brazil Industrial Production 

EUR/USD extends its slide from last week this morning following last week’s dovish ECB. While President Lagarde mentioned that it is too early to discuss rate cuts, she did not explicitly push back against a cut in April which was seen as more accommodative than expected. The primary Euro-specific data this week is GDP Tuesday and CPI Thursday, with expectations for the former showing almost no growth YoY and the latter showing a 0.2% drop to 3.2% YoY. EUR/USD is approximately 0.7% lower from this time last week.

USD/CAD is essentially unchanged on the day and versus last week. The Loonie ranged as much as 1% versus the USD last week but retraced to the downside as increased conflict across the Middle East has supported oil prices. All eyes are on US data this week although Canadian November GDP on Wednesday is due to show a slight increase.

GBP/USD is essentially unchanged on the day and versus last week. The Pound ranged as much as 1% versus the USD last week but retraced to unchanged as all eyes look to this week’s US data as well as Thursday’s Bank of England rate decision, expected to remain unchanged at 5.25%.

USD/MXN is essentially unchanged on the day and versus last week. The Peso ranged as much as 2% versus the USD last week but retraced to unchanged ahead of this week’s US data. Tomorrow’s Mexican 4Q GDP is expected to show a 0.3% drop YoY to 3.0%. The border crisis between Mexico and US has been heating up both on the ground and politically so any major developments with the 2024 US presidential election may impact the pair more than usual.

USD/BRL is essentially unchanged on the day and versus last week. The Real ranged as much as 2% versus the USD last week but retraced to unchanged as all eyes are on not only US Fed on Wednesday but the Brazilian Selic rate decision later that day. The BCB is expected to cut rates by 50 basis points to 11.25%.