Daily Market Pulse

Most markets are relatively unchanged this morning following last week’s US Nonfarm Payrolls volatility and ahead of this week’s US CPI release, a major barometer of inflation.

The theme over the last 2+ months has primarily been a rally in risk (lower treasury yields, higher equities, lower USD) as the Fed recognized the drop in inflation readings on several occasions. The market has understood this to be a signal that interest rates have peaked, further emboldened by the “dot plot” from December’s Fed meeting which showed 11 officials seeing 3 or more rate cuts in 2024, while 8 officials saw 2 or less.

However, while inflation has certainly dropped significantly (9.1% CPI peak in 2022 to 3.1% YoY in November), the remaining road to the Fed’s 2% target may prove to be the longest. Last Friday’s employment data showed continued strength in nonfarm payrolls, a low unemployment rate, and, possibly of most significance to the Fed, an unexpected increase in average hourly earnings YoY. This was enough to dismiss the notion that the risk-off start to the year was simply a temporary retracement, for now.

If Thursday’s CPI print is above expectations, currently 3.2% YoY, this would corroborate last Friday’s data and may throw a wrench into the “everything rally” that began in October. At a minimum, it would move the odds of a March cut, currently "a snowball’s chance...,” closer to zero.

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

• US Treasury Secretary Janet Yellen on Friday declared that the US Economy has achieved a “soft-landing.”
• A headline spending agreement was reached by US congressional leaders reducing the odds of a shutdown later this month.
• Dallas Fed President Lorie Logan, a non-voting member of the FOMC, suggested that the Fed should slow down its pace of balance sheet unwind.
• China sanctions five US defense companies in response to recently announced arm sales to Taiwan.

Event Calendar:

• Monday: Atlanta Fed President Bostic speaks
• Tuesday: Eurozone Unemployment; Mexico CPI
• Wednesday: US Mortgage Applications & Wholesale Inventories; New York Fed President Williams speaks
• Thursday: US CPI & Weekly Initial Jobless Claims; Brazil Inflation; Mexico Industrial Production
• Friday: US PPI; Canada Building Permits; UK GDP & Industrial Production; China CPI & PPI; Minneapolis Fed President Kashkari Speaks

EUR/USD is marginally higher on the day after last week’s near-1% drop. Current levels are almost 2% below the peak in late December. Retail sales in the Eurozone beat expectations coming in at –1.1% YoY (-1.5% survey) but German factory orders only increased by 0.3% MoM (+1.1% survey). Tomorrow’s Eurozone Unemployment data will be released at 5am EST.

USD/CAD is higher on the day, brining USD/CAD over 1% higher YtD as mixed employment data on Friday and the near-4% drop in oil prices today weigh on the Loonie. Friday’s net change in employment showed almost no job gains for December while +15k was expected. However, the unemployment rate ticked lower, and the hourly wage rate ticked higher.

GBP/USD is essentially unchanged on the day as well as YtD, although last week provided swings greater than 1%. The domestic highlights of the week are on Friday with Monthly GDP and Industrial Production releases that may shed some light on how weak the UK economy truly is given the amount of negativity already priced in. The head of the Bank of England, Governor Bailey, will testify on Wednesday regarding financial stability.

USD/MXN is essentially unchanged on the day as well as YtD, although last week provided swings of almost 1.5%. The domestic highlights of the week will be tomorrow’s CPI (an increase to 4.57% YoY from 4.32% is expected) and Friday’s Industrial Production (a decrease to 4.9% YoY from 5.5% is expected).

USD/BRL is marginally higher on the day and almost 1% higher from the start of the year. Today’s drop in oil prices and other commodities is weighing on the real ahead of both US & local inflation both due on Thursday.