Risk appetite is fading ahead of the North American open as traders brace for a more hawkish turn from Jerome Powell during tomorrow’s semi-annual Congressional testimony.

Officials seem to be growing uncomfortable with the recent easing in financial conditions. Federal Reserve Bank of Atlanta President Raphael Bostic last night suggested that the central bank’s first rate cut was likely to land in the third quarter, with a pause followed by moves spaced out over time. “Given the uncertainty,” he said, “I think there is some appeal to acting and then seeing how participants in the markets, business leaders, and families respond”. He warned that a sense of giddiness could unleash inflation pressures again, saying “This threat of what I’ll call pent-up exuberance is a new upside risk that I think bears scrutiny in coming months. As my staff and I have talked to business decision-makers in recent weeks, the theme we’ve heard rings of expectant optimism”.

Gaps between the major central banks have remained relatively static since the beginning of the year, and the degree to which rate expectations have moved in lockstep has reduced volatility in the currency markets. After a broad-based hawkish reappraisal of global growth and inflation risks, investors now have 3.4 rate cuts priced in for the Fed by year end, with 3.6 expected from the European Central Bank, 3.1 from the Bank of Canada, and 2.5 from the Bank of England.

China set its annual growth target at 5 percent – above market forecasts – but also outlined plans for a relatively modest increase in fiscal borrowing, dampening hopes for a stimulus-led acceleration. According to a work report delivered at the National People’s Congress, the government plans to keep deficit spending at less than 3 percent of gross domestic product in 2024, matching the goal originally set for 2023.

The yen is broadly unchanged after price data from the world’s largest city failed to support the case for an imminent end to the Bank of Japan’s loose-money policies. Core inflation in Tokyo – considered a bellwether for the country as a whole – jumped to 2.9 percent year over year in February from 1.8 percent in the prior month, but base effects related to last year’s phase-out of energy subsidies did much of the heavy lifting. On a month over month basis, prices rose just 0.1 percent, or 1.1 percent annualised, well below the 2 percent target used by most central banks. In any case, we remain unconvinced of the rationale for a rapid strengthening in the yen once the negative rates policy has been abandoned. Reflecting structural differences, rate differentials between Japan and other advanced economies will undoubtedly remain vast, and Japanese policymakers have a well-understood willingness to use balance sheet tools to tamp down unruly moves in bond markets. A grindingly slow appreciation path looks more likely.

Still coming: S&P Global will release its final February services purchasing manager indices for Canada and the US at 9:30 and 9:45, respectively. US factory and durable goods orders will land at 10:00, along with the Institute for Supply Management’s services index for February. Note that the Institute’s factory index – which measures a far smaller proportion of economic activity – sideswiped markets on Friday, with new orders, inventories, and employment all coming in below expectations.

“Super Tuesday” will see more than a dozen states holding Republican and Democratic primaries, but the outcome is already broadly understood. Unless something unexpected happens at the party conventions later this year, voters will ultimately have to choose between a geriatric, fiscally-liberal, and extremely protectionist candidate on one side, or a geriatric, fiscally-liberal, and extremely protectionist candidate on the other. Currency markets might react more badly to the tariff threats embodied in a Trump presidency, but for broader financial markets, the contest could amount to a distinction without difference.

 
Still Ahead

WEDNESDAY

Jerome Powell’s semi-annual Humphrey-Hawkins testimony could contain distinct hawkish notes, along with an aroma of caution. We expect him to echo some of the themes found in Governor Waller’s ‘What’s the Rush’ speech in late February, warning markets not to expect rate cuts until inflation shows conclusive signs of reaching target, while also indicating that a rapid-fire easing cycle remains unlikely. Markets will be prepared for this, but some position adjustment could take place, particularly if the chair suggests that easier financial conditions are working at cross-purposes to the Fed’s objectives. Prepared testimony is typically issued about an hour and half ahead of the Semi-Annual Monetary Policy Report to the House Financial Services Committee at 10:00. (08:30 EDT)

The Bank of Canada is almost-universally expected to stay on hold on March 6, and an April move remains unlikely, but evidence of softening inflation pressures and a deterioration in consumer demand across the economy should translate into a more dovish outlook in the accompanying statement and press conference. Recent data releases have illustrated surprising resilience in labour markets and top-line growth, but borrowing burdens are still rising, intensifying pressure on the country’s over-indebted private sector and driving final domestic demand into negative territory. A slowdown in labour markets looks like the next shoe to drop. We think the odds still favour a first cut in June, but we’re increasingly convinced the Bank could outpace the Federal Reserve in delivering rate cuts through the back half of the year – a view that could, if more broadly held, ultimately put downward pressure on the Canadian dollar. (10:00 EDT)

The number of US job vacancies likely dropped in January as hiring jumped, but both the vacancy-to-unemployment ratio and the quits rate probably remained well below pre-pandemic levels – suggesting that the second half of the Federal Reserve’s mandate isn’t yet imposing constraints on the expected policy path. (10:00 EDT)

THURSDAY

A raft of speeches and appearances have convinced us that the European Central Bank’s policy committee is not prepared to begin easing policy in March, with a June move remaining far more likely. Inflation in the bloc failed to retreat as much as had been hoped in February, employment markets remain strong, and consumer surveys are pointing to a modest improvement in sentiment. Updated staff projections, released after the meeting, should bear the imprint of downward revisions in inflation and growth forecasts however, helping to set the stage for an eventual pivot to rate cuts. (08:15 EDT)

FRIDAY

After January’s blockbuster 353,000-job print, February’s non-farm payrolls report could look rather disappointing. Markets think roughly 170,000 positions were added in the month, with the unemployment rate holding at 3.7 percent and hourly average earnings softening to near-zero-percent levels after a suspiciously-strong 0.6-percent gain. Revisions could also make a serious dent in the prior month’s data. But with job growth continuing to outpace an expanding workforce, the labour market’s apparent momentum remains strong. (08:30 EDT)

Canada’s labour market may have added jobs in February, but faster population growth likely pushed the unemployment rate higher. Consensus estimates seem to be aligned with a 20,000-position monthly gain – down from 37,300 in January – but conviction is understandably extremely low after a long series of surprises. We’re more confident in a rise in the unemployment rate, with a move up to 5.8 percent from the previous 5.7 percent looking likely as population growth continues to outpace the economy’s job creation engine. (08:30 EDT)