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Dollar Gains on Subdued Risk Appetite 

Good morning. The dollar is gaining strength before the North American open, bolstered by a broad-based worsening in risk appetite as investors lower expectations for how much the Federal Reserve is likely to lower rates. Equity futures are suffering losses in premarket trading, Treasury yields are steady, and both major oil benchmarks are slipping as US inventories continue to build.

Economists expect a small downward revision in fourth quarter gross domestic product when the Bureau of Economic Analysis publishes updated numbers this morning. The first iteration pointed to the economy expanding at a 3.3 percent seasonally adjusted annual rate, but downward adjustments in retail sales, published since the initial estimate, could weaken the personal consumption component and drag the headline slightly lower to 3.2 percent or so.

Yet the American economy remains astonishingly strong. After a series of better-than-expected data releases through the first two months of the year, the Atlanta Federal Reserve’s GDPNow forecasting model is pointing to a 3.2-percent annualized expansion in real gross domestic product during the first quarter, up from 2.9 percent previously.

Subcomponent contributions to GDPNow real gross domestic product forecasts, %

The gap between market expectations and the central bank’s last “dot plot” summary of economic projections has narrowed materially, reducing the likelihood of an extreme reaction to tomorrow’s January inflation data. Investors now expect three rate cuts in 2024, matching the median estimate submitted by Fed officials in December.

The euro area remains a study in contrasts. An update published this morning showed the European Commission’s euro area sentiment indicator sliding unexpectedly in February, with respondents in the manufacturing and services sectors turning more depressed even as consumer confidence saw a small improvement – diminishing hopes for a recovery in growth. The European Central Bank is now expected to deliver almost 100 basis points in easing through the course of the year, outpacing the Fed in cutting rates.

Ahead today: Canada will drop updated numbers on job postings and wage growth, but the stale nature of the data should leave markets largely unmoved. Federal Reserve speakers will include Atlanta’s Bostic, Boston’s Collins, and New York’s Williams. And Mexico will release its quarterly inflation report, with the growth outlook likely to see downward revisions even as inflation projections remain stable.


Still Ahead

WEDNESDAY

Canada’s December Survey of Employment, Payrolls, and Hours is unlikely to move markets, but will be closely parsed for evidence of cooling in the labour market, with job openings and wage growth numbers coming in for particularly close scrutiny. (08:30 EDT)

Quarterly inflation projections from Mexico’s central bank should remain consistent with a gradual easing in price pressures over the next three quarters, but growth forecasts could be revised down more sharply. The economy began losing momentum in the fourth quarter of last year, and domestic demand is showing clear signs of softening. Minutes taken during the Banxico’s last meeting showed policymakers narrowly favoured cutting rates in March, but if more recent hawkish signals from the Federal Reserve can be trusted, a delayed move is possible – from what we can tell, officials remain committed to maintaining a circa-600 basis point spread above the Fed Funds rate. (13:30 EDT)

THURSDAY

After a hotter-than-anticipated consumer price index reading earlier this month and this speech from Vice Chair Jefferson last week, markets expect the Federal Reserve’s preferred inflation indicator – the core personal consumption expenditures index – to print close to 0.4 percent on a month-over-month basis in January, up from 0.2 percent in December. Base effects should nonetheless put year-over-year price growth on track to slow to 2.8 percent in January from 2.9 percent in the prior month, with further progress coming in the months ahead. Although spending growth almost certainly slowed as consumers suffered the typical post-holiday hangover and grappled with colder-than-normal weather, personal income growth likely accelerated, powered by gains in labour market wages and social security adjustments. (08:30 EDT)

The Canadian economy likely dodged recession in the last quarter of 2023, with household consumption, residential construction, government spending, and exports helping offset weakness in business investment and inventories. A quarter-over-quarter print in the 0.4- to 0.6-percent range – which would lift year-over-year growth close to 1.6 percent from the previous 1.1 percent – shouldn’t shock markets, but a positive early estimate for January could partially nullify last week’s softer-than-anticipated inflation release in pushing expectations for the first Bank of Canada rate cut back out toward June. (08:30 EDT)

FRIDAY

Following a steady drumbeat of country-specific prints in the preceding days, Eurostat is expected to report a further deceleration in region-wide inflation during the month of February, which might help ratify bets on earlier easing from the European Central Bank. Estimates collected from economists by Bloomberg and Reuters suggest that core price growth slowed to 2.9 percent year-over-year, down from January’s 3.3 percent as a softening in domestic demand offset a modest rise in energy costs – but there is considerable uncertainty around the services component, with other indicators pointing to a rebound in consumer sentiment over the same period. Policymakers are likely to wait for more evidence before cutting rates, but a stronger than forecast print could easily add support to a still-nascent recovery in the euro. (05:00 EDT)

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Twists & turns

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