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Happy Friday. A relief rally, triggered by yesterday’s on-consensus personal consumption expenditures release, is losing momentum across financial markets this morning. North American equity futures are in neutral gear, two- and ten-year Treasury yields are down, and the dollar is essentially unchanged relative to its major counterparts.

The “soft landing” thesis has dodged another bullet. With yesterday’s strong headline print largely discounted in markets after hotter-than-expected consumer and producer price releases, investors breathed a collective sigh of relief when their worst fears went unrealized, and were further calmed when the Federal Reserve’s Bostic and Goolsbee later indicated a willingness to “look through” bumpy changes in the data. This seems valid: in our view, underlying US inflation pressures and economic trends remain essentially unchanged. Although there were many contradictory details, income gains were largely attributable to Social Security cost-of-living adjustments, headline prices jumped in line with a surge in stock market valuations, and spending cooled with unusually cold weather conditions in many states.

The Canadian dollar remains on the defensive as markets fade yesterday’s upside surprise in headline growth for the fourth quarter of 2023. With household consumption slumping and artificially flattering net exports, business investment turning negative, and final domestic demand falling, it is clear that higher borrowing costs are taking a toll on the underlying economy, making January’s strike-driven jump in growth look fundamentally unsustainable. The Bank of Canada is likely to acknowledge some of this weakness in next week’s rate decision, with language in the accompanying statement and press conference beginning to put the pieces in place for a pivot toward easier policy around mid-year.

The euro is trading on a stronger footing after euro area inflation slowed by less than expected in February, bolstering bets on rates remaining unchanged at the European Central Bank’s next two meetings. Bloc-wide year-over-year price growth dropped to 2.6 percent in February, above market expectations for a 2.5 percent print, and core inflation failed to decline as much as forecast, coming in at 3.1 percent.

Japan’s yen is drifting lower on a more cautious outlook from Governor Ueda. Speaking in Sao Paulo, the central bank governor said “We are not yet in a position to foresee the achievement of a sustainable and stable inflation target. We will continue to seek confirmation whether the virtuous cycle between wages and prices has begun to turn”. The exchange rate had leapt higher on Wednesday night after board member Hajime Takata suggest that the country could now be poised “at a juncture for a shift in the entrenched belief that wages and inflation won’t rise”.

Ahead today: The Institute for Supply Management’s manufacturing purchasing manager report, out at 10:00 EDT, might show the industrial cycle moving closer to neutral territory, with the primary index seen rising to 49.2 in February from 49.1 in the prior month. Continued strength in the prices-paid subindex could trigger market turmoil, suggesting that January’s jump in producer prices wasn’t an aberration. Due for release at the same time, the University of Michigan’s consumer sentiment survey should exhibit a small deterioration as inflation expectations climb back a bit. The Atlanta Fed’s Raphael Bostic, San Francisco’s Mary Daly, and Kansas City’s Jeffrey Schmid are on the speaking circuit.

Still Ahead


Super Tuesday – the presidential primary day on which the most states vote – is rarely market-moving, but a conclusive win for Donald Trump in the Republican contest could see the dollar rise against the currencies of major trading partners as markets price in a resumption in trade war hostilities. (all day)


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)


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)


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-0-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)

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