With the number of US data releases slowing to a trickle and next week’s all-important inflation print looming ahead, risk assets are inching higher, leaving currency markets largely rangebound. Equity futures are advancing while yields come under pressure – translating into a slightly weaker dollar. 

Implied volatility levels are coming back down, suggesting that a post-jobs report bounce in yields has helped reset market positioning to more neutral levels – reducing the perceived risk of a big washout around the January consumer price index release. Implied terminal rate expectations are holding between 5.1% and 5.2%, up from the 4.9% area last week. 

A summary of deliberations during the Bank of Canada’s January meeting showed policymakers sought to “balance the risk of over- versus under-tightening” by holding rates steady until a clearer picture of economic developments can emerge. Officials expressed concern about the impact a sustained downturn in real estate activity could have on the economy, but noted “expectations of future monetary policy easing could also spur buyers to re-enter the market”. Markets simply didn’t notice – the loonie moved sideways around the release, suggesting that Governor Macklem had removed any element of surprise in recent speeches and interviews. 

In Parliamentary testimony this morning, Bank of England Governor Bailey said “I do think we’ve turned the corner in terms of headline inflation. It has not only fallen, it’s now under what we thought it would be in November”. In defending the Bank’s price targeting performance last year, external member Silvia Tenreryo said “To meet the 2% inflation target in 2022, we would have needed services deflation of 15%. This would require a massive recession with unemployment at 2-digit levels”. And Chief Economist Huw Pill suggested that growth concerns were beginning to offset inflation, saying “We are now seeing some signs of loosening in the labour market data: vacancies are falling, and some leading indicators of wage developments are easing. The slowing in economic activity seen in 2022 H2 is working its way through into the labour market, while also reducing corporate pricing power.”

The number of applications submitted for unemployment benefits is expected to hit 190,000 in the week ended February 4, up from 183,000 a week prior. Both initial and continuing claims remain near extreme lows even after high-profile layoffs in the technology sector, suggesting that workers finding new positions relatively easily. 

There are no other major data releases or Fed speakers on today’s agenda. 

The Japanese government is expected to name Haruhiko Kuroda’s successor as soon as Sunday, raising the likelihood of a sharp move in the yen. The dollar exchange rate tumbled over the weekend on reports Prime Minister Fumio Kishida was poised to promote current Deputy Governor Masayoshi Amamiya, but some indications suggest the more-hawkish (by Japanese standards) Hiroshi Nakaso remains in the running.