Trading across financial markets remains subdued as participants stockpile powder ahead of Thursday’s personal consumption expenditures report. US Treasury yields are modestly lower, movement in equity futures remains tightly restrained after most major indices closed in negative territory during yesterday’s session, and oil prices are inching higher. The Canadian dollar is practically unmoved.

The yen was the lone outperformer overnight after Japanese price growth slowed less than expected in January, but its gains have mostly been reversed on closer examination of the underlying data. Core inflation, which in Japan excludes fresh food and includes energy, slowed to 2 percent year on year from 2.3 percent in December, with a technical adjustment in the cost of foreign travel packages causing the print to top forecasts that had been set closer to 1.9 percent. At the margins, we suspect evidence of sustained inflation will bolster the case for an exit from negative rates by the Bank of Japan, but strong wage gains will be needed to clinch the argument in favour of a policy adjustment.

Ahead today: The US is expected to report a -5-percent drop in durable goods orders for the month of January, but with tumbling sales at Boeing distorting the data, the ex-transportation number will capture more interest – markets think an incremental 0.2 percent increase is likely, down from December’s 0.5 percent print. The Conference Board’s measure of US consumer confidence could retreat from the levels reached in January on a modest rebound in inflation pressures, but the closely watched six-month household outlook should remain strong, helping support bets on continued resilience in consumer spending.

Thursday’s personal income and spending report remains the dominant event risk on the economic calendar, but month-end rebalancing could play a significant role in how markets are positioned before and after the release. After climbing in line with outsized gains in technology share indices through the early part of the year, the dollar is now looking stretched, and relative economic weakness looks fully incorporated in other major currency valuations. In the coming days, we wouldn’t be surprised to see market participants seizing the opportunity to reallocate funds toward international asset classes and currencies that could benefit from the second-derivative effects of a US soft landing.

 
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)