Activity in the currency markets remains muted ahead of what could become a dangerous week for believers in the “soft landing” consensus.

The dollar is inching higher against most of its major rivals, and ten-year Treasury yields are sitting near the 4.2 percent mark, recovering somewhat after losing altitude toward the end of last week. Data out on Thursday showed monthly core inflation accelerating in January, but this seemed mainly driven by idiosyncratic factors that are unlikely to repeat themselves. Social Security cost-of-living adjustments and a rise in stock market valuations helped lift personal incomes, but pay growth slowed. On Friday, the University of Michigan’s consumer sentiment index slumped, and the Institute for Supply Management’s survey showed new orders, inventories, and employment falling by more than expected.

Oil prices are holding steady after the OPEC+ group of exporters agreed to extend production cuts through June, as expected. The cartel said it would continue to keep 2.2 million barrels per day off the market as it works to stabilize prices amid weakening demand fundamentals and rising output in non-member countries. Russia pledged to cut output by an additional 471,000 barrels per day in the second quarter, but the net impact on exports remains unclear. The front-month Brent benchmark is trading around the $83 mark, while West Texas Intermediate is holding just below the $80 threshold.

The Canadian dollar has given back all of its gains from Thursday’s hotter-than-expected gross domestic product report, with traders back to focusing on signs of weakness in the underlying economy. Wednesday’s Bank of Canada decision could be a snoozer, but the currency might come under renewed pressure if policymakers crack the door to rate cuts.

Today’s agenda looks quiet. There are no major data releases scheduled, and Fedspeak will settle to a whisper, with Philly’s Patrick Harker due to make a speech on the economic impact of higher education – a topic unlikely to move markets.

Any sense of calm could prove fleeting. Tomorrow’s Institute for Supply Management services survey should shed light on conditions in the most important sector in the US economy. Jerome Powell will deliver his semi-annual testimony to Congress on Wednesday. If he firmly pushes monetary easing expectations into the second half of the year, the three cuts currently priced in could easily become two. Thursday’s policy decision from the European Central Bank might see inflation and growth forecasts revised down, firming odds on imminent rate cuts. And Friday’s non-farm payrolls report could deliver a final round of turbulence, with surprises above or below consensus again driving sharp adjustments in the Fed’s implied rate trajectory.

We note that belief in a “re-acceleration” in the US economy is growing stronger. Apollo Global’s Torsten Sløk – someone not prone to making wild calls on the economy – issued an excellent piece on Friday entitled ‘The Fed Will Not Cut Rates in 2024’. If he’s right, another round of turbulence could easily unfold in markets.

 
Still Ahead

TUESDAY

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)

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)