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Markets Tread Water Into Inflation Revisions 

Currency market participants are keeping their powder dry ahead of today’s US consumer price index revisions. The dollar is steady, Treasury yields are slightly higher, and equity futures are setting up for an incrementally-stronger open after the S&P 500 index hit a record high in yesterday’s session, briefly broaching the 5,000 mark.

The Bureau of Labor Statistics’ annual seasonal revisions are seen nudging measured consumer price index inflation rates up slightly in the latter half of 2023, but markets are wary of the potential for a bigger move. Many investors are still suffering post-traumatic stress disorder after last February’s procedure wiped out apparent disinflation in late 2022, triggering a violent upside move in yields and the dollar. A repeat looks unlikely, but still not outside the realm of possibility ahead of next week’s critical January inflation report. Markets think price growth will cool after topping forecasts in the prior month, but we’re not so sure.

The yen is back on the defensive as market expectations for an imminent tightening in Bank of Japan policy continue to crumble. A series of data releases – wage growth, retail spending, household consumption, and the Tokyo consumer price index – have all come in below expectations since the January meeting, and Wednesday’s speech from Deputy Governor Uchida helped throw cold water on the prospect of a dramatic rise in yields. “Even if the Bank were to terminate the negative interest rate policy,” he said, “it is hard to imagine a path in which it would then keep raising the interest rate rapidly”. We’re sticking with our long-standing view – we don’t think rate differentials will narrow enough to drive the yen massively higher this year.

The euro is trading on a slightly firmer footing, boosted by cautious language from monetary policymakers. In an interview this morning, Bank of France Governor Francois Villeroy de Galhau said “We are exiting the emergency of fighting inflation and are on the right path to overcome the sickness,” but refused to be pinned down on the timing of a decision. His typically-hawkish colleague, Latvian Governor Martins Kazaks earlier warned “At the moment, there are expectations that the rates could be cut in the spring, in March or April — I wouldn’t be optimistic. I would be cautious and I would wait until the inflation story is over. Then we can safely breathe and those rates can be lowered step by step.”

The Canadian dollar is marking time ahead of the January jobs report at 8:30 am. Investors expect a modest rebound from the 100 roles added in December, but the pace of job creation could continue to lag population growth, pushing the unemployment rate further into territory that has historically signalled a recession. The impact on the Canadian dollar could be difficult to extricate from the broader market reaction to US inflation revisions, but there is potential for a significant move as projections for Bank of Canada policy shift.

Please note: the Daily Market Brief will be on temporary hiatus until February 20. We wish Taylor Swift good luck in Sunday’s Super Bowl, and kung hei fat choy to all those celebrating Lunar New Year and beginning the year of the dragon.

Still Ahead


All bets are off with respect to the unemployment rate that will be reported by the UK Office of National Statistics on Tuesday – with the Labour Force Survey resuming after several months of critically-low response rates, markets aren’t willing to take directional positions on where the print will land. Cooling wage growth should keep the Bank of England on course toward easier policy, however – traders think increases in regular pay faded to 6.1 percent year-over-year in the three months ended December. (02:00 EDT)

Both headline and core measures of US consumer price growth are seen slowing in January, printing closer to 0.2 percent on a month-over-month basis, down from December’s 0.3 percent. Risks seem tilted to the upside however: both the manufacturing and services gauges from the Institute for Supply Management surprised to the topside in January, and wage growth remains strong – we worry that imported goods costs and services-sector payrolls could keep price growth aloft for a while yet, inflicting damage on the “soft landing” narrative currently driving markets (08:30 EDT)


Headline inflation in the UK might have accelerated slightly in January, but stability in core prices should leave policy expectations largely unmoved. Consensus estimates suggest that the all-items basket climbed 4.1 percent year-over-year, faster than 4 percent in the prior month, while the core measure is seen holding steady near 5.1 percent. Surprises are quite possible, however, and the pound could react sharply to a miss on either side of consensus. (02:00 EDT)

The Japanese economy almost certainly staged a rebound in the last three months of 2023, but the underlying details might prove underwhelming for central bankers considering a policy shift. Consensus estimates suggest that aggregate output expanded at a 1.4-percent annualized rate in the fourth quarter, reversing from a -2.9-percent contraction in the third, but domestic spending and investment are seen remaining soft. The case for monetary tightening could remain shaky for a while yet. (18:30 EDT)


The British economy likely neared technical recession in the fourth quarter of 2023, with output dropping another 0.1 percent after declining at a similar pace in the three months prior. An upside surprise might reduce odds on near-term rate cuts and lift the exchange rate, while a miss to the downside could see policy expectations slipping into closer alignment with the US and euro area – to the pound’s detriment.
(02:00 EDT)

Markets think US retail spending slowed in January, with control group sales – excluding autos, gas, food services, and building materials – eking out a 0.2-percent increase after December’s holiday-flattered 0.8-percent gain. A hotter-than-anticipated print could point to continued strength in consumer spending and push rate cut expectations out beyond the May Fed meeting, helping bolster the dollar. (08:30 EDT)

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