• S&P Global preliminary February PMIs may help determine whether U.S. economic exceptionalism has ended; there are some warning signs; Fed officials remain uniformly cautious; Canada reports December retail sales
  
• All eyes are on German elections this Sunday; eurozone and U.K. reported mixed preliminary February PMIs; U.K. reported firm January retail sales data
  
• Japan officials pushed back against the recent rise in JGB yields; Japan January national CPI ran hot; Japan and Australia reported firm preliminary February PMIs; RBA Governor Bullock reiterated the bank’s stance; RBNZ Chief Economist Conway reiterated the bank’s policy outlook

The dollar is firm ahead of the weekend. DXY is trading higher near 106.612 after two straight down days. The yen is underperforming as Japan officials push back against higher JGB yields (see below), with USD/JPY trading back above 150. The euro is also underperforming ahead of German elections Sunday (see below) and is trading lower near $1.0470, while sterling is trading lower near $1.2650. Fed officials remain mindful of the potential impact of Trump policies (see below), which will keep the Fed even more cautious. More and more tariff noise is likely in the coming days and weeks. However, we continue to look through that noise and focus on the underlying fundamental backdrop, which remains unchanged. The strong U.S. fundamental story of strong growth, elevated inflation, and a more hawkish Fed continues to favor higher U.S. yields and a stronger dollar. Today’s preliminary February PMIs from the U.S. will be key to maintaining the theme of U.S. economic exceptionalism.

AMERICAS

Has U.S. economic exceptionalism ended? So far, the February global PMIs don’t provide a good answer yet but we’ll know more this morning. Eurozone composite PMI was unchanged at 50.2, while the U.K fell a tick to 50.5. Japan and Australia were both firmer, with the former rising half a point to 51.6 and the latter rising a tick to 51.2. Of course, the big story will be whether the U.S. rebounds from the January drop.

There are some warning signs. Walmart earnings call pulled U.S. equities lower yesterday. We normally don’t comment on individual companies but Walmart’s warning seems timely. CFO Rainey said consumption remained “consistent” and “resilient” but warned that “We are in an uncertain time, and we don’t want to get out over our skis here.” Rainey stressed that the company has not made any “explicit assumption” regarding the impact of potential tariffs. However, we know that uncertainty can have a tangible impact on hiring and investment. Stay tuned.

Data highlight will be S&P Global preliminary February PMIs. Manufacturing is expected to rise two ticks to 51.4, services is expected to rise a tick to 53.0, and the composite PMI is expected to rise half a point to 53.2. We suspect the drop last month from the 55.4 peak in December was weather-related. If so, we could see a bigger bounce than what the market is expecting. Stay tuned.

Fed officials remain uniformly cautious. Goolsbee said that he remains nervous about anything that looks like a supply shock. He noted that if there is a large number of deportations, this creates a direct impact on jobs created. Goolsbee also noted that if tariffs raise prices, the Fed has to think about it. Musalem said his baseline scenario is for inflation to continue moving towards target but added that “This baseline scenario requires that monetary policy remains modestly restrictive until inflation convergence is assured, at which point the policy rate can be gradually reduced toward the neutral level as convergence progresses. He added that “Around this baseline scenario, the risks of inflation stalling above 2% or moving higher seem skewed to the upside.” Bostic said “Right now, there is a lot of uncertainty about where some important factors are going to land,” noting potential changes to trade, immigration, energy, and fiscal policies. He added that “There is a decent chance that my outlook today is not going to be the same as it was six months from now.” Jefferson speaks today.

Growth remains robust. The New York Fed Nowcast model’s estimate for Q1 is 3.0% SAAR and will be updated today, while its initial forecast for Q2 growth will come in early March. Elsewhere, the Atlanta Fed GDPNow model's estimate for Q1 growth is 2.3% SAAR and will be updated next Friday after the data.

Weekly jobless claims suggest the labor market is still holding up well. The latest initial claims reading was for the BLS survey week containing the 12th of the month and came in at 219k vs. 215k expected and a revised 214k (was 213k) previously. Continuing claims are reported with a one-week lag and came in at 1.869 mln vs. 1.868 mln expected and a revised 1.845 mln (was 1.850 mln) previously. There is no Bloomberg consensus yet for February NFP but its whisper number stands at 141k vs. 143k reported for January.

Canada reports December retail sales. Statistics Canada’s advanced retail indicator suggests sales increased 1.6% m/m in December after coming in flat in November. Sales ex-auto are expected at 2.0% m/m vs. -0.7% in November. The BOC has room to ease further, though at a more gradual pace as inflation has been around 2% since August. The market is pricing in 50 bp of easing over the next 12 months that would see the policy rate bottom at 2.50%. Bottom line: Fed/BOC policy divergence supports the uptrend in USD/CAD. Governor Macklem speaks twice today.

EUROPE/MIDDLE EAST/AFRICA

All eyes are on German elections this Sunday. The center right alliance led by Friedrich Merz and his CDU/CSU are polling around 30%, with the hard right AfD coming in second with around 20% support. Chancellor Scholz’s Social Democrats are a distant third with around 15% support, followed by the Greens with around 13%. Some 10% of German voters remain undecided, while many suspect that AfD is underperforming in the polls due to the so-called “Bradley Effect.” The head of leading German pollster Forsa summed it up best when he noted that “Rarely have the uncertainties before a ballot been as great as in this federal election. The final decision is more difficult than ever for many. Many just don’t know who to vote for.” A stronger than expected showing by the AfD (say by winning a third of the seats in the Bundestag) would likely scuttle any structural reforms and also feed into the forces that are working against greater eurozone integration. Such an outcome it would be very euro-negative, to state the obvious.

Eurozone preliminary February PMIs were mixed. Headline manufacturing came in three ticks higher than expected at 47.3 vs. 46.6 in January, while services came in eight ticks lower than expected at 50.7 vs. 51.3 in January. As a result, the composite index remained steady at 50.2 vs. 50.5 expected. The country breakdown was also mixed. The German composite PMI came two ticks higher than expected at 51.0 vs. 50.5 in January while France’s came in three and a half point lower than expected at 44.5 vs. 47.6 in January. Italy and Spain will be reported with the final PMI readings in early March but for now, the PMI readings remain consistent with a sluggish growth outlook.

European Central Bank easing expectations remain unchanged. The swaps market is pricing another 75 bp of ECB cuts in the next 12 months which would see the policy rate bottom at 2.00%. Unlike the Fed, we believe the ECB has scope to overdeliver on these rate cut expectations, which can pull EUR/USD lower. Centeno and Lane speak today.

U.K. reported firm January retail sales data. Headline sales came in at 1.7% m/m vs. 0.5% expected and a revised -0.65 (was -0.3%) in December, while sales ex-auto fuel came in at 2.1% m/m vs. 0.9% and a revised -0.9% (was -0.6%) in December. However, the details were less impressive and suggest underlying consumer spending activity remains subdued. Food stores sales volumes accounted for the bulk of the pick-up in retail sales. Food stores sales rose by 5.6% m/m in January, the largest rise since March 2020, while non-food stores fell -1.3% m/m. Markets are still pricing in a total of 50 bp of easing over the next 12 months, but the BOE’s job is complicated by the UK’s near-term stagflation backdrop, which is an ongoing drag on GBP.

U.K. reported mixed preliminary February PMIs. Manufacturing came in nearly two points lower than expected at 46.4 vs. 48.3 in January, while services came in three ticks higher than expected at 51.1 vs. 50.8 in January. As a result, the composite PMI fell a tick to 50.5 in January. This was the lowest since November and moves even closer to the key 50 boom/bust level.

ASIA

Japan officials pushed back against the recent rise in JGB yields. Bank of Japan Governor Ueda said “Moves in bond yields fluctuate to a certain degree. However, we will purchase government bonds nimbly to foster the stable formation of yields in exceptional cases where long-term yields rise sharply.” Ueda acknowledged that yields may surge if faith in Japan’s finances drops. However, he pointed out that the recent increase in JGB yields reflect the economic recovery and rising inflation. Elsewhere, Prime Minister Ishiba said “a rise in interest rates when there are high debt-to-GDP ratios puts pressure on policy expenses through increased interest payments…I have strong concerns about this.” We agree. Servicing Japan’s 230% of GDP debt pile is expected to chew up a hefty 21% of total central government expenditures, according to the Japan’s Ministry of Finance.

Japan January national CPI ran hot. Headline came in as expected at 4.0% y/y vs. 3.6% in December, core (ex-fresh food) came in a tick higher than expected at 3.2% y/y vs. 3.0% in December, and core ex-energy came in as expected at 2.5% y/y vs. 2.4% in December. Headline is the highest since January 2023 while core is the highest since June 2023 and moves further above the 2% target. However, February Tokyo CPI out next Friday is expected to show some easing in price pressures. Headline is expected to fall two ticks to 3.2% y/y, core (ex-fresh food) is expected to fall two ticks to 2.3% y/y, and core ex-energy is expected to pick up a tick to 2.0% y/y.

The market has adjusted its Bank of Japan expectations. The next hike is still priced in for September but the swaps market now sees around 50% odds of another 25 bp hike that would see the policy rate peak near 1.25% vs. 1.0% previously.

Japan reported firm preliminary February PMIs. Manufacturing rose two ticks to 48.9, services rose a tick to 53.1, and the composite rose half a point to 51.6. This reading for the composite PMI is the highest since September but we believe this improvement will be hard to sustain given downside risks to regional growth and activity.

RBA Governor Bullock reiterated the bank’s stance. She stressed again that “the Board remains cautious about prospects for further policy easing.” Bullock noted that strong employment growth could be “signaling a bit more strength in the economy, which could delay or derail the disinflation process.” January CPI data due out next Wednesday should remain supportive of the RBA’s cautious stance. Headline is expected to pick up a tick to 2.6% y/y. If so, it would accelerate for the third straight month to the highest since August.

Australia reported firm preliminary January PMIs. Manufacturing rose four ticks to 50.6, services rose two ticks to 51.4, and the composite rose a tick to 51.2. This reading for the composite PMI is the highest since August but we believe this improvement will be hard to sustain given our pessimistic outlook for China. For now, however, the firm readings provide support for the RBA’ s cautious stance.

RBNZ Chief Economist Conway reiterated the bank’s policy outlook. Conway highlighted that the RBNZ’s updated Official Cash Rate (OCR) forecast implied another 75 bp of easing over the next year while stressing that taking the OCR below neutral (around 3%) is “not our central projection.” Conway added that “the lower kiwi dollar is part of the reason we’re predicting growth to return over 2025 or from the end of 2024.” In fact, past weakness in NZD has already helped boost exports and shrink New Zealand’s merchandise trade deficit. The annual trade deficit narrowed to a more than a three-year low of -NZD7.2 bln in January vs. -NZD7.8 bln in December.