• Fed officials remain cautious; curve flattening continues; tariffs are back in the spotlight; the House passed a budget blueprint that sets up tax cuts worth $4.5 trln
  
• The internal debate at the ECB continues; BOE MPC member Dhingra speaks
  
• Australia reported mixed January CPI data; Thailand unexpectedly cut rates 25 bp to 2.0% vs. an expected hold

The dollar has firmed as tariffs are back in the spotlight. DXY is trading higher near 106.521 after President Trump directed the Commerce Department to examine copper tariffs (see below). The top exporters of copper to the U.S. are Chile, Canada, Mexico, and Peru and so those currencies should underperform near-term. USD/JPY is trading higher near 149.50 after trading below 149 yesterday. The euro is trading back below $1.05 as the internal ECB debate continues (see below), while sterling is trading lower near $1.2650 ahead of Dhingra’s speech (see below). Recent softness in the U.S. data has led to increased Fed easing expectations (see below), but we are not ready to push the panic button yet. If the data continue to soften, however, the strong USD fundamentals of strong growth, elevated inflation, and a more hawkish Fed will be called into question. We’re not there yet, but the lack of any topline U.S. data until Friday is likely to keep markets nervous and choppy.

AMERICAS

Fed officials remain cautious. Richmond Fed President Barkin warned that large budget deficits and changing labor market dynamics due to demographics and migration could put upward pressure on inflation. He added that “All these trends suggest we could see our tailwinds replaced by inflationary headwinds. All this uncertainty argues for caution as we look to wrap up the inflation fight. If headwinds persist, we may well need to use policy to lean against that wind.” We believe Barkin is the first Fed official to admit on record that rates may have to go higher. Others have said maybe yes, maybe no but have all remained very noncommittal. That said, Barkin's comments have taken on less significance given recent weak data, which have fed into Fed easing bets.

Yet Fed easing expectations have shifted the other way. Recent softness in the data cannot be ignored. Two cuts are still priced in but the timing has been moved forward to July and December. Furthermore, Fed Funds futures are pricing in a third cut in 2026. While three cuts do not suggest a recession is imminent, the outlook for more easing has clearly changed. Bostic and Barkin speak today. The only U.S. data release is January new home sales.

Curve flattening continues in the U.S. Indeed, the 3-month to 10-year US curve now stands at 3 bp and is close to inverting for the first time since mid-December. Since the U.S. avoided recession after the previous inversion, the predictive power has clearly weakened but the signal cannot be ignored. The 10-year yield traded as low as 4.28% earlier today, the lowest since mid-December. We know the Trump administration would like to lower rates at the long end but right now, they are falling for the wrong reasons, which is heightened recession fears.

Tariffs are back in the spotlight. Reports suggest President Trump has directed the Commerce Department to examine possible copper tariffs. Furthermore, reports suggest it will be carried out under Section 232 of the Trade Expansion Act, which gives President Trump broad authority to impose tariffs on domestic security grounds. The top exporters of copper to the U.S. are Chile, Canada, Mexico, and Peru and so those currencies should underperform near-term.

February Conference Board consumer confidence was soft. Headline came in at 98.3 vs. 102.5 expected and a revised 105.3 (was 104.1) in January. This was the lowest since June 2024 and was driven by drops in both present situation and expectations, with the latter down nearly 10 full points to the lowest since June 2024 too. Conference Board senior economist noted that “References to inflation and prices in general continue to rank high in write-in responses. Most notably, comments on the current administration and its policies dominated the responses.”

That said, this is survey data. Yes, the Conference Board consumer confidence readings confirm the drop in the Michigan consumer sentiment and warns of downside risks to consumption ahead. But besides the weak January retail sales, the hard data still point to solid growth. We'll know more this Friday with the personal spending data, which includes spending on services. Next week brings February ISM PMIs and jobs data so let's not hit the panic button yet.

The House passed a budget blueprint that sets up tax cuts worth $4.5 trln. The 217-215 vote was almost along party lines, with one Republican voting against it. The bill now goes to the Senate, which is expected to make changes before sending it back to the House. While the blueprint will most likely be amended, the initial plan for $2 trln in spending cuts will raise some eyebrows. The House blueprint did not specify exactly where those cuts would come from, but much of it would likely focus on safety net programs. Indeed, the blueprint calls for $880 bln in spending cuts from the Energy and Commerce Committee, which overseas health-related programs such as Medicaid and Obamacare.

EUROPE/MIDDLE EAST/AFRICA

The internal debate at the European Central Bank continues. General Council member Stournaras said “I don’t think that our next meeting is the right moment to discuss pausing. We are definitely still in restrictive territory.” He added that “Given the information we currently have, I expect that interest rates will reach 2% by the autumn of this year and that this is likely to be the terminal rate.” On the other hand, Executive Board Member Schnabel said the bank must move cautiously as “We can no longer say with confidence that our policy is restrictive.” The swaps market continues to price in 75 bp of easing over the next 12 months that would see the policy rate bottom near 2.0%. We continue to believe that the even the doves are too cautious and that the ECB will have to move policy below 2% and into accommodative territory.

Bank of England MPC member Dhingra speaks. She is likely to echo her calls yesterday for a more aggressive easing cycle. Dhingra was one of the two dissents (Mann was the other) that voted for a 50 bp cut in February and so her dovish comments should come as no surprise. Of note, Dhingra was just reappointed to another 3-year term on the MPC. The bank is expected to pause at its March 20 meeting. However, the swaps market is pricing in 50 bp of easing over the next 12 months, with nearly 50% odds of an additional 25 bp cut.

ASIA

Australia reported mixed January CPI data. Headline came in a tick lower than expected and remained steady at 2.5% y/y, while trimmed mean picked up a tick to 2.8% y/y. It’s worth noting that the RBA focuses on the quarterly CPI prints because it’s less volatile and captures more items than the monthly CPI indicator. That said, relatively sticky inflation supports the bank’s cautious stance. The swaps market is still pricing in about 50 bp of easing over the next 12 months that would see the policy rate bottom around 3.60%.

Bank of Thailand unexpectedly cut rates 25 bp to 2.0% vs. an expected hold. However, a couple of analysts polled by Bloomberg looked for the 25 bp cut. The bank noted that “The Thai economy is expected to expand at a slower pace than previously estimated due to the industrial sector being pressured by structural problems and competition from foreign products, as well as higher risks from trade policies of major economies.” Assistant Governor Sakkapop said that the 2% rate represents neutral policy, adding “The bar will be high next time.” The swaps market is still pricing in 25 bp of easing over the next 12 months that would see the policy rate bottom near 1.75%.