• Markets are punishing the dollar for the lack of any further tariff threats; Fed officials remain cautious; ADP private sector jobs estimate and ISM services PMI will be the highlights; January PMIs will also be reported for Canada; Colombia central bank releases its minutes
  
• ECB wage tracker points to sharply slower gains ahead; Poland is expected to keep rates steady at 5.75%; Iceland cut rates 50 bp to 8.0%
  
• Japan December cash earnings data ran hot; New Zealand reported soft Q4 labor market data; Caixin reported soft services and composite PMIs

The dollar remains soft due to the de-escalation in the trade wars. DXY is trading lower near 107.537 and has fully surrendered its gains from this most recent tariff tantrum. We view this dollar correction as a buying opportunity (see below). The yen is the top performing major after wage data ran hot (see below), with USD/JPY trading lower near 152.85. Clean break below 1525 sets up a test of the December low near 148.65. Sterling is trading higher near $1.2535, while the euro is trading higher near $1.0415 despite sharply lower eurozone wage readings (see below). Despite the truce, 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. Simply put, 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. Indeed, we believe the ongoing tariff noise is keeping the Fed even more cautious.

AMERICAS

Markets are punishing the dollar for the lack of any further tariff threats. With the one-month delay on Canada and Mexico tariffs in effect and the 10% tariffs on China in place, we are in a lull and markets are reacting as one might expect. That said, we think it’s only a matter of time before the EU and Japan come under threat. Until then, we view this correction in the dollar as a buying opportunity, as the fundamental drivers of dollar strength remain in place regardless of the tariff story. That is, the U.S. economy continues to outperform and the Fed remains hawkish.

Fed officials remain cautious. Daly said “There is a lot of uncertainty. We can take our time to look at what’s coming in, both on the economy and any policy changes.” Jefferson said “I continue to see a gradual reduction in the level of monetary policy restraint placed on the economy as we move toward a more neutral stance as the most likely outcome. I do not think we need to be in a hurry to change our stance.” This is Fed consensus now and the market has gotten the message as the next cut is not priced in until July. After that, only one more cut is priced in for Q1 2026. Barkin (twice), Goolsbee, Bowman, and Jefferson speak today.

ADP reports its private sector jobs estimate. It is expected at 150k vs. 122k in December. Bloomberg consensus for NFP is 170k vs. 256k in December, while its whisper number stands at 195k. Both would be consistent with a healthy labor market, but we see risks of another 2-handle. For reference, NFP gains have averaged 170k per month over the past three months.

January ISM services PMI will also be important. Headline is expected to remain steady at 54.0, while prices paid is expected at 65.1 vs. 64.4 in December. The regional Fed ISM services prints point to some downside risk. Of note, the S&P Global services PMI fell to a 9-month low of 52.8 in January vs. 56.8 in December.

Growth remains robust. The Atlanta Fed GDPNow model's estimate for Q1 growth is 3.9% SAAR and will be updated today after the data. The latest Q1 estimate from the NY Fed's Nowcast model stands at 2.9% SAAR and will be updated Friday, while its initial forecast for Q2 growth will come in early March. The economy clearly has strong momentum going into 2025 and is another reason the Fed can remain patient.

December JOLTS data were mixed. Job openings fell more than expected to 7.600 mln vs. 8.000 expected and a revised 8.156 mln (was 8.098 mln) in November. The job openings rate dropped 0.4 ppt to 4.5%, the lowest since September, while the layoff rate remained steady at 1.1% for a fourth consecutive month, suggesting that there is no layoff spiral underway. The quit and hiring rates were unchanged at 2.0% and 3.4%, respectively, in line with labor demand coming into better balance with supply.

January PMIs will also be reported for Canada. S&P Global services and composite PMIs will be reported today. Earlier this week, its manufacturing PMI came in at 51.6 vs. 52.2 in December. Ivey PMI will be reported tomorrow.

Colombia central bank releases its minutes. At last week’s meeting, the bank delivered a hawkish surprise and kept rates steady at 9.5% vs. an expected 25 bp cut. The vote was split, with 5 in favor of steady rates, 1 in favor of a 25 bp cut, and 1 in favor of a 50 bp cut. Governor Villar said the easing cycle can resume later but expressed concern about the impact of the recent minimum wage hike. Of note, central bank co-directors Roberto Steiner and Jaime Jaramillo saw their terms end and will be replaced by Laura Moisa and Cesar Giraldo. This is likely to lead to a dovish shift at the bank but may not be enough to tilt it in favor of a cut at the next meeting March 31. The swaps market is pricing in 150 bp of easing over the next 12 months that would see the policy rate bottom near 8.0%.

EUROPE/MIDDLE EAST/AFRICA

The ECB wage tracker points to sharply slower gains ahead. The overall reading suggests salaries will rise 1.5% y/y in Q4 2025 vs. the 5.3% peak seen in Q4 2024. The wage tracker with unsmoothed one-off payments (like the one used for the ECB’s indicator of negotiated wage growth) suggests salaries will rise 2.8% y/y in Q4 2025 vs. the 6.5% peak seen in Q3 2024. Bottom line: the eurozone disinflationary process is well on track and argues for additional ECB rate cuts. The swaps market is pricing in 125 bp of total easing over the next 12 months that would see the policy rate bottom near 1.50% vs. 2.00% just last week. Chief Economist Lane speaks later today.

National Bank of Poland is expected to keep rates steady at 5.75%. Minutes to the January meeting will be published Friday. At that January meeting, NBP left rates steady at 5.75% and reiterated that “the current level of the NBP interest rates is conducive to meeting the NBP inflation target in the medium term.” It also warned again that “in the coming quarters inflation will remain markedly above the NBP inflation target,” signaling no rush to start easing. In fact, Governor Glapinski stressed that policy rate cut discussion must be delayed for some time, adding “we as a central bank can’t ignore when inflation is double the target and forecasts don’t show it’s trending toward the target.” Still, the swaps market is pricing in steady rates over the next three months and 75 bp of total easing over the next 12 months.

Sedlabanki cut rates 50 bp to 8.0%. The bank said that “Although inflation has eased and inflation expectations have fallen, inflation pressures remain, which calls for a continued tight monetary stance and caution regarding decisions going forward.” We were looking for a 25 bp cut after the bank warned at the last meeting in November that “persistent inflation and inflation expectations above target call for caution” even as Governor Jonsson hinted at a slower pace of cuts. Last week, CPI inflation slowed to 4.6% y/y vs. 4.8% in both November and December and was the lowest since October 2021 and nearing the 1-4% target range. This was most likely the deciding factor behind today’s dovish surprise.

ASIA

Japan December cash earnings data ran hot. Nominal earnings came in at 4.8% y/y vs. 3.7% expected and 3.9% in November and the highest since 1997, while real earnings came in at 0.6% y/y vs. -0.1% expected and 0.5% in November and rose for the second straight month. Scheduled full-time pay picked up a tick as expected to 2.8% y/y. We believe this is consistent with the Bank of Japan’s projection for inflation to stabilize around its 2% target in 2026, assuming productivity growth of 1%. The yen has strengthened today even through market pricing for the BOJ has not shifted, with the next hike priced in for September and a peak policy rate near 1.00% over the next two years.

New Zealand reported soft Q4 labor market data. Employment fell -0.1% q/q vs. -0.2% expected and a revised -0.6% (was -0.5%) in Q3, whereas the RBNZ had penciled in a -0.3% decline. The unemployment rate tracked the RBNZ’s forecast and rose three ticks as expected to 5.1%. Private wages rose the expected 0.6% q/q vs. 0.6% q/q in Q3 and was marginally higher than the RBNZ’s 0.5% projection. In line with RBNZ guidance, markets continue to imply another 50 bp rate cut to 3.75% at the February 19 meeting and the policy rate to bottom near 3.00% over the next 12 months. Bottom line: RBNZ/Fed policy divergence remains a drag for NZD.

Caixin reported soft services and composite PMIs. Services came in at 51.0 vs. 52.4 expected and 52.2 in December, which helped drag the composite lower to 51.1 vs. 51.4 in December after its manufacturing PMI fell to 50.1 in January. Note that the official PMIs also fell sharply in January, with the composite reading of 50.1 barely above the key 50 boom/bust level. With the economy weakening at the start of the year, it’s clear that deflation risks remain in place and that the PBOC will have to continue easing in 2025.