• The tariff noise continues; FOMC minutes will be the highlight; December TIC data are worth discussing; Canada January CPI ran hot; Banxico releases its quarterly inflation report
  
• ECB doves remain vocal; U.K. January CPI ran hot
  
• BOJ board member Takata remains hawkish; Australia Q4 wages cooled; RBNZ cut rates 50 bp to 3.75%, as expected; Indonesia kept rates steady at 5.75%, as expected

The dollar remains firm as tariff noise continue. DXY is trading higher for the second straight day near 107.183 on Trump’s promise of at least 25% tariffs on autos and semiconductors (see below). Sterling is the worst performing major and is trading near $1.2580 after CPI data confirmed stagflation risks (see below). The yen is outperforming on hawkish BOJ comments (see below), with USD/JPY trading lower just below 152. NZD is also outperforming despite the 50 bp cut from the RBNZ (see below). Lastly, the euro is trading lower near $1.0425. With the truce in the trade war clearly over, 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

The tariff noise continues. President Trump said yesterday he’s considering tariffs “in the neighborhood of 25%” on automobiles and at least 25% on semiconductors and pharmaceutical products, adding that they would “go very substantially higher over the course of the year.” Trump indicated again he would “probably” provide final details on automotive tariffs on April 2. This comes after he promised 25% tariffs on steel and aluminum. We continue to look through the tariff noise and focus on the underlying fundamental drivers that favor continued dollar strength.

FOMC minutes will be the highlight. At the January 28-29 meeting, the Fed delivered the widely expected hold. The statement read hawkish, as it removed the reference to inflation making progress towards the 2% target. Instead, the Fed noted that inflation “remains somewhat elevated.” It also noted that unemployment has stabilized and the labor market remains “solid.” There were no dissents for the first time since the September 17-18 meeting. Powell later downplayed the change in the language but subsequent Fed official comments suggest the change reflected added caution on the part of the Fed. Indeed, the January CPI data underscore that progress towards 2% has indeed been interrupted.

It's clear that the Fed is in no hurry to cut rates. Fed officials speaking this week have been as cautious as Powell was in last week’s testimony before Congress. Yesterday, Daly said “At this point, policy needs to remain restrictive until, from my vantage point, until I see that we are really continuing to make progress on inflation.” Jefferson speaks today. The next Fed cut is priced in for September after being pushed out to October after the CPI data, while the swaps market sees around 40% odds of a second cut in H2 after pricing in no further cuts after the CPI data.

Growth remains robust. The Atlanta Fed GDPNow model's estimate for Q1 growth is 2.3% SAAR and will be updated today after the data. The weak January retail sales data led to a sharp downward revision but we continue to view that as a blip. Indeed, the NY Fed Nowcast model’s estimate for Q1 remained strong at 3.0% SAAR last week and will be updated Friday, while its initial forecast for Q2 growth will come in early March.

Regional Fed surveys for February will continue rolling out. New York Fed services will be reported today. Empire manufacturing kicked things off yesterday and came in at 5.7 vs. 0.0 expected and -12.6 in January. Philly Fed manufacturing will be reported tomorrow and is expected at 15.0 vs. 44.3 in January.

December TIC data are worth discussing. Total net flows came in at $87.1 bln vs. a revised $134.1 bln (was $159.9 bln) in November, while net long-term flows came in at $72.0 bln vs. a revised $53.2 bln (was $79.0 bln) in November. Simply put, the U.S. remains a magnet for foreign investment inflows. Of note, net foreign purchases of long-term US securities totaled $1.153 trln in the 12 months through December, eclipsing over the same period the cumulative US trade deficit of -$918 bln.

Canada January CPI ran hot. Headline came in as expected at 1.9% y/y vs. 1.8% in December, but core median came in two ticks higher than expected at 2.7% y/y vs. a revised 2.6% (was 2.4%) in December and core trim came in a tick higher than expected at 2.7% y/y vs. 2.5% in December. The data suggest the BOC will likely pause its easing cycle at its next meeting March 12. Of note, the market sees nearly 40% odds of a 25 bp cut then.

Banco de Mexico releases its quarterly inflation report. The bank then publishes its minutes tomorrow. At that meeting February 6, the bank cut rates 50 bp to 9.5%. It was a dovish cut as the bank said “The Board estimates that looking forward it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes.” The swaps market has reacted to the dovish signals and is now pricing in 125 bp of further easing over the next 12 months that would see the policy rate bottom near 8.25% vs. 8.5% before the February decision.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank doves remain vocal. GC member Panetta noted that “After two quarters of no growth in the euro area and tensions in the manufacturing sector, employment is giving signs of weakening.” He added that said the weakness is “more persistent than we expected” as the expected consumption-led recovery has yet to materialize. We concur.  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.

U.K. January CPI ran hot. Headline came in two ticks higher than expected at 3.0% y/y vs. 2.5% in December, core came in as expected at 3.7% y/y vs. 3.2% in December, and CPIH came in two ticks higher than expected at 3.9% y/y vs. 3.5% in December. Headline was the highest since March 2024 and further above the 2% target. Encouragingly, services inflation came in a tick lower than expected at 5.0% y/y vs. 4.4% in December and suggests the BOE can keep easing at a gradual pace. The swaps market is pricing in 50 bp of easing over the next 12 months, with some modest odds of another 25 bp beyond that. However, the BOE’s job is complicated by the near-term stagflation backdrop, which is a drag on GBP.

ASIA

Bank of Japan board member Takata remains hawkish. He said “It will be important for the bank to consider continuing to implement gear shifts gradually, even after the additional rate hike decided in January, in order to avoid creating excessively high expectations of continued monetary easing.” He added that “The bank will need to conduct monetary policy based on the recognition that it has finally reached the point of returning from the implementation of unconventional monetary measures to policy conduct that is in line with what is seen in normal times.” The market has adjusted its Bank of Japan expectations. The next hike is still priced in for September but the swaps market now sees 60% odds of another hike that would see the policy rate peak near 1.25% vs. 1.0% previously. The January CPI data due out tomorrow will either reinforce or curtail current rate hike expectations.

Australia Q4 wages cooled. The wage price index rose 0.7% q/q vs. 0.8% expected and a revised 0.9% (was 0.8%) in Q3, matching the lowest quarterly rise since Q1 2022. In y/y terms, wage growth slowed in line with consensus and RBA projections to 3.2% vs. a revised 3.6% (was 3.5%) in Q3. The RBA signaled it will pay particular attention to labor market developments to guide future policy decision. As such, the January labor force survey out tomorrow will help guide near-term RBA policy rate expectations. For now, the market is pricing in almost 75 bp of further easing over the next 12 months.

Reserve Bank of New Zealand cut rates 50 bp to 3.75%, as expected. The bank highlighted that “if economic conditions continue to evolve as projected, the Committee has scope to lower the OCR further through 2025.” Indeed, Governor Orr flagged more modest 25 bp cuts in April and May. Updated macro forecasts and rate path projections were released. The RBNZ expects to lower the OCR at a faster pace than projected in November, with the OCR seen bottoming at 3.10% by Q1 2026 vs. Q1 2027 in November. However, the swaps market is pricing in a terminal rate between 2.50-2.75% over the next 12 months. Bottom line: NZ-US 2-year bond yield spreads can further weigh on NZD.

Bank Indonesia kept rates steady at 5.75%, as expected. Governor Warjiyo said “Stability is the most important thing for our economy to continue growing. That’s why we continue to be in the market and maintain the stability of the rupiah, especially when global turmoil is high.” This was a notable change from the January meeting, when he said “We have changed our stance, which is to pro-stability and growth.” Warjiyo added that he sees room for further cuts but that the timing will depend on the global situation.