• Tariffs are coming; Fed easing expectations have picked up; Dallas Fed President Logan spoke about the Fed’s balance sheet; February Conference Board consumer confidence will be the highlight; Brazil reports mid-February IPCA inflation
  
• Incoming German Chancellor Merz is wasting no time in trying to boost fiscal spending; eurozone negotiated wages indicator cooled in Q4; BOE Chief Economist Pill speaks; Hungary is expected to keep rates steady at 6.5%
  
• Korea cut rates 25 bp to 2.75%, as expected; PBOC left its 1-year MLF rate steady at 2.0%, as expected

The dollar remains in a holding pattern. DXY is trading flat for the second straight day near 106.568 in the absence of any fresh drivers. However, the sharp drop in XBT today suggests another bout of risk off sentiment may be brewing. USD/JPY continues to trade in narrow ranges on both sides of 150 after trading below 149 yesterday. The euro is trading higher near $1.0485 despite soft wage data (see below), while sterling is trading higher near $1.2640. 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. Conference Board consumer confidence today (see below) has taken on greater significance after the weak University of Michigan reading last week.

AMERICAS

Tariffs are coming. Yesterday, President Trump said that tariffs on Canada and Mexico that were delayed until March 4 would go into effect then. Specifically, he said “The tariffs are going forward on time, on schedule” and added that “It’ll be very good for our country, our country will be extremely liquid and rich again.” We don't think anyone should be surprised by this. As we’ve said along, we don't know how big or how widely they will be applied, but tariffs are coming.

Recent softness in the data have increased Fed easing expectations. That said, Two cuts are still priced in but odds of a third cut have risen to nearly 40%. Also, the timing of those two cuts has been moved forward to July and December. That said, 2-3 cuts do not suggest a recession is anywhere near being priced in. We know the Fed is concerned about the economic impact of Trump tariff and immigration policies. However, policy will remain on hold until the actual scope of these policies are better known. Barr and Barkin speak later today.

Dallas Fed President Logan spoke about the Fed’s balance sheet. Speaking at a balance sheet conference hosted by the Bank of England today, she noted that “Although I view a neutral mix of purchases relative to issuance as appropriate in the long run, it would make sense in the medium term to overweight purchases of shorter-dated securities so as to more promptly return the Fed’s holdings to a neutral allocation.” She added that “Roughly matching the duration of our assets and liabilities would reduce these fluctuations and could, thus, enhance the effectiveness of policy communications.” Logan did not talk about slowing or pausing the current pact of QT. However, she said she supported the current ample reserves framework and stressed that “The important point is that money market rates right now are well below IORB, and all the other metrics that staff are reviewing don’t suggest that we’ve reached that ample level.”

Recall that the January FOMC minutes revealed that slowing QT was discussed. Specifically, “Regarding the potential for significant swings in reserves over coming months related to debt ceiling dynamics, various participants noted that it may be appropriate to consider pausing or slowing balance sheet runoff until the resolution of this event.” The Fed is currently allowing up to $25 bln in USTs and $35 bin in MBS to mature each month without reinvestment. Bostic said this month that the Fed should “be more cautious today” with its balance sheet runoff, as he pointed out that “the debt ceiling is one factor that comes into that, but there are others as well, including how banks decide to deploy capital across their investment instruments.”

February Conference Board consumer confidence will be the highlight. Headline is expected at 102.5 vs. 104.1 in January. If so, it would be the lowest since September but remain within the same narrow range that’s held throughout the past two years. However, there are clear downside risks after the University of Michigan reading Friday. That said, positive real wage growth, encouraging labor demand, and strong household balance sheets suggest household spending will remain an important tailwind to GDP growth. Watch out for the labor index (jobs plentiful minus jobs hard to get). In January, that index fell to a five-month low at 16.2, suggesting consumers are less optimistic about future labor market conditions.

Chicago Fed National Activity Index for January is worth discussing. Headline came in at -0.03 vs. -0.05 expected and a revised 0.18 (was 0.15) in December. As a result, the 3-month moving average rose to 0.03 vs. -0.13 in December. It is the highest since October 2022 and further above the -0.7 threshold that typically signals recession. Estimates for Q1 growth are so far mixed, with the Atlanta Fed GDPNow model tracking at 2.3% SAAR and the New York Fed Nowcast model at 3.0% SAAR. Both models will be updated Friday.

February Fed regional surveys will continue rolling out. Philly Fed services, Richmond Fed manufacturing (-3 expected) and services, and Dallas Fed services will all be reported today. Yesterday, Dallas Fed manufacturing came in at -8.3 vs. 6.4 expected and 14.1 in January.

Brazil reports mid-February IPCA inflation. Headline is expected at 5.10% y/y vs. 4.50% in mid-January. If so, it would be the first acceleration since November. Headline would also be the highest since September 2023 and move back above the 1.5-4.5% target range. At the last policy meeting January 29, the central bank hiked rates 100 bp for the second straight time to 13.25% and said a similar hike would be seen at the next meeting March 19. Looking ahead, the swaps market is pricing in 175 bp of total easing over the next 12 months that would see the policy rate peak near 15.0%.

EUROPE/MIDDLE EAST/AFRICA

Incoming German Chancellor Merz is wasting no time in trying to boost fiscal spending. Reports suggest Merz is looking at using the outgoing parliament, which can convene until March 24, to lift the country’s debt brake and approve up to EUR200 bln in special defense spending. It will be easier to push through fiscal reforms in the current parliament, as the next parliament may not have the necessary two-thirds majority to make constitutional changes. Such political developments in Germany are EUR supportive. However, the prospect of more ECB easing is an ongoing drag for EUR.

Eurozone negotiated wages indicator cooled in Q4. Negotiated wages rose 4.1% y/y in Q4 from a series high of 5.4% in Q3. This points to a sharper slowdown in wage pressures this year. Indeed, eurozone firms expect wage growth to slow to 3.6% this year vs. 4.3% in 2024. Of note, the wage tracker with unsmoothed one-off payments (like the one used for the ECB’s indicator of negotiated wage growth) indicates an average negotiated wage growth of 2.7% y/y in Q4 2025.

The eurozone disinflationary process remains well on track. The swaps market is pricing in 75 bp of easing over the next 12 months that would see the policy rate bottom near 2.00%. Nagel showed his hawkish colors by saying “There’s nothing to be gained from publicly speculating on where we might stand, in terms of our interest rate policy, in the summer or at the end of the year. In view of the latest developments on the inflation front, and given the high level of uncertainty, it’s wise to take one step at a time in terms of monetary policy. And not to rush into further interest rate cuts.” Centeno and Schnabel speak later today.

Bank of England Chief Economist Pill speaks today. Yesterday, MPC member Dhingra argued for more aggressive easing as she noted that “even if you thought of a 25 bp a quarter type of gradual definition, you would still pretty much, according to most metrics, be in restrictive territory all of this year.” 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 come as no surprise. Dhingra was just reappointed to another 3-year term on the MPC and will speak again tomorrow. The Bank of England 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 after that.

National Bank of Hungary is expected to keep rates steady at 6.5%. At the last meeting January 28, the bank kept rates steady for the fourth straight month and updated its policy guidance as it warned that “risks to the outlook for inflation warrant the maintenance of tight monetary conditions.” This suggests the bar for additional rate cuts is high. Deputy Governor Virag said tight monetary conditions were necessary as upside risks have materialized, adding that “This is a new situation in a qualitative sense.” Despite this hawkish guidance, the swaps market is still pricing in a 25 bp cut over the next six months.

ASIA

Bank of Korea cut rates 25 bp to 2.75%, as expected. The decision was unanimous, but only 2 board members saw another cut over the next three months while 6 saw steady rates. The bank said that the cut was made to “mitigate downward pressure on the economy” and added that growth was expected to slow significantly. The central bank cut its 2025 growth forecast a couple of ticks to 1.5%, and Governor Rhee said “The outline of Trump’s tariff policies has now largely taken shape, and that prompted the downgrade from January.” Rhee added that market pricing of 2-3 cuts this year is similar to the bank’s assumptions. The swaps market is pricing in only 25 bp of further easing over the next 12 months that would see the policy rate bottom near 2.5%.

The People’s Bank of China left its 1-year MLF rate steady at 2.0%, as expected. More easing is in the pipeline as China’s economy is still struggling to escape a deflationary spiral. However, the growth outlook will remain unimpressive as long as policymakers fail to address the root cause of weak consumption spending activity: low household income levels, high precautionary savings, and high levels of household debt. Of note, China’s annual “Two Sessions” National People's Congress meeting begins March 5. While detailed policy announcements are not expected, the sessions provide a valuable insight into the government’s fiscal and growth objectives.