• Jobs data will be the highlight of a busy week; Fed officials remain very cautious; Bessent signaled that the Trump administration does not want a weaker dollar; University of Michigan consumer sentiment for February will be reported; Canada highlight will also be jobs data; Mexico reports January CPI
  
• ECB staff will publish an update on the neutral rate; BOE delivered a dovish cut; updated macroeconomic projections point to a near-term U.K. stagflation backdrop
  
• IMF warns of Japan’s fiscal trajectory; India cut rates 25 bp to 6.25%, as expected

The dollar has steadied ahead of the jobs data. DXY is trading higher for the second straight day near 107.776. We continue to view this week’s dollar dip as a buying opportunity but today’s jobs report is key (see below). The yen is the worst performing major as the IMF warns on Japan’s fiscal outlook (see below), with USD/JPY trading higher near 152.15. Sterling is trading higher near $1.2450 in the wake of the BOE’s dovish cut (see below), while the euro is trading lower near $1.0380. Despite the truce in the trade war, 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 (see below). Today’s jobs data will be important, as will next week’s CPI, PPI, and retail sales data. All should confirm that growth remains strong and inflation remains elevated.

AMERICAS

Jobs data will be the highlight of a busy week. Bloomberg consensus for NFP is 175k vs. 256k in December, while its whisper number stands at 199k. Both would be consistent with a healthy labor market, but we see risks of an upside surprise due to favorable readings from weekly jobless claims and other labor market indicators. The unemployment rate is expected to remain unchanged at 4.1% while average hourly earnings are expected at 3.8% y/y vs. 3.9% in December. Overall, wage growth is running around sustainable rates consistent with the Fed’s 2% inflation target given annual non-farm productivity growth of around 2%. The final benchmark revisions to establishment survey employment will also be issued at the same time. The preliminary estimate of the benchmark revision released last August indicated an adjustment to the March 2024 total nonfarm employment of -818k (-0.5%).

Fed officials remain very cautious. Logan asked “What if inflation comes in close to 2% in coming months? While that would be good news, it wouldn’t necessarily allow the FOMC to cut rates soon, in my view.” Logan added that inflation falling towards the 2% target coupled with a stable labor market would suggest the Fed is near neutral, adding that would mean little near-term room to cut rates. Elsewhere, Goolsbee said that with regards to how uncertainty about fiscal policy impacts monetary policy, “I thought it made the environment even foggier. I still think my ultimate where we’re going to land is a fair bit below where we are today, but the speed at which we get to that I made a little shallower because there are these uncertainties.” Bowman and Kugler speak today.

Treasury Secretary Bessent signaled that the Trump administration does not want a weaker dollar. Specifically, he said “The strong-dollar policy is completely intact with President Trump.” Bessent stressed that “We want the dollar to be strong. What we don’t want is other countries to weaken their currencies, to manipulate their trade.” He added that there are a number of countries that are accumulating large trade surpluses, which he said could be due in part to exchange rates. While the strong dollar policy dating back to then-Treasury Secretary Rubin has always been nebulous, it is nevertheless reassuring to hear that Bessent won’t try to weaken the dollar has some had feared.

University of Michigan consumer sentiment for February will be reported. Headline is expected at 71.8 vs. 71.1 in December. Current conditions are expected to fall to 73.7 while expectations are expected to rise to 70.1. Watch out for rising inflation expectations as recent data indicate inflation is not only stalling above 2% but is creeping higher toward 3%. In January, one-year inflation expectations unexpectedly rose 0.5 ppt to 3.3%, the highest level since May, while inflation expectations 5 to 10 years out rose 0.3 ppt to 3.3%, the highest level since June 2008.

Canada highlight will also be jobs data. Consensus sees a 25.0k rise in jobs vs. 91.0k in December, while the unemployment rate is expected to rise a tick to 6.8%. Overall, the labor market remains soft and firms’ hiring intentions are muted. The market is pricing in 75 bp of further easing over the next 12 months that should see the policy rate bottom at the lower end of the BOC’s neutral range estimate of 2.25-3.25%. Bank of Canada Governor Macklem reiterated overnight that a long-lasting and broad-based trade conflict would badly hurt economic activity in Canada and put direct upward pressure on inflation. This complicates the BOC’s job as monetary policy cannot lean against weaker output and higher inflation at the same time.

Mexico reports January CPI data. Headline is expected at 3.63% y/y vs. 4.21% in December, while core is expected at 3.69% y/y vs. 3.65% in December. If so, headline would move back into the 2-4% target range for the first time since February 2021. Yesterday, Banco de Mexico 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 175 bp of further easing over the next 12 months that would see the policy rate bottom near 7.75% vs. 8.5% before the decision.

EUROPE/MIDDLE EAST/AFRICA

ECB staff will publish an update on the neutral rate. The ECB’s current neutral range estimate is between 1.50-3.00%. That said, Chief Economist Lane warned markets not to spend too much time worrying about the neutral rate, noting that as rates approach it, it “loses some relevance.” Meanwhile, markets currently expect the policy rate to bottom between 1.75-2.00% over the next 12 months. We believe rates will have to go even lower and into accommodative territory. Guindos speaks today.

The Bank of England delivered a dovish cut. The bank cut rates 25 bp to 4.50% whilst noting that “there has been sufficient progress on disinflation in domestic prices and wages.” However, the dovish surprise came from the vote split. It was a 7–2 vote to cut rates, with the two dissents in favor of a larger 50 bp cut. That uber dove Dhingra was one of the dissents was not surprising; what’s shocking is that uber hawk Mann was the other. Mann was up until now a staunch hawk on the MPC and so the shift in her stance lowers the bar for more BOE easing.

The updated macroeconomic projections point to a near-term stagflation backdrop. The Q1 2025 GDP growth projection was slashed to 0.4% vs. 1.4% previously while the Q1 2025 CPI inflation forecast was raised to 2.8% vs. 2.4% previously. Market expectations for the BOE have adjusted lower, with the policy rate seen bottoming near 3.75% vs. 4.0% at the start of this month.

The minutes are worth noting. Importantly, they show that for one of the two members that voted for a 50 bp cut felt that “a more activist approach at this meeting would give a clearer signal of financial conditions appropriate for the United Kingdom.” Mann is an outspoken proponent of an activist monetary policy strategy. In the current economic cycle, this strategy meant keeping rates on hold for longer until there were clear signs the remaining persistence in inflation dissipates. Once inflation persistence has been purged, it would then be appropriate to ease fast and forcefully. The fact she voted for a jumbo cut today signals she sees a sharp slowdown in inflation. Mann will likely offer more clues behind what guided her decision today when she speaks next Tuesday. Chief Economist Pill speaks today.

ASIA

The IMF warns of Japan’s fiscal trajectory. In its annual Article IV consultation, the agency warned that “As interest rates rise, the cost of servicing the large public debt is expected to double by 2030, putting a premium on a robust debt management strategy. In the face of rising gross financing needs and a shrinking BOJ balance sheet, government bond issuance will need to rely on additional demand from foreign investors and domestic institutions.” While the IMF makes valid points, Japan has one huge mitigating factor: a high savings rate means that most of the JGBs outstanding are held domestically. Indeed, the BOJ holds nearly half!

Reserve Bank of India cut rates 25 bp to 6.25%, as expected. The decision to cut rates today was unanimous with the bank noting that “inflation has declined” and that growth is “much below that of last year.” The RBI also noted it would “continue with the neutral monetary policy stance and remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.” This is the first meeting under new Governor Malhotra and marks the first rate cut since 2020 after holding rates at 6.50% for almost two years. The swaps market is pricing in 25 bp of further easing over the next 12 months that would see the policy rate bottom at 6.00%.