Jobs Data on Deck

• USD and Treasury yields are steady ahead of the US January non-farm payrolls report. Canada’s January jobs report is also due today.

• ECB staff will publish an updated on the neutral rate. This will offer a guide on how low rates can go.

• Reserve Bank of India cuts rates 25bps to 6.25% and Banco de Mexico slashes rates 50bps to 9.50%.

USD is range-bound just above this week’s lows while animal spirits continue to drive equity markets. Fed funds futures still imply about 50bps of total easing in 2025, with the next full 25bps cut priced-in for July. More evidence of solid US labor market conditions today can trigger an upward adjustment to US rate expectations in favor of a firmer USD.

Regardless, the Fed is in no rush to resume easing which is USD supportive. Yesterday, Dallas Fed President Lorie Logan (non-FOMC voter) highlighted that the bar for more rate cuts would be high even if inflation comes in close to 2% in coming months. According to Logan “on-target inflation alongside two quarters of stability in the labor market and demand would strongly suggest that we’re already pretty close to the neutral rate, without much near-term room for further cuts.” Meanwhile, Chicago Fed President Austan Goolsbee (FOMC voter) toned down his dovish rhetoric warning “I feel the neutral rate is well below the current fed policy, but it is appropriate to slow the pace of cuts to find a stopping point.”

US Treasury Secretary Scott Bessent sticks to the strong dollar policy, first expressed by his predecessor Robert Rubin in January 1995. Bessent confirmed that “The strong-dollar policy is completely intact with President Trump…We want the dollar to be strong. What we don’t want is other countries to weaken their currencies, to manipulate their trade.” Overall, the dollar’s unrivalled 80-year reign as an international currency is secure. USD dominates as a store of value, medium of exchange and unit of account. But other currencies, notably the euro and gold, are gaining a more prominent role, which is a structural headwind for USD.

US

The January non-farm payrolls report takes center stage today (1:30pm London). Non-farm payrolls are expected at 175k vs. 256k in December, consistent with a healthy labor market. For reference, payroll job gains averaged 170k per month over the past three months. The final benchmark revision to the establishment survey employment risk distorting today’s print. The preliminary estimate of the benchmark revision released last August indicated an adjustment to March 2024 total nonfarm employment of -818k (-0.5%).

The unemployment rate is projected to remain at 4.1% while average hourly earnings are forecast at 3.8% y/y vs. 3.9% in December. Wage growth is running around sustainable rates consistent with the Fed’s 2% inflation target given non-farm productivity of 1.6% y/y in Q4 2024.

The February University of Michigan preliminary consumer sentiment report will also generate some market volatility (3:00pm London). Headline is expected at 73.7 vs. 74.0 in January. Watch-out for the inflation expectations gauge as last month’s data indicated inflation may be stalling above 2%. In January, consumers' one-year inflation expectations unexpectedly soared 0.5pts to 3.3%, the highest level since May. Inflation expectations 5 to 10 years out also rose to 3.3%, the highest level since June 2008, from 3.0% in December.

Fed Governor Michelle Bowman gives a brief economic update and speaks on bank regulation (2:25pm London). There is no Q&A. Fed Governor Adriana Kugler speaks on entrepreneurship and aggregate productivity (5:00pm London).

EUROZONE

ECB staff will publish an updated on the neutral rate today. The ECB’s current neutral range estimate is between 1.50% and 3.00%. Interest rate futures firmed up bets of additional ECB rate cuts after Eurozone real GDP unexpectedly stagnated in Q4 and the ECB warned of additional headwinds in the near-term. Over the next 12 months, markets imply almost 100bps of ECB policy rate cuts vs. less than 50bps of Fed funds rate cuts. Bottom line: EU-US 2-year bond yield spreads can further weigh on EUR/USD.

UK

GBP is trading on the defensive against most major currencies and UK 10-year government bonds are underperforming global peers. Yesterday, the Bank of England (BOE) reduced the policy rate 25bps to 4.50% (widely expected) and stressed there would be “a gradual and careful approach” to the further rate cuts. Markets imply an additional 75 to 100bps of cuts over the next 12 months.

The MPC voted by a majority of 7–2 to cut rates. The two dissenting members, uber dove Swati Dhingra and surprisingly Dr. Catherine Mann, preferred a 50bps cut. Dr. Mann was a staunch hawk on the MPC, so her policy stance change lowers the bar for more BOE easing.

The BOE’s updated macroeconomic projections point to a near-term UK stagflation backdrop. Q1 2025 GDP growth projection was slashed to 0.4% vs. 1.4% previously while Q1 2025 CPI inflation forecast was raised to 2.8% vs. 2.4% previously. This unfavorable near-term environment can further weigh on GBP and keep long-term gilt yields under upside pressure as fiscal concerns resurface.

Interestingly, the BOE minutes highlights that for one of the two members that voted for a 50bps cut “a more activist approach at this meeting would give a clearer signal of financial conditions appropriate for the United Kingdom.” Dr. Mann is an outspoken proponent of an activist monetary policy strategy.

In the current economic cycle, this strategy implies keeping rates on hold for longer until there are 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 UK inflation. Dr. Mann will likely offer more clues behind what guided her latest policy decision when she speaks next Tuesday. Today, BOE Chief Economist Huw Pill takes the spotlight (12:15pm London).

CANADA

USD/CAD is stabilizing around key technical support at 1.4300. Bank of Canada (BOC) Governor Tiff 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.

Canada’s January labor force survey is the domestic focus (1:30pm London). Consensus sees a 25k rise in jobs vs. 91k in December, while the unemployment rate is expected at 6.8% vs. 6.7% in December. Overall, the labor market remains soft and firms’ hiring intentions are muted. Interest rate futures imply almost 75bps of BOC cuts 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% to 3.25%. Bottom line: FED/BOC policy trend, risk of all-out trade war between Canada and the US, and the Trump administration’s focus on lowering energy prices support a higher USD/CAD.

MEXICO

Banco de Mexico delivered on expectations and slashed the policy rate 50bps to 9.50%. More jumbo cuts are in the pipeline as “the Board estimates that looking forward it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes.” Indeed, the bar for more easing is low. There was only one dissenting vote in favor of a smaller 25bps cut and the bank continues to project headline inflation to converge to the 3% target in Q3 2026. The risk of all-out trade war between Mexico and the US is an ongoing drag for MXN. But Mexico’s positive real policy rate and favorable balance of payments backdrop offer MXN important support.

INDIA

Reserve Bank of India (RBI) delivered on expectations and cut the policy rate 25bps to 6.25%. The decision to cut rates today was unanimous with the MPC noting that “inflation has declined” and 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 marks the first rate cut since 2020 after holding rates at 6.50% for almost two years. The swaps market is pricing in 25bps of total easing over the next 12 months that would see the policy rate bottom at 6.00%.