Risk sentiment received a boost in early US trading as January’s PCE inflation data came in line with expectations, lifting hopes that Fed may have room to cut rates in the first half of the year. Both headline and core PCE inflation slowed, adding to expectations that disinflation remains on track. Fed fund futures now indicate a roughly 70% chance of a 25bps rate cut in June, up from around 63% just a week ago.
However, it remains to be seen whether the bounce in equities, as suggested by higher futures, can hold. Market sentiment remains fragile, particularly with ongoing uncertainty surrounding US tariff policies. Investors are cautious about the economic fallout from trade measures, which could overshadow any optimism from cooling inflation data.
In the currency markets, Dollar is on track to close the week as the best performer, followed by Sterling and Swiss Franc. Meanwhile, Kiwi remains the weakest, followed by Aussie and Loonie, with little sign of a reversal. Euro and Yen are positioning in the middle.
In Europe, at the time of writing, FTSE is up 0.36%. DAX is down -0.57%. CAC is down -0.55%. UK 10-year yield is down -0.024 at 4.490. Germany 10-year yield is down -0.026 at 2.394. Earlier in Asia, Nikkei fell -2.88% Hong Kong HSI fell -3.28%. China Shanghai SSE fell -1.98%. Singapore Strait Times fell -0.65%. Japan 10-year JGB yield fell -0.02 to 1.376.
US PCE inflation slows as expected, personal income surges but spending contracts
The latest US PCE inflation data showed price pressures moderating slightly in January. Both headline and core PCE (excluding food and energy) price indices rose 0.3% month-over-month, aligning with market expectations.
On an annual basis, headline PCE inflation slowed to 2.5% yoy from 2.6% yoy, while core PCE eased to 2.6% yoy from 2.9% yoy, reinforcing the view that disinflation remains on track despite persistent price pressures in some sectors.
However, the consumer sector showed signs of strain. Personal income surged 0.9% mom, far exceeding expectations of 0.3%, but personal spending unexpectedly declined by -0.2%, missing the anticipated 0.2% gain.
Canada’s GDP grows 0.2% mom in Dec, misses expectations
Canada’s GDP expanded by 0.2% mom in December, falling short of the expected 0.3% growth. Both services-producing (+0.2%) and goods-producing industries (+0.3%) contributed to the increase, marking the fifth gain in the past six months. A total of 11 out of 20 industrial sectors posted growth.
Looking ahead, preliminary data suggests GDP grew by 0.3% mom in January, with gains led by mining, quarrying, oil and gas extraction, wholesale trade, and transportation. However, retail trade remained a weak spot, partially offsetting the overall growth.
BoE’s Ramsden sees inflation risks two-sided
BoE Deputy Governor Dave Ramsden indicated a shift in his inflation outlook, stating that he no longer views risks to achieving the 2% target as skewed to the downside. Instead, he now sees inflation risks as “two-sided,” acknowledging the potential for “more inflationary as well as disinflationary scenarios”.
Ramsden also raised concerns about the UK’s sluggish economic growth, highlighting the possibility that the economy’s supply capacity might be “even weaker” than previously assessed by BoE.
If this proves true, the UK’s “speed limit” for growth would be lower, leading to prolonged tightness in the labor market and sustained wage pressures. That would result in “greater persistence in domestic inflationary pressures.”
Swiss KOF falls to 101.7, manufacturing and services under pressure
Switzerland’s KOF Economic Barometer declined from 103.0 to 101.7 in February, missing expectations of 102.1.
The data suggests weakening momentum in the economy, with most production-side sectors facing increasing pressure. According to KOF, manufacturing and services sectors saw the most notable deterioration.
However, the report also pointed to some stabilizing factors, as foreign demand and private consumption showed resilience, helping to offset some of the negative trends.
BoJ’s Uchida: Yield rise reflects market’s views on economic and global developments
Speaking in parliament today, BoJ Deputy Governor Shinichi Uchida said recent rise in JGB yields “reflects the market’s view on the economic and price outlook, as well as overseas developments.”
“There’s no change to our stance on short-term policy rates and government bond operations,” he emphasized, adding that the bond holdings “continue to exert a strong monetary easing effect” on the economy.
When asked whether the prospect of further rate hikes and tapering would continue to drive yields higher, Uchida responded that it is ultimately “up to markets to decide.”
Japan’s Tokyo CPI slows to 2.2% yoy in Feb, industrial production down -1.1% mom in Jan
Tokyo’s core CPI (ex-food) slowed to 2.2% yoy in February, down from 2.5% yoy and below market expectations of 2.3% yoy. This marks the first decline in four months, largely due to the reintroduction of energy subsidies. Meanwhile, core-core CPI (ex-food and energy) held steady at 1.9% yoy. Headline CPI slowed from 3.4% yoy to 2.9% yoy.
In the industrial sector, production contracted by -1.1% mom in January, a sharper decline than the expected -0.9%. Manufacturers surveyed by Japan’s Ministry of Economy, Trade, and Industry anticipate a strong 5.0% mom rebound in February, followed by a -2.0% mom drop in March.
On the consumer front, retail sales grew 3.9% yoy in January, slightly missing the 4.0% yoy forecast, but still pointing to resilient domestic demand.
EUR/USD Mid-Day Outlook
Daily Pivots: (S1) 1.0365; (P) 1.0430; (R1) 1.0462; More…
Intraday bias in EUR/USD stays on the downside at this point. Consolidations from 1.0176 should have completed with three waves up to 1.0527. Deeper fall should be seen to retest 1.0176/0210 support zone. Firm break there will resume whole decline from 1.1213. For now, risk will stay on the downside as long as 1.0527 holds, in case of recovery.
In the bigger picture, immediate focus is on 61.8 retracement of 0.9534 (2022 low) to 1.1274 (2024 high) at 1.0199. Sustained break there will solidify the case of medium term bearish trend reversal, and pave the way back to 0.9534. However, reversal from 1.0199 will argue that price actions from 1.1274 are merely a corrective pattern, and has already completed.
