• Fed officials continue to say easing can wait. Treasury yields firmer across the curve. Second-tier US economic data are due today. Canada reports January CPI.
• The UK labor market was resilient in December and argues against back-to-back BOE policy rate cuts. GBP jumped, then pared back gains.
• RBA trims the policy rate 25bps to 4.10%, as expected, but signals a cautious easing path ahead. AUD outperformed while Australian government bonds underperformed.

USD bounced-off slightly from its 2-month low, US equity futures are modestly higher and global government bond yields are up. Overall, USD will remain supported as the US maintains a wide bond yield advantage against all other major economies. USD may not see any sustained relief until Friday, when global February PMI readings should underscore the divergence theme.

Fed officials are in no hurry to resume easing. Philadelphia Fed President Patrick Harker (non-voter) pointed out that “the current data paints a picture of an American economy that continues to function from a position of strength. Inflation is still elevated…GDP and production remain resilient. Labor is largely in balance. And these are reasons enough for holding the policy rate steady.”

Fed Governor Michelle Bowman emphasized “policy is now in a good place, allowing the Committee to be patient and pay closer attention to the inflation data as it evolves…the current policy stance also provides the opportunity to review further indicators of economic activity and get further clarity on the administration's policies and their effects on the economy.”

Fed Governor Christopher Waller stressed “the data are not supporting a reduction in the policy rate at this time. But if 2025 plays out like 2024, rate cuts would be appropriate at some point this year.” Waller also downplayed the effects of tariffs on inflation. “My baseline view is that any imposition of tariffs will only modestly increase prices and in a non-persistent manner. So I favor looking through these effects when setting monetary policy to the best of our ability.”

Interestingly, Bowman and Waller were not concerned with the poor US January retail sales print. Both pointed out that the retail sales data is noisy at this time of the year and may have been negatively affected by the cold weather. We agree. The US consumer spending outlook remains encouraging supported by positive real wage growth, healthy labor market and strong household balance sheet.

Today, San Francisco Fed President Mary Daly (non-voter) (10:20am New York) and Fed Vice Chair for Supervision Michael Barr (1:00pm New York) speak. Second-tier US economic data are due: February NAHB housing market index, February Empire manufacturing survey, and December TIC flows.

UK

UK labor market conditions were resilient in December. The unemployment rate was unchanged at 4.4% for a second consecutive month. Consensus and Bank of England (BOE) had 4.5% penciled-in. Payrolled employees unexpectedly increased 21k (consensus: -30k) vs. -14k (revised up from -47k) in December. Average weekly earnings ex-bonuses rose in line with consensus to 5.9% y/y vs. 5.6% in November and private sector weekly earnings ex-bonuses rose to 6.2% y/y (BOE forecast: 6.3%) vs. 5.9% in November.

Nonetheless, leading indicators point to a softer jobs market. The KPMG and REC UK Report on Jobs survey showed a further steep drop in permanent placements in January. Moreover, the vacancies-to-unemployment ratio is now below the 0.6 level that Bank researchers consider to be consistent with a balanced labor market. And the BOE’s DMP survey points to slower wage growth at 3.9% y/y over the year ahead.

Markets continue to imply a total of 50bps of BOE policy rate cuts over the next 12 months, with the next 25bps cut priced-in for the May 8 meeting. Still, the BOE’s job is complicated by the UK’s near-term stagflation backdrop which is a drag on GBP. In fact, BOE Governor Andrew Bailey cautioned again this morning that the UK is facing “a short-run hump in inflation” and “a weak growth environment.”

EUROZONE

EUR and German bond yields ignored the better-than-expected improvement in Germany’s February ZEW investor economic sentiment survey. The expectations index surged to a seven-month high at 26.0 (consensus: 20.0) vs. 10.3 in January, to be above the long-term average of around 21.0. Regardless, the Eurozone disinflationary process is well on track and the economic growth outlook is unimpressive. Bottom line: unlike the Fed, the ECB has scope to deliver on rate cut expectations which can pull EUR/USD lower.

AUSTRALIA

RBA trimmed the policy rate 25bps to 4.10% but signaled it’s not about to open the policy tap wide open. This was the first interest rate reduction since November 2020, and it was virtually fully priced-in by markets. AUD outperformed most major currencies while Australian government bonds underperformed.

The RBA stressed that “in removing a little of the policy restrictiveness in its decision today, the Board acknowledges that progress has been made [returning inflation to target] but is cautious about the outlook.” Indeed, the RBA projects underlying inflation to remain at 2.7% (slightly above the mid-point of its 2-3% target) over the forecast period. The RBA also revised down its unemployment rate projection across the forecast horizon to 4.2% (from 4.4%-4.5%) reflecting the recent strength in labor market indicators.

RBA Governor Michele Bullock jawboned expectations for more rate cuts: “I want to be very clear that today’s decision does not imply that further rate cuts along the lines suggested by the markets are coming.” The RBA will pay particular attention to labor market development to guide future policy decision. According to the RBA “there is a risk that any pick-up in consumption is slower than expected, resulting in continued subdued output growth and a sharper deterioration in the labour market than currently projected. Alternatively, labour market outcomes may prove stronger than expected, given the signal from a range of leading indicators.”

As such, Australia’s January labor force survey due Wednesday will help guide near-term RBA policy rate expectations. Interest rate futures imply 65bps of RBA cuts over the next 12 months that would see the policy rate bottom around 3.50%.

CANADA

USD/CAD is trading in a narrow range just under 1.4200 ahead of today’s Canada January CPI report (8:30am New York). Headline inflation is expected at 1.9% y/y vs. 1.8% in December while core inflation (average of trim and median CPI) is anticipated at 2.5% y/y vs. 2.45% in December. The GST/HST holiday (from Decembre 14, 2024 to February 15, 2025) will pull down inflation in January, particularly in categories such as food services and semi-durable goods. For reference, the Bank of Canada (BOC) projects headline and core CPI inflation to average 2.1% and 2.5% over Q1, respectively.

The BOC has room to ease further, though at a more gradual pace because inflation has been around 2% since August. Interest rate futures imply 50bps of BOC cuts over the next 12 months that should see the policy rate bottom at 2.50%. Bottom line: FED/BOC policy trend supports the uptrend in USD/CAD.