AI Advancements Weigh on Tech

STOCK INDEX FUTURES

The indexes are mixed as earnings flood in following a selloff in the tech sector that was fueled by worries that advances in AI could hurt software services providers. Data analytics, professional services, and software stocks fell globally after Anthropic revealed a new AI tool that would  automate tasks across legal, sales, marketing, and data analysis. The selloff largely reflects the current environment where gains in efficiency from AI adoption are still muddy and further cloud company valuations and business prospects. AI adoption and its efficiency gains remain to be seen in hard data, a dynamic that is likely to contribute to sector-specific volatility in the equities.

The corporate spotlight will be on Alphabet after the bell, after shares of Advanced Micro Devices sank around 9% on a weak sales outlook. Elsewhere, Chipotle’s stock slipped after the chain reported another quarter of declining customer traffic. On the upside, Supermicro shares popped after the server maker upped its annual sales forecast. ISM Services PMI will be released later in the morning and should provide an update on underlying economic trends in the services sector, after the manufacturing reading surprised to the upside.

Friday’s Jobs report has been delayed due to the government shutdown along with December’s JOLTS report, which was scheduled to be released on Tuesday.

CURRENCY FUTURES

US DOLLAR: The USD index is little changed. ADP private payroll figures, which did little to move the market, showed the private sector added 22,000 jobs in January, below forecasts of 46,000. The dollar felt pressure on Tuesday amid a broad risk-off rally in the equities, while Treasury yields stayed range bound in the absence of data. Dollar direction will be driven by ISM’s Services PMI data out later in the morning for signals on economic momentum and inflationary trends; the prices gauge has slowly come down from a local high of 70 in October. The dollar is down 0.8% YTD. Markets are priced for a cut in July or September, with September’s meeting being fully priced in. Market odds of total easing by year end have slipped to 47.8 bps from 51.5 bps at the start of the week.

EURO: The euro is little changed ahead of the European Central Bank’s policy meeting due on Thursday. Investors will be keen on any comments regarding how the euro’s recent strength has impacted the monetary policy outlook. Policymakers at the ECB have flagged concerns that the euro’s quick appreciation could drag inflation further below target, even as official forecast already have inflation running just under 2% for most of 2026. For policymakers at the ECB, any sustained rise above $1.20 is likely to drive serious policy discussions regarding a drop in rates to keep inflation near target. President Christine Lagarde is expected to reiterate that policy remains in a good place, with markets expecting no change in policy through 2026. Reduced policy uncertainty, resilient economic growth, and strong equity market performance have provided structural support for the euro heading into 2026. In recent months, robust euro area equity returns have prompted asset managers to rotate out of the dollar, reinforcing euro-positive capital flows.

On the data front, inflation the eurozone eased to 1.7% year-over-year in January, a drop from 2.0% in December and in line with forecasts. A stronger euro and falls in services and energy prices led prices to fall 0.5% during the month. Core inflation fell to its lowest level since October 2021 at 2.2%. Among major eurozone economies, prices eased in France (0.4% vs. 0.7%), Spain (2.5% vs. 3.0%), and Italy (1.0% vs. 1.2%), but rose in Germany (2.1% vs. 2.0%). Elsewhere, eurozone composite PMI figures were revised slightly lower from 51.5 to 51.3. However, the reading marks 13 straight months of expansion in private sector activity, led by an increase in services activity and a rebound in manufacturing.

BRITISH POUND: The pound is little changed against the dollar as traders await a policy decision from the Bank of England, where expectations are that the bank will keep rates on hold. Strong domestic data in recent weeks and elevated price pressures have led markets to scale back expectations of the amount of easing the UK could see in 2026 following a tight 5-4 vote to cut rates in December. Composite PMI figures were revised slightly lower but still reflected the sharpest past of private sector growth in 21 months, supported by both the services and manufacturing sectors. On a sour note, the PMI data also revealed rising labor costs and a drop in private sector employment though for policymakers at the BoE, a fall in employment is likely to help alleviate price pressures. Rates are likely to fall in the coming months as a cooling labor market and easing wage growth alleviate underlying prices pressures in the economy. Still, markets will pay attention to the composition of Thursday’s vote for signals on the pace of interest rate cuts that could come. The bank will also update its forecasts for growth and inflation. Markets currently price the first BoE rate cut to come in June or July, with July’s meeting being fully priced but see no further cuts by year-end.

JAPANESE YEN: The yen is sharply lower against the dollar, heading for its fourth straight day of losses ahead of elections this weekend that are likely to further support Prime Minister Takaichi’s plans of more fiscal stimulus and tax cuts. The yen has fallen more than 2% since January 30, where it gained support from speculation that a government intervention was imminent after a rate check from the NY Federal Reserve. A strong result for Takaichi’s ruling coalition this weekend is likely to continue to pressure the yen and could stoke talk about a possible intervention if the currency breaks the 160 level.

A summary of opinions from the Bank of Japan’s January meeting showed that policymakers debated mounting price pressures from a weak yen, with some warning of the risk of being “behind the curve” in dealing with too-high inflation. Meanwhile, on Sunday night, Takaichi talked up the benefits of a weaker yen in a campaign speech, adopting a tone at odds with her finance ministry which has refused to rule out any options to counter excessive foreign exchange volatility. Takaichi later softened her stance saying that she did not have a preference on the yen’s direction. On the data front, figures from last week showed that Tokyo core CPI figures came in below forecasts, with prices growing at a yearly rate of 2.0%. The reading marks the lowest since October 2024 and in line with the Bank of Japan’s 2% target, reinforcing expectations that the central bank will remain cautious on further rate hikes.

AUSTRALIAN DOLLAR: The Aussie is higher against the dollar as expectations of further policy-tightening in the economy lend support to the currency following the Reserve Bank of Australia’s decision to hike rates. The RBA delivered its first rate increase in two years, lifting its cash rate by 25 bps to 3.85%. The central bank also noted that it was unsure if current policy is restrictive, signaling that another rate hike could come in 2026. The RBA’s economics unit  raised its forecasts for inflation this year and next, despite building in a technical assumption of 60 basis points of tightening in 2026, suggesting policy risks were to the upside. Australia’s annual inflation climbed to 3.8% in December, with the trimmed mean CPI inching up to 3.3% year-over-year from the prior 3.2%. Recent figures that have reflected that financial conditions might not be restrictive at all. Robust consumer spending, record-high housing prices and easy credit availability for households and businesses have added to inflationary pressures in the economy and signal that demand-driven inflation could be growing quicker than anticipated.

INTEREST RATE MARKET FUTURES

Yields edged higher across the curve ahead of ISM’s services PMI data due later in the morning, where a strong reading could temper expectations of policy easing. Yields were rangebound on Tuesday in the absence of official data, while this mornings ADP private payroll figures did little move markets. The partial government shutdown ended on Tuesday, meaning that this weeks reports will be released in the near future, the timing of which, remains to be announced. The Treasury also announced its quarterly refunding plans and maintained a larger portion of borrowing in short term bills instead of longer-maturity bonds in an attempt to ease the debt burden of elevated interest rates.

The JOLTS report is also subject to a delayed release. Attention in the JOLTS report should be focused on the layoff and quits rates for signals on labor market health. In recent weeks, weekly initial jobless claims data has shown no signs of an uptick in layoff activity, likely setting the background that layoffs in the economy could remain low despite recent news of mass-corporate layoffs.

The spread between the two- and 10-year yields is 70.40 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.582%.

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