January PCE at Near Two-Year High

MACRO FRAME

Renewed geopolitical tensions add another layer of uncertainty to global markets, while February’s nonfarm payrolls report keeps the case for a summer Fed rate cut intact but offers limited clarity on the extent of easing.

STOCK INDEX FUTURES

Equity indexes are higher as hopes rise for a partial reopening of the Strait of Hormuz. An Axios report said President Trump told other government leaders in a virtual meeting Wednesday that Iran is “about to surrender.” Those reported comments came before Iran’s new supreme leader, Mojtaba Khamenei vowed to continue fighting Thursday and said his country will keep the Strait of Hormuz closed. However, India is in active talks with Iran to allow at least 23 tankers through the strait with the first crossings expected by the weekend, The Wall Street Journal reported Friday, citing Indian officials. The conflict continues to weigh on sentiment, while domestically, concerns surrounding private credit markets and weakening demand for enterprise software add pressure to financial and software shares.

GDP data showed the economy grew at an annualized rate of 0.7% in Q4 2025, as consumer spending slowed more than expected (2% vs. 2.2%), while fixed investment also grew less than expected (1.6% vs. 2.6%). Exports declined at a faster pace of 3.3%, compared with the initial estimate of a 0.9% drop, marking the largest contraction since Q2 2023. Imports also fell (-1.1% vs. -1.3%). Meanwhile, government spending and investment contracted sharply (-5.8% vs -5.1%), subtracting 1.03 pp from overall growth, due to the government shutdown. For 2025, the US economy expanded by 2.1%, slightly below the initial estimate of 2.2% and down from 2.8% in 2024.

Consumer spending rose slightly more than expected in January, increasing 0.4% month-over-month, underscoring continued resilience in household demand. At the same time, underlying inflation remained firm, with the Fed’s preferred core PCE measure rising 0.4% on the month (Jan) and 3.1% year-over-year. The combination of steady consumption and sticky inflation reinforces expectations that the Fed will keep rates unchanged for the near term.

Watch point: Further escalation in the Middle East or a sustained move in oil above $90 could deepen the current risk-off tone across equities.

CURRENCY FUTURES

US DOLLAR: The USD Index rose 0.25% to 99.982, giving up earlier gains after weaker-than-expected GDP outweighed robust consumer spending and PCE inflation data. Rising energy prices continue to provide the greenback with strong tailwinds as upside inflation risks have limited market bets on the amount of monetary easing from the Fed this year. While recent data supports the case for Fed easing later in the year, the recent surge in oil prices has complicated the outlook for policy as upside risks to energy prices remain elevated and are likely to make their way into the broader economy if the rise in prices is sustained.

Near-term price action is likely to remain headline-driven; any signs of de-escalation could weigh on the dollar as safe-haven demand fades, while continued fighting and tighter energy markets would likely reinforce dollar strength through higher inflation expectations.

Watch point: Dollar direction is likely to remain driven by geopolitical headlines and energy markets in the near term.

EURO: The euro slipped 0.25% to $1.1482, to a seven-month low ahead of the European Central Bank’s meeting next week, where focus will center around on the rise in energy prices implications on monetary policy. Market pricing for a rate hike from the ECB is favorable to a hike in July and is fully priced in a hike at the September meeting, after initially expecting no change in policy for 2026 at the beginning of the year. Expectations for tightening in monetary policy have arisen from the conflict in Iran. However, uncertainty surrounding the conflict in Iran likely warrants no action from the ECB in the near-term, while a sustained and prolonged conflict raises upside risks to inflation and consequently would support the case for policy tightening.

Data out overnight revealed that prices in France rose 0.7% on the month in February, above forecasts for a 0.4% rise and a jump above January’s -0.4%. the rise in inflation is reflective of an overall moderation in energy prices and a rise in food inflation. Elsewhere, industrial production figures for the eurozone in January disappointed, with output falling 1.5% on the month, below forecasts for a rise of 0.6%, to mark the steepest monthly drop since April 2025. Drops in production in several key sectors were responsible for the poor reading, while on a country level, output decreased in Germany (-1.3%), Italy (-0.6%) and Spain (-0.5%), but rose in France (0.5%) and was unchanged in the Netherlands (0.0%).

Macro conditions remain favorable to the euro – apart from the conflict in the Middle East. Labor market conditions remain firm, with the unemployment rate falling to a record low of 6.1% in January, while inflation data has surprised to the upside, with headline inflation rising to 1.9% year-over-year and core inflation reaching 2.4%, both above forecasts.

Watch point: Euro direction will likely remain sensitive to global risk sentiment and dollar dynamics.

BRITISH POUND: Sterling is 0.55 % lower at $1.3268, heading for its fourth-straight of losses against the dollar as weak domestic data and concerns over the economic impact of higher energy prices weighed on the currency. GDP growth stagnated in January, missing forecasts for 0.2% growth.  The services sector recorded no growth, despite recent upbeat PMI. Industrial production declined by 0.1%, while manufacturing production rose 0.1%, both missing forecasts. Despite the disappointing GDP data, money markets are now pricing in a roughly 86% chance of a Bank of England rate hike by the end of 2026 due to rising inflation risks as a result of the conflict in Iran.

Watch point: Policy decisions from the Bank of England are now on hold with renewed geopolitical risks and a potential sustained rise in energy prices.

JAPANESE YEN: The yen is little changed against the dollar at 159.25, though remaining under pressure from surging energy prices. Earlier in the morning, Finance Minister Satsuki Katayama said Japan is ready to take the necessary steps against yen moves that impact people’s lives, adding that she was in close contact with US authorities on foreign exchange issues.

Japan’s Business Survey Index for large manufacturers fell to 3.8 in Q1 2026 from 4.7 in Q4 but remained in positive territory for a third consecutive quarter. The reading came in below market expectations of 5.5, as businesses grapple with the impact of the Middle East conflict and surging oil prices. That heightened concerns over renewed inflationary pressures and a resulting economic hit to business, per survey respondents. The survey, which tracks sentiment among major manufacturers, remains a key gauge of Japan’s industrial outlook in an economy where manufacturing plays a central role.

Money markets continue to price in a July rate hike from the BoJ, while also favorable to a hike in June as well.

Watch point: A move beyond the ¥160 range would likely intensify intervention rhetoric, while sustained energy-driven inflation could keep tightening expectations intact despite political pressure.

AUSTRALIAN DOLLAR: The Aussie slipped 0.3% to $0.7053, as flows to the dollar pressured the currency. Australia’s consumer inflation expectations rose to 5.2% in March from 5.0% in February, marking the highest level since July 2023, ahead of the Reserve Bank of Australia’s policy meeting next week. Markets currently imply around a 77% probability of a rate hike at the bank’s meeting, and are pricing another hike by August.

Stronger-than-expected growth data and inflation readings have supported a tightening bias from the RBA. Currently, the headline inflation sits at 3.8% and is expected to surpass 4% as petrol prices continue to climb, while core inflation remains elevated at 3.4%, well above the RBA’s 2–3% target band.

Watch point: Wage figures, capacity utilization, PMI readings, and other signals on economic momentum will dictate market sentiment over future timing expectations.

TREASURY FUTURES

Treasury yields are lower across the curve following a raft of data this morning. GDP data showed the economy grew at an annualized rate of 0.7% in Q4 2025 to mark 2.1% growth for the year, below the initial estimate of 2.2% and down from 2.8% in 2024. Meanwhile, PCE data showed the prices remained sticky in January. Money market pricing is no longer fully priced in for a rate cut this year from the Fed, though favorable to a cut in December. Markets are pricing in a total of 24 bps of easing by year end. Oil will likely continue to be the main driver for sentiment and yields, with the risk of a prolonged conflict likely to further shape Fed policy toward a halt in policy for the remainder of the year.

Watch point: A weak headline NFP figure supports the case for Fed easing this year, but questions as to how slow labor demand is cooling will likely determine further policy at the Fed, while a prolonged conflict in Iran is likely to limit the amount of easing in policy.

The spread between the two- and 10-year yields is 54.50 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.702%.

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