Manufacturing Growth Surprises Higher

STOCK INDEX FUTURES

The indexes are mixed, with the S&P and Nasdaq taking gains, while the Dow traded flat. ISM Manufacturing PMI data surprised to the upside, with the index rising to 52.6 in January from 47.9 the previous month to mark the fastest pace of growth in the manufacturing sector since 2022. The reading also marked the first time the sector experienced an expansion in growth in 12 months. New orders, production, employment, supplier deliveries, and inventories all expanded, though employment remained in contraction. Despite the positive reading, the increase in activity is attributed to cyclical factors regarding the start of the year. January is a reorder month, and the buying was likely an effort to get ahead of expected price increases.

The earnings calendar is busy. Palantir rose in premarket trading after a strong outlook reignited faith in AI demand, while focus on Nvidia and OpenAI remains as reports that an investment deal between the two is falling apart. Focus will shift to AMD’s earnings report after the bell, which could provide a clear insight into the AI trade ahead of results from Amazon and Alphabet (Google) later in the week.

Looking ahead, JOLTS Job Openings data out later in the morning, ISM Services PMI will be released on Wednesday, while Weekly Initial Claims on Thursday will round out the week on the data front. Friday’s Jobs report has been delayed due to the government shutdown.

CURRENCY FUTURES

US DOLLAR: The USD index slipped, after gaining over 1% the previous two sessions, as the nomination of Kevin Warsh to lead the Fed and solid ISM manufacturing PMI data slightly pushed back expectations for rate cuts in 2026. 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 bps from 51.5 bps to start the week. Looking ahead, JOLTS data will provide fresh clues on the potential timing of the next move from the Fed, while the monthly jobs report will be delayed because of the partial shutdown. Elsewhere, ISM services PMI data out on Wednesday will provide an update on economic momentum in the services sector.

EURO: The euro was little changed against the dollar following the release of French HICP (inflation) and Spanish unemployment figures. Harmonized inflation in France rose 0.4% year-over-year in France, below forecasts for 0.6% and December’s 0.7%, to mark the lowest reading since late 2020. The drop in inflation was mainly driven by a decline in manufactured goods prices. Meanwhile, the number of people registering as jobless in Spain rose by 30,392 from the previous month to 2.439 million in January 2026, beating market expectations of a 10,500 increase. Despite expectations that policy will be left on hold, the ECB meeting on Thursday will be the key focus for markets as traders focus on any signals about how the bank may respond to any rising risks or what direction the next move will be. A stronger euro and renewed geopolitical uncertainty present the risk of a dovish tilt from the ECB in their outlook. However, any change in policy from the ECB is not expected for some time.Hoa

Recent comments from several ECB officials has sparked concern that a stronger euro would necessitate a rate cut from the bank due to its deflationary pressures, but markets would likely need a clean break above the $1.20 level before getting excited about pricing in another rate cut. 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.

BRITISH POUND: The pound edged higher against the dollar ahead of a policy decision from the Bank of England, where expectations are that the bank will keep rates on hold following a tight 5-4 vote to cut rates in December. This time, policymakers are likely to be in agreement that rates should keep steady as inflation persists above the bank’s 2% target even though it has shown signs of easing. 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.

Strong domestic data in recent weeks has supported sterling and prompted markets to pare back expectations for near-term easing from the Bank of England. Recent PMI surveys pointed to the strongest expansion in UK business activity since April 2024. The PMIs also signaled firming inflationary pressures across both services and manufacturing, with output price inflation climbing to a nine-month high, alongside softer employment trends. As a result, the case for an imminent rate cut remains weak, and policymakers are likely to wait for further data. Markets currently price the first BoE rate cut to come in June or July, with July’s meeting being fully priced.

JAPANESE YEN: The yen continued its slide against the dollar with focus on the political front this week ahead of Sunday’s Lower House election. Expectations are that Prime Minister Takaichi’s ruling Liberal Democratic party will regain its majority, as the Prime Minister enjoys strong popularity in the country. This has worried markets regarding her policy proposals, which favor stimulus and tax breaks, as they reignite concerns over the country’s fiscal health. Elsewhere, focus remains on the prospect of intervention from government authorities as the yen’s weakness remains front and center in political and economic debates. 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%. Forecasts were expecting a rise to 2.2%. 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. Elsewhere, Japan’s unemployment rate held at 2.6% in December, where it has held for four-straight months. Japanese retail sales unexpectedly dropped 0.9% year-on-year in December. The reading reverses last month’s upwardly revised 1.1% growth to mark the first decline since August.

AUSTRALIAN DOLLAR: The Aussie bounced higher against the dollar after the Reserve Bank of Australia delivered its first rate increase in two years, lifting its cash rate by 25 bps to 3.85%. The central bank also warned about inflation, stoking bets that there would be at least one more increase this year. The RBA’s economics unit also 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 also shown that capacity utilization in the economy is stronger than expected, growth remains robust, unemployment is low, while PMI reading have pointed to strong private-sector activity.

INTEREST RATE MARKET FUTURES

Yields moved higher across the curve ahead of today’s JOLTS report. The January jobs report will not be released on Friday because of the partial government shutdown the Bureau of Labor Statistics said on Monday. Data collection is already finished, but the shutdown has nonetheless forced a delay in the schedule. The report will be rescheduled when funding resumes. Markets are friendly to a July cut and are fully priced in for a cut in September, after expectations shifted slightly to later in the year following the strong ISM manufacturing data.

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. Elsewhere, the Treasury is expected to leave not and bond auction sized unchanged this quarter when it announces its financing plans later in the week. This will reinforce its strategy of leaning into an increase in bills instead of long-dated debt as it manages a sizeable deficit.

Former Governor Kevin Warsh has been nominated to head the Fed.  Warsh previously served on the Fed’s board of governors from 2006 to 2011, notably serving during Washington’s rescue of Wall Street during the 2008 financial crisis. Warsh has offered criticism of the Fed in recent times, aligning himself with the views of President Trump, likely a factor as to why he got the nod from the President to succeed Powell. Recently, Warsh has indicated that the bank should be cutting rates faster. That desire is likely to face serious pushback from members at the FOMC who have been uneasy about cutting rates when inflation rests well above the target 2%, especially as the labor market has reflected signs of stabilization and avoided a rapid downturn in labor market conditions. Warsh is also likely to face pressure from the President to lower rates, despite a board that just voted 10-2 to keep rates steady.

The spread between the two- and 10-year yields is 70.50 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.586%.

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