Markets Await Direction on PCE Data

MACRO FRAME

January’s CPI and employment data reinforced the case for an extended Federal Reserve pause, leaving attention to Friday’s PCE release, though odds of near-term easing out of the Fed are unlikely. Equity volatility continues to reflect rapid sentiment shifts rather than broad macro stress, as investors rotate between perceived winners and losers.

STOCK INDEX FUTURES

Equity indexes are lower, weighed down by growing US-Iran fears and negative reactions to Walmart’s earnings. Tensions between the US and Iran have escalated despite ongoing negotiations regarding Iran’s nuclear program, after the US said the use of military force remains on option. On the earnings front, shares of Walmart fell ahead of the bell after the company posted a modest earnings beat, but noted that headwinds are likely to impact growth in the year ahead.

On the data front, trade figures show the deficit widened to $70.3 billion in December from $53 billion in November, above forecasts of a $55.5 billion. In 2025, the country recorded a $901.5 billion deficit, slightly down from $903.5 billion in 2024. Meanwhile, the Philadelphia Fed Manufacturing Index rose to a five-month high with a reading of 16.3 in February, above expectations for a reading of 8.5. The positive figure was supported by moderately strong business activity, though businesses noted they expect price increases soon.

Stocks were higher on Wednesday, gaining momentum following data releases that showed better-than-expected figures for building permits, housing starts, and industrial production. The figures have spurred some optimism that AI-related capex spending and related infrastructure spending is starting to make its way into the physical economy. The tech sector found support on Wednesday following news that Meta would use millions of Nvidia’s chips in its new datacenter, while Amazon and Micron gained following news that a large asset manager had bought substantial positions in both companies.

Market focus will shift to the release of the Fed’s preferred inflation gauge, the PCE index for further signals on policy. January’s minutes revealed a divide among policymakers on how to proceed on policy, though most acknowledged that inflation remains too high to move on rates. The PCE figures should provide clearer insight into underlying price trends following last week’s data, though expectations for near-term policy easing remain limited.

Weekly initial jobless claims came in at 206,000 (vs. forecasts of 223,000), bringing the figure below its four-week moving average after a spike in claims the previous two weeks.

Watch point: Following January’s jobs and inflation prints, focus on sectoral job gains will gain greater scrutiny for signals on labor market health.

CURRENCY FUTURES

US DOLLAR: The USD Index maintained gains from Wednesday, hovering near two-week highs as resilient economic data and hawkish-leaning January FOMC minutes reinforced expectations of an extended Fed pause. Several policymakers at the Fed noted that they would like to see inflation fall further before considering any downward adjustments to policy, with some raising the possibility that a move upwards could be necessary to tame inflation. Markets are broadly centered on summer easing rather than an imminent move, with expectations of a cut come June or July, with July’s meeting being fully priced in.

Watch point: Following a hawkish receipt of January’s Fed meeting, Friday’s PCE data will be watched to fine tune policy timing expectations and offer further guidance for the dollar.

EURO: The euro slipped against the dollar, but stabilized following yesterday’s selloff, which was initially triggered by speculation that European Central Bank president Christine Lagarde would be leaving her post early. For the broader market, a leadership transition is unlikely to materially alter the monetary policy outlook and have minimal effect on sustained price direction in the euro.

Still, several senior ECB officials are set to depart in the coming years, a transition that could gradually influence monetary policy expectations. Vice President Luis de Guindos concludes his eight-year term in May, while Chief Economist Philip Lane’s mandate runs through May 2027. Earlier this month, Bank of France Governor François Villeroy de Galhau announced he would step down in June, more than a year before the end of his second term, adding to the evolving leadership landscape within the ECB.

Attention now turns to flash PMI and wage data due tomorrow, though the figures are unlikely to have an outsized impact on monetary policy expectations. Wages are expected to show continued moderation, while the PMI data is expected to deviate little from previous readings, a dynamic that aligns with the ECB’s neutral policy. Despite near-term softness, the euro continues to draw structural support from capital flows and relative equity performance.

Watch point: Sustained appreciation above $1.20 would materially raise expectations of verbal or policy intervention from ECB officials, though action from the bank is unlikely.

BRITISH POUND: The Sterling fell lower against the dollar, set for its fourth day of losses following economic data, which has bolstered expectations for a March rate cut from the Bank of England. January’s inflation data reinforced deflationary trends; prices rose 3.0% year-over-year in January, in line with expectations and down from 3.4% in December. Labor data earlier in the week pointed to gradually softening conditions, with the unemployment rate rising to 5.2% in Q4, its highest level outside the pandemic since 2015, while wage growth continued to cool. However, services inflation eased only marginally from 4.5% to 4.4%. The modest slowdown in services prices could complicate the case for an immediate rate cut for some policymakers at the BoE, though the drop in labor conditions likely has more of an outsized effect.

Markets currently price roughly a 80% probability of a 25 bps cut at the March meeting and roughly 50 bps of easing by year-end.

Watch point: A March rate cut is increasingly in consideration given disinflationary trends, though still-firm services inflation could present a hurdle to further easing.

JAPANESE YEN: The yen slipped against the dollar. The Trump administration announced three projects valued at $36 billion to be financed by Japan, the first of some $550 billion in projects Tokyo agreed to undertake in order to lower US tariffs. Currency markets are assessing whether the capital flows to fund the projects ultimately favor the dollar through increased dollar-denominated funding, or support the yen if structured in a way that limits direct FX outflows. Some participants have suggested Japan’s FX reserves could be used to back dollar loans, a mechanism that may help mitigate downward pressure on the currency.

While the weaker-than-expected GDP figures earlier in the week tempered some optimism, the softer growth print is unlikely to materially alter the Bank of Japan’s policy trajectory, expectations for a near-term rate hike remain subdued, with markets largely pricing the next move around mid-year.

Watch point: Improving sentiment toward Japan’s growth outlook should lend near-term support to the yen, though concerns over expanded fiscal spending may act as a headwind to further appreciation.

AUSTRALIAN DOLLAR: The Aussie is little changed after giving back overnight gains to a stronger dollar. Fresh labor data showed that unemployment remained at 4.1%, below expectations for a rise to 4.2%, while total employment in the country grew by 17,800. The strong data follows wage figures, which grew 3.4% year-over-year in Q4 2025. Markets responded by upping the probability of an increase in the Reserve Bank of Australia’s cash rate in May to 80% from 70%. A 25 bps increase is now fully priced in by August’s meeting.

Watch point: Evidence of sustained moderation in core inflation or a clearer slowdown in household demand would likely temper tightening expectations, while continued strength in price and spending data could keep policy bias firm.

INTEREST RATE MARKET FUTURES

Treasury yields are higher, sustaining support from Wednesday’s data and hawkish Fed meeting minutes, which supported the case for an extended pause from the Fed as markets position ahead of tomorrow’s PCE data. Several FOMC members noted that it may be necessary to hold policy steady for some time, with a few raising the possibility that a move upwards could be required if inflation continues to rest above target. A vast majority of participants also noted that the downside risks to employment had moderated, while the risk of more persistent inflation remains. The minutes supported expectations that an action out of the Fed is unlikely until the summer, where a rate cut in July remains priced in. Attention shifts to tomorrow’s PCE data, which is expected to show inflation continuing to rest at 2.8%.

Market-priced odds remain favorable to a cut July, with markets pricing 56 bps of total easing by year-end. The 10-year yield is 1.5 bps higher at 4.096%.

Watch point: With labor data pointing to continued stability and January’s core inflation rising 0.3% on the month, even as the year-over-year pace eased slightly, a summer rate cut remains the base case rather than an imminent move.

The spread between the two- and 10-year yields is 61.80 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.476%.

 

 

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