Markets Position after Macro Data and Earnings

MACRO FRAME

Markets continue to balance resilient growth signals against moderating inflation, with the latest jobs report reinforcing the view of a stable labor market. Equity volatility remains concentrated in technology shares amid ongoing debate over AI-driven disruption, while broader risk sentiment has yet to materially weaken. With labor data now absorbed, attention turns more squarely to upcoming inflation figures and earnings results as the primary drivers of near-term rate expectations.

STOCK INDEX FUTURES

Equity indexes are higher as investors assess the latest round of earnings and position ahead of Friday’s CPI report. Cisco Systems shares fell more than 7% after issuing a weaker-than-expected profit outlook, overshadowing stronger sales tied to increased AI-related infrastructure demand. The company cited margin pressure from elevated memory costs amid ongoing datacenter investment, highlighting how supply constraints are beginning to weigh on profitability even as revenue growth improves. The reaction underscores broader investor scrutiny around earnings quality and which business models may be most exposed to AI-driven disruption, particularly within enterprise software and networking segments.

As fourth-quarter earnings season concludes, evidence of a broader market rotation has become increasingly apparent. Elevated concentration, with the top ten US stocks comprising roughly 39% of the S&P 500 compared with about 26% at the peak of the dot-com era, left equities vulnerable to a shift in leadership. Recent price action suggests a widening of participation rather than outright risk aversion.

Last week saw notable inflows into more defensively positioned or “AI-insulated” sectors, including utilities, consumer staples, mining, construction, and telecommunications. The rotation from high-growth technology leadership toward traditional value-oriented industries echoes the early-2000s growth-to-value transition, though current fundamentals remain more balanced.

Weekly initial jobless claims came in above forecasts of 222,000 at 227,000, marking the fourth week in a row that weekly claims have came in above the four-week moving average.

Watch point: Following January’s jobs print, focus on sectoral job gains will gain greater scrutiny.

CURRENCY FUTURES

US DOLLAR: The greenback is little changed, holding near 96.8 following weekly initial claims data as traders position themselves ahead of Friday’s CPI figures. The dollar experienced heightened volatility following January’s NFP report, which reinforced the narrative of a stable labor market. Wage growth held at 3.7% year-over-year, slightly above expectations and unchanged from December, providing underlying support, while steep revisions to 2025 data limited gains. With inflation data now in focus for tomorrow, near-term direction is likely to hinge on the composition of price pressures in the economy.

Watch point: A hotter-than-expected core CPI reading would likely reinforce dollar support, while softer inflation data could revive easing expectations and pressure the index lower.

EURO: The euro is modestly higher against the dollar as traders look ahead to upcoming US inflation data amid a relatively light regional economic calendar. Attention will also turn to the second estimate of GDP due tomorrow, which should provide additional clarity on underlying growth momentum.

The single currency has drawn support from indications that the European Central Bank remains broadly comfortable with the euro’s recent appreciation, alongside reports that Bank of France Governor François Villeroy de Galhau is expected to step down in June, a development viewed as marginally hawkish given his typically dovish policy stance.

Broadly, the euro continues to draw structural support from capital flows and relative equity performance despite a neutral policy backdrop. Markets appear comfortable with the ECB maintaining a patient stance, though sustained appreciation above the $1.20 level would likely prompt more dovish rhetoric from policymakers.

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: Sterling is higher against the dollar despite data that showed the UK economy recorded marginal growth in 2025. The economy expanded by 1.3% in 2025, a modest improvement from 1.1% growth in 2024, with all major sectors contributing to the increase. Despite the uptick, the result fell short of the government’s 1.5% projection and remained subdued relative to historical averages. Activity faced several headwinds during the year, including higher tax burdens, trade-related uncertainty, and disruption from a significant cyberattack on a major domestic manufacturer.

Other data showed that industrial production unexpectedly declined 0.9% month-on-month in December, missing expectations for a flat reading and reversing an upwardly revised 1.3% gain in November, the first contraction since September. The pullback was led by softer manufacturing output, particularly in pharmaceuticals, food products, and chemicals, pointing to renewed weakness in goods-producing sectors despite prior momentum.

Paired with the Bank of England’s narrower-than-expected vote to hold rates steady last week, the prospect of a March rate cut has moved more firmly into consideration. Several policymakers have signaled growing comfort with near-term easing, and alongside softer wage growth, a gradual loosening in the labor market, and updated BoE projections showing CPI returning to target by Q3 2026, concerns over persistent price pressures have eased, though some officials are likely to seek further confirmation that recent progress is sustained. Markets are pricing a 64% chance of a 25 bps cut at the March meeting.

Watch point: Expectations for near-term easing are likely to build if upcoming data remain accommodative, leaving sterling vulnerable to further downside against the dollar should rate-cut timing shift toward March or April.

JAPANESE YEN: The yen edged higher against the dollar and is on track for its strongest weekly gain in a year, suggesting a shift in market sentiment may be taking hold. The yen advanced on Wednesday despite higher US yields as the currency gains support from repositioning by investors and a series of economic data releases, including a jump in machine tool orders and a non-seasonally adjusted current account surplus of 7.288 trillion. Sustained yen strength is attributed to the election result for Prime Minister Takaichi’s coalition, which secured a supermajority in the Lower House.

Positive sentiment that Japanese markets could be positioned for a cyclical breakout have also been favorable to yen strength. Stocks have outperformed bonds and expansionary fiscal policy paired with industrial policy reflects a broader push to bolster Japan’s economic growth. Still, Takaichi’s fiscal desires are likely to offer strong headwinds to any sustained strengthening in the yen.

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 higher as global equities find support and widening yield differentials attract inflows. Ten-year Australian government bonds now yield roughly 75 bps more than comparable US Treasurys, compared with a 60 bps disadvantage this time last year, the widest positive spread since 2016, when the currency last traded near $0.75. Three-year yields are also more than 200 bps above German bunds, the largest gap since late 2022, reflecting a rapid repricing over recent months.

The widening in spreads has been driven largely by the Reserve Bank of Australia’s hawkish shift amid persistent inflation pressures, reinforcing the currency’s relative carry appeal. The Aussie hit a three-year high at $0.7143 on Wednesday amid a rise in metals prices and hawkish commentary from a central bank official. Reserve Bank of Australia Deputy Governor Andrew Hauser reiterated that inflation remains too high and that policymakers are committed to bringing it lower. Markets currently imply roughly a 70% probability of another rate increase to 4.10% at the May meeting, with expectations reinforced by recent inflation data.

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 slipped lower following weekly initial claims data, which has pointed to an uptick in jobless claims over the last four weeks. Markets remain centered on a July rate cut, with some probability assigned to a June move. Money markets are pricing around 53.8 bps of total easing by year end.

Treasury yields moved higher following January’s NFP report, which pointed to continued labor market resilience and reinforced the Fed’s wait-and-see stance. Job gains were concentrated in health care (+82k) and social assistance (+42k), sectors that have driven much of recent hiring and are less sensitive to economic cycles. Construction and manufacturing also added workers, while transportation, financial services, information, and government payrolls declined, underscoring uneven breadth beneath the headline strength.

Yields came off their intraday highs as traders digested substantial downward revisions to 2025 employment data, which showed the economy added roughly 181,000 jobs for the year, an average of about 15,000 per month, marking the weakest annual pace of job growth in over two decades outside of recessionary periods. For comparison, average monthly payroll gains from 2010–2019 stood near 183,000, exceeding all of last year’s total increase.

Despite the revisions, January’s data supported the case for hawks on the FOMC. The unemployment rate edged down to 4.3%, even as the labor force as the labor force participation rate increased from 62.4% to 62.5%, reinforcing the narrative of a low-hire/low-fire environment. Broader labor supply dynamics remain a point of uncertainty, particularly as administration policies immigration are likely to weigh on net workforce growth in 2025. With policy rate seemingly viewed as neutral, an extended pause into the summer remains the base case from the Fed.

Attention now turns to Friday’s inflation figures for further signals on the timing of Fed policy. January’s inflation reports have historically shown a mild upside bias, as the start of the year is a common period for price resets across goods and services. While seasonal adjustment factors are designed to account for this pattern, seasonally adjusted January readings have tended to run slightly firmer than other months, suggesting some residual seasonality may remain.

Services inflation could carry added weight in this release, as businesses in the sector often implement price increases early in the year. Additional upside risk stems from firms passing through tariff-related cost pressures, particularly where prior price adjustments were more gradual.

Recent Fed Commentary:

• Kansas City Fed President Jeff Schmid (nonvoter) said January’s strong job gains eased worries about labor‑market weakness and argued the Fed should keep policy tight.
• Cleveland Fed President Beth Hammack (voter) said the bank faces no urgency to lower rates; “we could be on hold for quite some time.”
• Dallas Fed President Lorie Logan (voter) said she was “cautiously optimistic” that the current policy setting will get inflation back to target while keeping the labor market stable. Logan said if data pans out as she hopes, there will be no need to lower rates further. Logan noted she was more worried about inflation remaining high but said she would support rate cuts if the labor market cools materially.

Watch point: With the current data pointing to a stable labor market, Friday’s inflation data will be watched for signs of where inflation is coming from, rather than a headline figure as a whole.

The spread between the two- and 10-year yields is 65.80 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.506%.

 

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