Markets Look Ahead to Labor and Inflation Data

MACRO FRAME

Markets enter the week balancing resilient growth signals against moderating inflation and a gradually cooling labor market. Equity volatility remains concentrated in technology shares amid ongoing debate over AI-driven disruption, though broader risk sentiment has yet to materially deteriorate. Attention now shifts to upcoming labor and inflation data, which are likely to play a central role in shaping near-term rate expectations.

STOCK INDEX FUTURES

Equity indexes are lower following a volatile week that saw the Dow move above 50,000, as investors look ahead to a heavy slate of earnings alongside key inflation and labor market data. Recent price action continues to reflect unease within technology shares as markets reassess the potential impact of AI-driven disruption on legacy software and enterprise businesses. Despite a late-week rebound, the Nasdaq still recorded its fourth consecutive weekly decline, underscoring ongoing sector-specific pressure rather than broad equity weakness.

Attention now turns to the delayed January jobs report due midweek and the consumer price index release scheduled for Friday. Both readings are likely to play a central role in shaping near-term interest rate expectations.

On the earnings front, results from Coca-Cola, McDonald’s, Cisco, and ON Semiconductor are among the week’s notable releases.

Recent developments in the AI space have raised concerns that many business models may be under threat from further advancements in the AI space, partly because there is little visibility about the eventual winners and losers. Still, broader AI adoption timelines remain uncertain, and several industry leaders have emphasized that replacement of core enterprise software is far from immediate. The dynamic has led to sharper intraday swings, with sentiment often shifting faster than underlying fundamentals.

Watch point: Continued “shoot-first, ask-questions-later” reactions to AI headlines could amplify short-term volatility. A more durable shift would likely require soured earnings or a meaningful tightening in financial conditions rather than isolated technology-sector moves.

CURRENCY FUTURES

US DOLLAR: The greenback is modestly lower ahead of several key data releases this week that are likely to shape views on economic momentum and, more importantly, the near-term monetary policy outlook. While a sustained dollar downturn would likely require clearer evidence of an economic downturn, downside risks remain should labor data disappoint alongside continued disinflation or softer retail activity.

Traders continue to reassess the timing of potential policy easing from the Federal Reserve later this year. Fed funds futures most recently implied roughly a 20% probability of a 25 bps cut at the March 18 meeting, underscoring that conviction around near-term easing remains limited. Money markets are favorable to a rate cut in June or July, with July’s meeting being fully priced in.

Watch point: An upside surprise in labor data would likely reinforce dollar support.

EURO: The euro is modestly higher in what is shaping up to be a relatively light week on the regional economic calendar, leaving near-term direction more sensitive to incoming US data. The primary domestic release will be the second estimate of GDP on Friday, while France publishes unemployment figures on Tuesday and Spain reports CPI later in the week.

The European Central Bank held rates as expected and described growth as resilient but uncertain, maintaining data-dependent guidance while continuing passive balance sheet runoff. The combination signals little urgency to move on rates but preserves policy flexibility. Inflation in the eurozone eased to 1.7% year-over-year in January from 2.0% in December, while core inflation slipped to 2.2%, its lowest level since October 2021, reinforcing the view that price pressures are gradually moderating to below the 2% target.

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: A break above $1.20 would materially raise expectations of verbal or policy intervention from ECB officials.

BRITISH POUND: Sterling is modestly higher against the dollar, after trading flat earlier in the session, though it remained softer versus the euro as markets weighed renewed political uncertainty in the UK. The resignation of senior government aides has added a layer of near-term headline risk, prompting some caution in sterling crosses despite limited immediate spillover into gilt yields.

Attention now turns to Thursday’s GDP release, which will be closely watched for signals on underlying growth momentum following the Bank of England’s narrow decision to hold rates steady last week. Any evidence of economic softening would likely reinforce expectations for an earlier rate cut, while firmer activity data could temper near-term easing bets.

The BoE delivered a narrower-than-expected 5–4 vote to hold rates steady, with the split decision signaling that several policymakers are increasingly comfortable with easing in the near term. This has reinforced expectations that policy could shift should incoming data continue to point to moderating inflation and softer labor conditions.

Recent indicators, including easing wage growth and a gradual loosening in the labor market, have contributed to disinflationary trends and reduced concerns over persistent price pressures. Updated BoE projections now anticipate CPI returning to target by Q3 2026, earlier than previous guidance, though some officials are likely to seek further confirmation that recent progress is sustained rather than temporary.

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 strengthened at the start of the week following a decisive election result for Prime Minister Takaichi’s coalition, which secured a supermajority in the Lower House and increases the likelihood of promised tax cuts and fiscal spending measures. The outcome provides greater legislative flexibility despite limited control in the upper chamber.

Notably, the long end of the Japanese government bond curve has shown little adverse reaction to the election result, a dynamic that has helped underpin the currency for now. Under a stronger LDP mandate, fiscal policy is likely to tilt more expansionary, including the possibility of targeted consumption tax reductions, which could add to inflationary pressures and, in turn, bring forward expectations for further Bank of Japan rate normalization.

Markets remain attentive to the prospect of intervention rhetoric, though near-term price action appears more sensitive to shifts in fiscal direction and monetary policy expectations than to currency management signals alone.

Watch point: A disorderly move beyond the 160 level would significantly raise intervention probabilities.

AUSTRALIAN DOLLAR: The Aussie is sharply higher as tightening expectations continue to lend support following the central bank’s rate hike last week. Australian household spending declined in December as consumers pulled back after year-end sales, though underlying volumes remained firm, a mix that points to some moderation in demand while still offering partial justification for the Reserve Bank of Australia’s recent move to contain inflation.

Attention now turns to upcoming catalysts, including the National Australia Bank’s business survey, where capacity-utilization trends will be closely watched after RBA officials highlighted supply constraints as a source of persistent price pressure. Markets will also monitor remarks from Deputy Governor Andrew Hauser midweek for confirmation of the bank’s commitment to returning inflation to the 2–3% target range.

Financial markets currently price roughly an 85% probability of another rate increase in May, while updated RBA staff projections show higher inflation forecasts for this year and next, even with a technical assumption of further tightening in 2026, leaving policy risks tilted modestly to the upside rather than fully neutral.

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 were mixed, with the front end edging lower while longer maturities firmed, pushing the 10-year yield toward 4.22%. Attention now turns to Wednesday’s labor data and Friday’s inflation release, both of which are likely to shape near-term expectations for Federal Reserve policy. Elsewhere, Bloomberg News reported Chinese regulators have advised financial institutions to curb their US Treasury exposure.

Recent indicators continue to point to resilient growth alongside moderating inflation and a cooling, but still stable, labor market. Markets remain centered on a July rate cut, with some probability assigned to a June move following last week’s JOLTS data. Fed funds futures also reflect expectations for an additional cut in December.

Consensus forecasts call for nonfarm payrolls to rise by roughly 70,000, though annual benchmark revisions and methodological changes in this report introduce a wider-than-usual range of potential outcomes.

JOLTS data revealed job openings fell to their lowest level since September 2020. Beneath the headline weakness, however, the layoffs rate was unchanged, reinforcing the view of a labor market that is cooling gradually rather than deteriorating. The quits rate, a gauge of labor mobility, has been stagnant, reflecting that workers do not feel comfortable enough to voluntarily leave their job as opportunities elsewhere are sparse.

Watch point: An upside labor surprise would likely steepen the curve further, while a combination of softer employment data and easing services prices would likely push yields lower.

The spread between the two- and 10-year yields is 72.90 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.481%.

 

 

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