AI debate cools as markets rebound – Fed stays cautious on rate cuts

Markets

AI and tariff related uncertainty moved a bit to the back ground yesterday as drivers for daily trading/sentiment. (US) equities recovered (Nasdaq +1.04%) as investors pondered how to position in the wake of the recent debate on the potential disruptive effects of AI on (separate) economic sectors. For now its far less easy to draw any firm conclusions of the AI-debate for central bank policy and rates’ markets. Fed governor Lisa Cook yesterday elaborated on the topic, but her main message is that it might take plenty of time for the Fed to have a clear view on how AI will affect its policy and what it means for the neutral rate. A bit remarkable, Lisa Cook indicated that it might not be appropriate/evident for the Fed to counter an AI-driven rise in unemployment with a stimulative demand-side policy. Whatever, for now, most Fed members (Goolsbee, Collins, Barkin,…) are holding to the line that more confirmation on goods disinflation is needed for the Fed to cut rates further. US yields held relatively tight ranges, changing between +2.3 bps (2-y) and -2 bps (30-y). US consumer confidence (Conference Board) was better than expected both on the assessment for current conditions and expectations, but had hardly any impact on trading. German yields changed less than 1 bp across the curve. The dollar gained marginally, but also mostly held tight ranges (DXY close 97,84; EUR/USD close 1.17). The yen underperformed on headlines that PM Takaichi in a meeting with the BOJ governor Ueda showed concerns on a more restrictive BOJ policy. In a hearing before the UK Parliament’s Treasury Select Committee, BoE governor Bailey confirmed that he expects inflation to drop to 2% in Spring, but didn’t formally engage on March rate cut yet (“It’s a genuinely open question”), amongst others as services inflation didn’t decline as much as hoped. The BoE governor also elaborated on higher productivity causing some dishoarding of labour in the economy. BoE economist Phil still warned on upside underlying inflation risks. Even so, UK gilts’ performance didn’t profoundly deviated from Bunds. UK Money markets still see about 75% chance of a March 25 bps rate cut. Sterling gained marginally on the day (EUR/GBP close 0.873).

Overnight, in his State of the Union address, US president Trump basically defended his policy, including his cost of living approach, but didn’t flag much new policy initiatives. Asian (equity) markets mostly start the day in risk-on modus, joining yesterday’s rebound in the US. US yields gain a few bps. The dollar eases modestly. The yen again underperforms (see below). The yuan extends its uptrend (USD/CNY 6.868). The eco calendar in the US and EMU is again very thin. After the close of US markets Nvidia will publish results. Markets also will continue to keep an eye on the results of software companies as the debate on the impact of AI on other sectors develops. 

News and views

Australian inflation slowed from 1% M/M to +0.4% M/M in January, but this helped stabilizing the annual number at 3.8% Y/Y. Consensus was looking for a slight moderation to 3.7%. The largest contributor to annual inflation was housing (6.8% Y/Y from 5.5% in December). Electricity prices (+32.2% Y/Y from 21.5% Y/Y) remain influenced by government rebate programmes. Food inflation remains high at 3.9% Y/Y. A key measure of underlying inflation (for the Reserve Bank of Australia), the trimmed mean, accelerated from 0.2% M/M to 0.3% M/M and from 3.3% Y/Y to 3.4% Y/Y. Today’s inflation numbers bolster bets that the central bank could already follow up on its inaugural 25 bps rate hike (earlier this month) by the time of the May policy meeting (92%). The market implied probability of back-to-back action in March is slim (16%). AUD/USD profits this morning, moving back above 0.71 and targeting the YtD high at 0.7147.

Japanese PM Takaichi nominated two candidates to fill seats opening up on the Bank of Japan’s policy board. Both Toichiro Asada and Ayano Sato are considered to share the PM’s reflationist views. Yesterday the Japanese yen already lost ground after the PM in a meeting with BoJ governor Ueda voiced opposition against more rate hikes. The two nominees, if approved by both houses of Japanese parliament, are expected to tilt the balance on the BoJ board to the dovish side. The Japanese yield curve bear steepens this morning with the long end rising by up to 7.6 bps higher (driven by inflation expectations). USD/JPY initially spiked from 155.50 to 156, but the move petered out.

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