Anticipation builds for US CPI

In focus today

Today's most important data release will be the US February CPI. We think headline CPI grew by +0.2% m/m SA and 2.8% y/y (Jan. +0.5% m/m SA and 3.0% y/y) and core CPI by +0.3% m/m SA and 3.2% y/y (Jan +0.4% m/m SA and 3.3% y/y). The previous January release surprised sharply to the topside and markets will closely follow if this was driven by one-off annual price increases at the beginning of the year, or if it was a sign of more persistent inflation pressures. 

In Canada, the BoC is set to announce its policy rate decision, with markets and consensus favouring a 25bp rate cut. We also expect a 25bp rate rut, bringing the policy rate to 2.75%, as we anticipate the BoC will ensure the Canadian economy is well-protected against the impact of US tariffs.

Economic and market news

What happened overnight  

In Japan, many of the big Japanese corporates, such as Toyota, the largest carmaker in the world, have decided to fully meet their labour unions' wage demands, which on average amounted to 6.1% this year. This follows what is expected to be very strong financial results for 2024. The big question is now whether the smaller companies, which employs most of the Japanese, also find room to meet wage demands. Strong wage growth is key for supporting domestic demand in Japan and a prerequisite for further rate hikes from the BoJ. 

In geopolitics, delegations from Ukraine and the United States concluded discussions, with Ukraine agreeing to a 30-day US-brokered ceasefire. This led the US to agree to reinstate military assistance and intelligence sharing with Ukraine. The proposed ceasefire still requires Russia's acceptance. Both countries stated they had agreed to finalise a comprehensive agreement to develop Ukraine's critical mineral resources as soon as possible, following uncertainty after Zelenskyy's meeting at the White House.

In the US, 25% tariffs on steel and aluminium imports came into effect as exemptions concluded, despite increasing worries about the risk of a domestic recession. Yesterday, Trump initially threatened to increase tariffs to 50% on all steel and aluminium imports from Canada but later retracted after Ontario agreed to suspend the 25% surcharge. This caused fluctuations in financial markets, which were already unsettled by Trump's extensive tariff measures.

What happened yesterday  

In the US, the JOLTs report showed that job openings remained relatively stable at 7.74m in January (cons: 7.63m, prior: 7.508m). Involuntary layoffs decreased, potentially boosting consumer sentiment despite prevailing uncertainties. Meanwhile, the NFIB index, measuring small business sentiment, weakened for a third straight month, marking its lowest reading since before the November election. This drop reflects owners' concerns over tariff and spending cut plans, showcasing increased uncertainty among business owners.  

Equities: The sell-off did not make Trump cave in, frankly the opposite as Trump doubled up on steel import tariffs at the US opening bell only to retreat at closing. As a result, the rebound in futures was absent and replaced by another day of declines. S&P 500 fell -0.8% - which means we are flirting with correction levels - Dow -1.1% while Nasdaq shaved off only -0.2% and Russell 2000 even rose 0.2%. Sector performance was a more buoyant reading than the headline though. Cyclicals outperformed defensives, although both were lower, with MAG 7 the notable outperformers, while equal-weighted S&P 500 was down more. European equities sold off heavily, Stoxx 500 -1.7%, but interestingly this was also a reflection of defensives selling off. Health care and consumer staples were actually the worst performing sectors, although cyclicals were weak as well. Futures are significantly higher in Europe this morning, as a potential ceasefire could be imminent in Ukraine. This could de-risk European equities and warrant more foreign equity inflows. US futures also a notch higher this morning.

FI & FX: Yesterday's FX session was generally characterized by an outperformance of European FX with the EUR, CEEs, SEK and NOK all being the outperformers while the JPY at the other end of the spectrum saw a slight setback. In FI-space the sell-off continued in the US and European markets as government bond yields rose and the curves steepened from the long end. 10Y German government bond yields rose some 6bp, while the 2Y segment declined 2bp. Furthermore, the Bund ASW-spread widened towards -13bp. In the US 10Y yields also rose 6bp like the move in the 2Y segment. Furthermore, there has been a rise in interest rate volatility, but we are not seeing much flight-to-quality as the 10Y BTPS-Bund spread remains fairly stable.