The only bright spots from Friday’s data were the higher-than-expected rise in manufacturing payrolls and the slower-than-expected wages growth on an annual basis. The latter could help tame additional inflationary pressures from tariffs in the US along with the waning consumer confidence and spending, and help the Federal Reserve (Fed) support the US economy navigate through agitated waters. But inflation will be crucial to determine the extent of Fed support.

This week, the US CPI update will be closely watched. rising inflation expectations keep the Fed doves on the sidelines. Activity on Fed funds futures hints that the Fed won’t be able to cut the rates before its June meeting – if it cuts at all this year. Fed’s Powell said on Friday that the US economy continues to ‘be in a good place.’ But the recession bets are rising, and the latest forecasts point at a sharp drop in economic growth in Q1.

Anyway, this week, analysts expect the US to print a slight easing in February inflation figures on both monthly and annual basis. If that’s the case, if the CPI update points at a number in line with expectations, or ideally softer-than-expected, the Fed doves could step up their rate cut bets for earlier than the June meeting. The latter could further pressure the US 2-year yield that best captures the Fed expectations and further weigh on the US dollar. It could also give support to the major US indices which were hit by their worse selloff since the Fed’s tightening peaked in 2023. If inflation looks stronger-than-expected, on the other hand, the market mood could further sour and the selloff in equities and the dollar could continue.

The reverse Trump trade

The S&P500 dropped more than 3% last week, Nasdaq 100 lost nearly 3.30%, the Dow Jones declined 2.40%, the mid-caps lost almost 3.50% while the small cap Russell 2000 index dropped more than 4%. Note that this is the complete opposite of what was broadly expected to happen under Trump. The small and medium-sized stocks were supposed to flourish on America First policies and the dollar explode. Instead, the EURUSD has had its best week since more than a decade despite a 25bp rate cut from the European Central Bank (ECB) and the Stoxx 600 hit a fresh ATH, boosted by defense stocks. Cherry on top, the Eurozone’s Q4 growth surprised to the upside, and strengthened the view that growth in Europe could gather momentum as growth in the US will probably slow dramatically. As such, the rotation trade from the US to European stocks is set to continue. The EURUSD will probably test the 1.10 level sometime in the coming weeks. But in the short run, note that we see a hesitant start to the week, the RSI indicator confirms that the euro might have been purchased too fast and in a too short period of time and it could be time for correction. The price pullbacks could be interesting opportunities to build long euro positions on the stronger convergence for the US/European growth outlooks.

Carney is back!

We woke up to the new week on news that Mark Carney, the ex- President of the Bank of Canada (BoC) and the Bank of England (BoE), will replace Trudeau as the next Canadian PM! Carney plans to respond to the US tariff attack with retaliatory tariffs but also implement economic reforms that include tax reductions and the promotion of innovation with the goal of reducing dependence on the US. His tough tone could help the Liberals improve popularity. The currency markets didn’t give a significant reaction to the news, the Loonie is rather pressured by the falling oil prices this morning. In the medium run, we could see the Loonie gain some colour against a broadly paler greenback if Carney successfully counters the US trade attacks. But in the short-run, selling pressure persists, and the BoC is expected to trim rates by another 25bp when it meets this Wednesday.

Ugly early week selloff in China

The week starts on a sharp negative note for the Chinese stocks, as the latest inflation update showed that consumer prices in China fell the most in more than a year. The Hang  Seng index extends losses to more than 2% at the time of writing. But note that the index rebounded close to 30% since the DeepSeek news broke in January and the low valuations of the Chinese technology stocks along with promising AI news and the ample government support will probably bring the buyers in at dips.

Overall, the week is expected to bring more tariffs the Chinese tariffs on US agricultural and some Canadian products will start today, while the US steel and aluminium tariffs will be live from Wednesday.