Housing Starts Jump

MACRO FRAME

January’s CPI and employment data reinforced the case for an extended Federal Reserve pause, leaving attention to Friday’s PCE release, though odds of near-term easing out of the Fed are unlikely. Equity volatility continues to reflect rapid sentiment shifts rather than broad macro stress, as investors rotate between perceived winners and losers.

STOCK INDEX FUTURES

Equity indexes were higher overnight and gained momentum following better-than-expected durable goods orders and housing starts data. New orders for US-manufactured durable goods decreased by 1.4% in December, following an upwardly revised 5.4% jump in November. The decline was smaller than the forecasted 2% decline and was largely driven by a fall in transportation equipment.

Housing starts rose 6.2% month-over-month to a seasonally adjusted annualized rate of 1.404 million in December, up from 1.322 million in November and well above forecasts of 1.33 million. The increase marked the second straight monthly gain, lifting starts to their highest level since July and further rebounding from October’s 15-month low.

Stocks traded mostly flat Tuesday, paring early losses as weakness in technology and software shares was offset by strength in financials following fresh Fedspeak. Software and cloud names remained under pressure on AI-disruption concerns, while semiconductor performance was mixed. Financials outperformed after Fed Vice Chair Michael Barr signaled rates may remain steady “for some time.”

Broader market focus will shift to the release of the Fed’s meeting minutes from its latest meeting, out later today. The minutes could shine light on any policy signals ahead of Friday’s PCE inflation data. The PCE figures should provide clearer insight into underlying price trends following last week’s data, though expectations for near-term policy easing remain limited.

Watch point: Following January’s jobs and inflation prints, focus on sectoral job gains will gain greater scrutiny for signals on labor market health.

CURRENCY FUTURES

US DOLLAR: The USD Index is higher as domestic data provided support and as investors reposition ahead of FOMC meeting minutes out later today and PCE inflation data on Friday. Meanwhile, comments from Fed Vice Chair Barr were supportive of the dollar on Tuesday. Recent data have delivered mixed signals, combining firm job growth with a cooling headline inflation trend, though pockets of price stickiness persist across select sectors.

The January FOMC minutes should provide incremental insight into policymakers’ thinking, though a clearer policy signal is more likely to emerge in March alongside updated dot-plot projections. Until then, incoming economic data are expected to remain the primary driver of rate expectations and near-term dollar direction. Markets are broadly centered on summer easing rather than an imminent move, with expectations of a cut come June or July, with July’s meeting being fully priced in.

Watch point: This week’s PCE data and the tone of the FOMC minutes will determine whether the dollar can build momentum or remain range-bound.

EURO: The euro slipped against the dollar following reports that European Central Bank President Christine Lagarde may leave her role ahead of schedule, with the Financial Times indicating a departure before October 2027. In the near term, an early exit could introduce some volatility and modest shifts in euro-area yield curves; however, given the broader macroeconomic backdrop and data-dependent policy framework, a leadership transition is unlikely to materially alter the monetary policy outlook.

Attention now turns to flash PMI releases for France, Germany, and the broader euro area later in the week, which should provide updated signals on economic activity, though little deviation from recent trends is anticipated. Elsewhere, wage data due Friday are expected to show continued moderation, a dynamic that aligns with the European Central Bank’s neutral policy stance and supports progress toward its 2% inflation target. Despite near-term softness, the euro continues to draw structural support from capital flows and relative equity performance.

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: The Sterling is little changed against the dollar following the release of January’s inflation data, which reinforced deflationary trends and strengthened the case for an earlier-than-expected interest rate cut from the Bank of England.

Prices rose 3.0% year-over-year in January, in line with expectations and down from 3.4% in December, while services inflation eased only marginally from 4.5% to 4.4%. Sterling held relatively firm following the release, though the modest slowdown in services prices could complicate the case for an immediate rate cut at the Bank of England’s March meeting for some policymakers.

Labor data earlier in the week pointed to gradually softening conditions, with the unemployment rate rising to 5.2% in Q4, its highest level outside the pandemic since 2015, while wage growth continued to cool. Average earnings excluding bonuses slowed to 4.2% year-over-year from 4.4%, and private-sector pay growth eased to 3.4%, reinforcing signs of a loosening labor market will aid in the broader deflationary outlook.

Markets currently price roughly a 85% probability of a 25 bps cut at the March meeting and roughly 50 bps of easing by year-end.

Watch point: A March rate cut is increasingly in consideration given disinflationary trends, though still-firm services inflation could present a hurdle to further easing.

JAPANESE YEN: The yen weakened against the dollar despite strong trade overnight. Exports surged 16.8% year-over-year in January, the fastest pace in over three years, supported by robust demand for AI-related chips. Imports fell 2.5%, resulting in Japan’s trade deficit narrowing sharply. Elsewhere, the Trump administration announced three projects valued at $36 billion to be financed by Japan, the first of some $550 billion in projects Tokyo agreed to undertake in order to lower US tariffs.

While the weaker-than-expected GDP figures earlier in the week tempered some optimism, the softer growth print is unlikely to materially alter the Bank of Japan’s policy trajectory, expectations for a near-term rate hike remain subdued, with markets largely pricing the next move around mid-year.

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 lower. Data showed wages grew 3.4% year-over-year in Q4 2025, a step above the previous quarter’s downwardly revised 3.3% and in line with forecasts. Investors continue to digest meeting minutes from the Reserve Bank of Australia’s latest meeting, where the bank raised rates. The minutes showed the board was uncertain about whether further hikes would be needed. However, policymakers did note that inflation has largely been above target for the past three years, leaving the door open to further hikes. Markets currently imply roughly a 83% probability of no changed in rates at the March  meeting, with expectations for another hike in May or June.

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 are higher, with yields seeing a slight bounce following the release of housing starts and durable goods order data. Focus will center around the Fed’s meeting minutes out later today for signals on the policy path after last week’s mixed data kept policy expectations largely unchanged. Yesterday, Fed Vice Chair Barr offered hawkish remarks, saying that he wants to see evidence that goods price inflation is sustainably retreating before considering an additional reduction in policy.

January’s CPI print reinforced a broader disinflation trend, but services inflation remained sticky, while core price pressure remained stubborn, climbing 0.3% month-over-month in January, a modest pickup from December’s 0.2% pace. The increase was driven largely by services categories, a sector which FOMC members have noted as tricky for bringing inflation down and will likely be noted at upcoming policy meetings. Paired with resilient labor data, the case for a patient Fed stance is expected.

Market-priced odds for any near-term easing remain subdued, with pricing favorable to a cut in June or July, with July’s meeting being fully priced in. Markets are currently pricing 59 bps of total easing by year-end. The 10-year yield is 2.5 bps higher at 4.079%.

Watch point: With labor data pointing to continued stability and January’s core inflation rising 0.3% on the month, even as the year-over-year pace eased slightly, a summer rate cut remains the base case rather than an imminent move.

The spread between the two- and 10-year yields is 61.70 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.460%.

 

 

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