Earnings Weigh on Gains

STOCK INDEX FUTURES

The indexes are mixed as Tesla, Meta, and Microsoft all head different directions following their earnings results yesterday ahead of Apple’s report today. The S&P is readying to break above 7,000 once more as Meta shares surged over 8% pre-market due to strong guidance on its quarterly revenue outlook. The company also plans to spend up to $135 billion on data centers this year in a bid to advance in the AI race. On the other hand, Microsoft dropped around 7% as higher-than-expected capital spending scared investors alongside a slowdown in its quarterly cloud sales growth. Tesla advanced around 2% after it announced a pivot in strategy regarding EV and robot sales, while a earnings beat was good enough to distract from a drop in annual revenue. Market attention is now centered around Apple’s results after the bell.

Markets have largely shrugged off the recent escalation in US-Iran tensions, after Iran reportedly pulled out of talks with the US in Oman and after President Trump warned the country it must secure a nuclear deal or face the prospect of military strikes. US Navy vessels have been amassing in the region over the past week.

The Fed held rates steady and signaled that rates may stay on pause for some time in a widely-expected move as labor conditions have stabilized, while inflation remains elevated. On data front, weekly initial jobless claims came in above forecasts at 209,000 (vs. 206,000), while the previous figure was revised higher to 210,000 (vs. 204,000). Elsewhere, US trade balance data showed that imports rose 5% in November thanks to an increase in goods imports, which have been under pressure from tariffs. Meanwhile, US exports fell by 3.6%, coming down from an all-time high of $303 billion in October.

CURRENCY FUTURES

US DOLLAR: The USD index continued lower near multi-year lows, with the prospect of a prolonged wait in rate cuts offering little support as worries over US policy continue to pressure the dollar. The dollar recovered on Wednesday following comments from Treasury Secretary Scott Bessent that the US maintains a “strong dollar policy,” while also refusing to acknowledge that the US would be intervening in the yen. The comments come after President Trump said on Tuesday that the value of the dollar was “great”, when asked if he thought it had declined too much. That statement lead markets to believe that the administration was signaling comfort with a weaker greenback to support exports. The Fed held rates steady in a while expected move, while the committee removed language from its prior statement saying that downside risks to employment had risen – an indication policymakers as a group are becoming less worried about a rapid downturn in the labor market. The dollar has fallen over 2% YTD as a mix of geopolitical developments, dollar repositioning, government shutdown fears, and strength in the yen have weighed on the greenback. Government shutdown fears have recently been weighing on the currency after Chuck Schumer, said Democrats would vote against funding legislation that includes money for the Homeland Security Department. The deadline for a temporary funding bill is January 30.

EURO: The euro edged higher against the dollar but remained below the $1.20 level, which it broke on Wednesday as growing concerns over the deflationary effects of its strength have limited upside gains. Two European Central Bank officials said on Wednesday the strength of the euro could influence monetary policy. Austrian central bank governor Martin Kocher told the Financial Times the ECB may have to consider another interest-rate cut if the strength of the euro starts to affect the outlook for inflation. Bank of France Governor François Villeroy de Galhau said in a LinkedIn post that policymakers were “closely monitoring the appreciation of the euro and its potential impact on lower inflation”. The euro is up over 2% against the dollar YTD, benefitting from a weaker dollar, fewer material risks to central bank policy, strong economic growth and equity market performance amid increased infrastructure spending plans in major economies. Assets managers have been diversifying away from the dollar in recent months as foreign equities have outperformed major US benchmarks, making major foreign currencies more desirable. Recent geopolitical developments have supported the euro’s rise as well as fears over the dollar’s safe haven status have come into question. Fourth-quarter GDP and CPI figures for some of the eurozone’s major economies will be out Friday to round out the week.

BRITISH POUND: The pound is little changed against the dollar after hitting its highest level against the dollar since October 2021 on Tuesday. Strong domestic data in recent weeks have lent support to the sterling and caused markets to reduce easing expectations out of the Bank of England. Figures from the British Retail Consortium on Tuesday showed that prices at major British retailers rose at the fastest pace in almost two years in January. Meanwhile, recent PMI figures showed UK businesses recorded their fastest growth in business since April of 2024. The data also revealed rising inflationary pressures on businesses and a drop in employment. Output price inflation picked up to a nine-month high across the services and manufacturing sectors. The data is could make things difficult for members at the BoE, which is set to meet next week, though markets are expecting the bank to hold rates steady. Previous meetings have seen tight 5-4 vote splits, but given recent data, February’s vote is likely to be less contested. Inflation in the country is among the highest out of all G7 countries, though it is expected to fall in the coming months as wage growth eases and unemployment creeps up. However, there is not enough evidence of this dynamics playing out in the economy to support the case for another rate cut just yet. Instead, policymakers at the BoE are likely to favor holding rates until further data confirms their forecasts. Currently, money markets are priced for a rate cut from the Bank of England in June or July, with July’s meeting being fully priced in and see 36 bps of total easing by year end.

JAPANESE YEN: The yen gained slightly on the dollar as the currency hovers in the 152-154 range as focus remains on the prospect of official government intervention and the outlook for the Bank of Japan. Investors continue to speculate about the impact of an actual intervention, especially because Prime Minister Takaichi is basing her snap election campaign on expanded stimulus measures. Japan’s election is set for February 8. Speculation over a possible intervention by authorities has been supportive of the currency in recent days. On Monday, Japan’s currency minister said the government is working with US authorities regarding ongoing currency developments. Elsewhere, focus will also center around Tokyo area CPI data out at the end of the week and meeting minutes from the Bank of Japan’s December meeting out on Wednesday. CPI data is expected to show that inflation held above the BoJ’s 2% target in December, though falling energy prices do present some downside risk regarding the headline reading. Japan’s ministry of finance will also be conducting several bond auctions during the week, which could impact yen moves after a Japan-led bond sell-off triggered global markets last week. Japanese bonds, just like the yen, have been under pressure in recent months over concerns of the country’s ability to finance its debt (double its GDP) because of Takichi’s planned stimulus measures and tax cuts.

AUSTRALIAN DOLLAR: The Aussie topped a three-year peak on Thursday alongside a rise in gold prices as expectations of a February rate hike from the Reserve Bank of Australia grow. All four main Australian banks now expect a quarter-point rate hike from the RBA next Tuesday, following the inflation surprise from last quarter’s reading. Australia’s annual inflation climbed to 3.8% in December, surpassing market forecasts of 3.6% and remaining above the RBA’s 2–3% target. The trimmed mean CPI inched up to 3.3% year-over-year from the prior 3.2%, in line with estimates. The data comes alongside recent figures that have shown capacity utilization in the economy is stronger than expected, growth remains robust, unemployment is low, and upbeat PMI readings. Traders upped odds for a quarter-point rate hike to around 72% at the upcoming February meeting, up from 63% before the CPI release.

INTEREST RATE MARKET FUTURES

Yields are lower at the front end and higher at the long end in a curve-steepening move following the Fed’s decision to hold rates steady yesterday. There was little surprising about the Fed’s move apart from the fact that it removed language from its prior statement saying that downside risks to employment had risen, signaling that policymakers are becoming less worried about a rapid downturn in the labor market. The Fed offered no hints about when another reduction in borrowing costs might come, noting that “the extent and timing of additional adjustments” to the policy rate would depend on incoming data and the economic outlook. Both Governor Christopher Waller, a contender to replace Fed Chair Jerome Powell when his term as central bank chief ends in May, and Governor Stephen Miran, on leave from his job as an economic adviser at the White House, dissented in favor of a quarter-percentage-point rate cut.

US Fed Funds futures have priced in about 47 bps of easing, or less than two 25 bp cuts, for 2026. That is down from about 53 bps two weeks ago. Chair Powell said inflation in December was likely still well above the central bank’s 2% target. Powell said that PCE inflation was likely 3% in December, noting that “these elevated readings largely reflect inflation in the goods sector, which has been boosted by the effects of tariffs. In contrast, disinflation appears to be continuing in the services sector.” Most of the recent strength in prices comes from goods prices as a result of tariffs. For members at the Fed, this is a welcome development unlike demand-driven inflation, which is harder to address.

The spread between the two- and 10-year yields is 68.80 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.577%.

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