Rate Cut Odds Shift to June

MACRO FRAME

Corporate earnings are introducing pockets of volatility as investors reassess potential winners and losers in the AI-driven shift. Broader moves remain sensitive to the balance between moderating inflation trends, still-resilient growth data, and a gradually cooling labor market ahead of next week’s jobs report.

STOCK INDEX FUTURES

Equity indexes are higher as markets look to a cautious rebound following a bruising week spurred by heavy selling in the tech sector. Amazon shares fell roughly 8% after earnings, with the company outlining plans for a sizable increase in capital spending for 2026, potentially exceeding $200 billion, while its operating income outlook came in below expectations. The reaction reflects investor sensitivity to margin pressure as large-scale AI and cloud infrastructure investments accelerate.

Elsewhere, Stellantis warned it expects to take a charge of more than €22 billion as it scales back elements of its electric-vehicle strategy. Shares declined more than 20% in both US and European trading, adding to broader weakness across the EV space following significant recent losses in Chinese automaker BYD. The moves highlight continued uncertainty around the pace of EV adoption and capital intensity within the sector.

Stocks fell across the board on Thursday as the recent tech rout gained momentum across the market. The equal-weight S&P fell around 0.85%, with most sectors in index falling. Responses to recent big tech earnings have shown that concern among traders has been shifted from what companies’ profits will be boosted by AI to which companies will be hurt by it. Recent developments in the AI space have raised concerns that many business models may be under threat from further advancements in the AI space, partly because there is little visibility about the eventual winners and losers. Still, broader AI adoption timelines remain uncertain, and several industry leaders have emphasized that replacement of core enterprise software is far from immediate. The dynamic has led to sharper intraday swings, with sentiment often shifting faster than underlying fundamentals.

Watch point: Continued “shoot-first, ask-questions-later” reactions to AI headlines could amplify short-term volatility. A more durable shift would likely require soured earnings or a meaningful tightening in financial conditions rather than isolated technology-sector moves.

CURRENCY FUTURES

US DOLLAR: The greenback is holding near two-week highs, drawing safe-haven support as investors unwind positions in risk-sensitive assets following broad weakness in equities, crypto, and precious metals over the past week. Price action remains largely range-bound, however, with Thursday’s JOLTS and weekly claims figures doing little to materially shift rate expectations. Despite softer headline readings, flows favored the dollar and Treasuries as equities and metals weakened, pointing more to defensive positioning than a fundamental repricing of policy.

December’s JOLTS data showed a notable decline in job openings but offered little evidence of a broader deterioration in labor conditions, leaving near-term policy expectations largely intact, though odds of a June cut are now fully priced in. While rate-cut pricing edged earlier in the year, the absence of a sharp repricing suggests markets continue to view the Fed as comfortably on hold in the near term. Dollar performance remains driven more by relative growth resilience and stable financial conditions than by outright policy divergence.

Watch point: An upside surprise in labor data would likely reinforce dollar support.

EURO: The euro is modestly higher following a heavy slate of German data, where a sharp rebound in exports, including stronger shipments to the US, provided near-term support for the currency. Industrial production, however, declined 1.9% in December, reversing November’s gains and reflecting weaker output in the automotive sector. The mixed readings point to uneven momentum in the region’s largest economy, with external demand offering some offset to softer domestic manufacturing conditions.

The European Central Bank held rates as expected and described growth as resilient but uncertain, maintaining data-dependent guidance while continuing passive balance sheet runoff. The combination signals little urgency to move on rates but preserves policy flexibility. Inflation in the eurozone eased to 1.7% year-over-year in January from 2.0% in December, while core inflation slipped to 2.2%, its lowest level since October 2021, reinforcing the view that price pressures are gradually moderating to below the 2% target.

Broadly, the euro continues to draw structural support from capital flows and relative equity performance despite a neutral policy backdrop. Markets appear comfortable with the ECB maintaining a patient stance, though sustained appreciation above the $1.20 level would likely prompt more dovish rhetoric from policymakers.

Watch point: A break above $1.20 would materially raise expectations of verbal or policy intervention from ECB officials.

BRITISH POUND: Sterling is modestly higher, recovering part of the prior session’s losses after the Bank of England delivered a narrower-than-expected 5–4 vote to hold rates steady. The split decision signaled that several policymakers are increasingly comfortable with easing in the near term, reinforcing expectations that policy could shift should incoming data continue to point to moderating inflation and softer labor conditions.

Recent indicators, including easing wage growth and a gradual loosening in the labor market, have contributed to disinflationary trends and reduced concerns over persistent price pressures. Updated BoE projections now anticipate CPI returning to target by Q3 2026, earlier than previous guidance, though some officials are likely to seek further confirmation that recent progress is sustained rather than temporary.

Gilt yields moved higher despite the dovish tilt in the vote, reflecting a recent political developments regarding Prime Minister Starmer and speculation over a challenge to his leadership.

Watch point: Expectations for near-term easing are likely to build if upcoming data remain accommodative, leaving sterling vulnerable to further downside against the dollar should rate-cut timing shift toward March or April.

JAPANESE YEN: The yen steadied around the 157 level ahead of Sunday’s election, where expectations are that Prime Minister Takaichi’s ruling coalition will gain more seats. Recent weakness in the yen continues to reflect that fiscal and political expectations are outweighing policy cues from the Bank of Japan, signaling that tightening from the central bank will not do enough to prevent the currency’s drop. This weekend’s elections are likely to increase support for Prime Minister Takaichi’s plans of more fiscal stimulus and tax cuts. Markets remain alert to the possibility of intervention rhetoric, though price action appears more sensitive to fiscal and monetary policy moves in the near term.

Watch point: A disorderly move beyond the 160 level would significantly raise intervention probabilities.

AUSTRALIAN DOLLAR: The Aussie is sharply higher as tightening expectations continue to lend support following the central bank’s rate hike earlier in the week. Near-term price action, however, remains influenced less by domestic inflation prints and more by commodity prices and broader risk sentiment.

The Reserve Bank of Australia delivered its first rate increase in two years earlier this week, raising the cash rate by 25 bps to 3.85%, while indicating uncertainty over whether current policy settings are sufficiently restrictive. Updated staff projections showed higher inflation forecasts for both this year and next, even while incorporating a technical assumption of additional tightening in 2026, a combination that suggests policy risks remain skewed modestly to the upside rather than fully neutral.

Recent inflation data continue to reflect persistent price pressures, with headline CPI rising to 3.8% year-over-year in December and trimmed mean inflation edging higher to 3.3%. Broader domestic indicators also point to financial conditions that may not yet be materially constraining demand, as solid consumer spending, elevated housing prices, and accessible credit conditions have supported activity.

Taken together, the backdrop implies that while the RBA is not signaling an imminent tightening cycle, it is also not prepared to declare policy sufficiently restrictive, leaving the currency and rate expectations sensitive to incoming inflation and consumption data.

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 edged lower, with the 10-year yield falling to a three-week low of 4.20% as recent volatility in the equity market and a soft headline JOLTS figure were favorable to buying conditions.

JOLTS and weekly claims data were broadly supportive for bond prices, with job openings falling to their lowest level since September 2020. Declines were most pronounced in professional and business services, retail trade, and finance and insurance. Beneath the headline weakness, however, the layoffs rate was unchanged, reinforcing the view of a labor market that is cooling gradually rather than deteriorating. The quits rate, a gauge of labor mobility, has been stagnant, reflecting that workers do not feel comfortable enough to voluntarily leave their job as opportunities elsewhere are sparse. Rate cut pricing shifted earlier, with June’s meeting now priced in for a cut, signaling that markets are not convinced of any near-term easing. The curve continues to steepen modestly, indicating growth expectations remain intact as inflation concerns persist.

Watch point: An upside labor surprise would likely steepen the curve further, while a combination of softer employment data and easing services prices would likely push yields lower.

The spread between the two- and 10-year yields is 72.30 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.477%.

 

 

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