Market Brief: Price Action Slows in Run-Up to Rate Decisions

The dollar is advancing against most of its peers and financial markets are broadly holding steady ahead of this afternoon’s Federal Reserve decision. The world’s most powerful central bank is almost-universally expected to stay on hold—and the accompanying statement should remain essentially unchanged—but Chair Jerome Powell’s words in the post-decision press conference will be closely scrutinised for hints as to whether a rate cut could come at the March meeting.

Yields have retreated from their recent highs, driven by a modest softening in incoming survey data, market turmoil, relatively-dovish rhetoric from Fed officials, and a rush among investors to top-tick rates. The Conference Board’s consumer confidence survey, published yesterday, unexpectedly fell to 104.1 this month from an upwardly revised 109.5 in December as respondents turned negative on the current labour market situation for the first time since September and expressed wariness over the outlook for incomes, jobs, and business conditions. Monday’s plunge in tech stocks lowered yields across the curve. Price pressures eased earlier in the month, prompting Governor Waller to say “If we continue getting numbers like this, it’s reasonable to think rate cuts could happen in the first half of the year”. And although few expect a reversion to pre-pandemic patterns, long-term investors are increasingly motivated to lock in rates before they decline again.

We expect Powell to maintain the relatively-hawkish tone displayed during the December meeting, but also think he will strive to keep the Fed’s options open, providing no clear guidance on the central bank’s next steps. With market valuations remaining near all-time highs, inflation showing signs of plateauing, consumer spending remaining high, the new administration’s policy direction changing by the hour, and tariffs looming as a major unknown, a data-dependent “wait and see” approach seems to be the only viable path for policymakers.

A sixth consecutive rate cut at this morning’s Bank of Canada meeting is almost fully priced in, with overnight index swaps putting 95-percent odds on a move. Hiring and spending data have improved slightly in recent months, and there are signs that last year’s easing efforts are translating into a modest thawing in overall economic conditions, but underlying inflation is still running well below target—especially on an ex. shelter basis—and risks are clearly tilted to the downside. Survey data published last week showed uncertainty levels among consumers and businesses remaining elevated.

Reaction in the Canadian dollar could therefore be driven by how officials discuss tariff risks. In our view, the Bank will ultimately be forced to ease policy further if Trump follows through on his threat (given that a loss of export revenues would translate into weaker demand across the economy) but the impact that a trade war might have on goods inflation would be difficult to quantify even if the scale and scope of the tariffs were known in advance—and the extent to which fiscal support helps lessen the damage remains unknowable. There are good reasons to expect a prolonged pause as policymakers adopt a data-dependent stance, but rate hikes seem unlikely in the near term, and differentials between US and Canadian yields—currently near all-time highs—should remain tilted against the loonie.

From a broader perspective, currency markets are exhibiting relatively range-bound dynamics as traders brace for negative tariff shocks to economies outside the US. The euro is failing to gain momentum ahead of tomorrow’s European Central Bank meeting, where policymakers are expected to cut rates and set out a measured trajectory for easing over the year ahead. The British pound is hemmed in by stagflationary concerns—which could be exacerbated by recent currency weakness—and is struggling to push higher. The Japanese yen is dancing to a tune played in US markets, trading inversely to Treasury yields and mirroring the Swiss franc in reverting to its long-standing role as a global safe haven currency. Across the board, topside breakouts look difficult to achieve in the absence of clarity on US president Donald Trump’s trade plans*.

Turmoil in equity markets appears to be subsiding after Monday’s DeepSeek-driven selloff, with many investors betting that the Chinese company’s artificial intelligence breakthrough could deliver gains outside the technology sector by driving implementation costs down for businesses in other areas of the economy. The ‘Magnificent Seven’ group of tech giants is underperforming even as broader market indices grind higher.

It is dangerous to extrapolate longer-term trends from short-run moves, but the current dynamic suggests that market participants may be heeding one of the great lessons of financial history: technologies that ultimately change the world rarely deliver exceptional returns for their investors. The British Railway Mania of the 1840’s** helped supercharge the industrial revolution and put the foundations in place for modern globalisation, but also involved a catastrophic misallocation of capital—by some estimates almost half of the total investment in the economy—and huge losses for speculators crowded into the sector. Something similar happened during the dotcom boom of the late nineties, and could be underway now. If so, today’s “there is no alternative” period of dollar outperformance could give way to an international rotation in the months and years ahead.

*Mr. Trump is, perhaps, playing five-dimensional chess here, but it is difficult to see how this environment helps the United States. Sustained strength in the dollar widens trade deficits and will only add to the headwinds facing US companies abroad.

**Apologies, this newsletter occasionally loses focus on the here-and-now.

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