PCE and GDP Support Policy Hold

STOCK INDEX FUTURES

The indexes are lower, as chipmaker Intel reported disappointing earnings, which put Wall Street on the back foot. The three major indexes are set to end the volatile week lower following this week’s Greenland saga that shook up markets. In premarket trading, Intel shares plunged more than 13% after the company issued a weaker-than-expected outlook and warned of ongoing manufacturing challenges. By contrast, Nvidia (+0.9%) and AMD (+2.5%) edged higher following reports that Nvidia CEO plans to visit China in the coming days, potentially helping to reopen a key market for the company. Beijing has reportedly told China’s big techs they can start preparations to order Nvidia’s H200 chips, whose imports are currently curbed. US GDP growth was revised higher to an annualized rate of 4.4% in the third quarter of 2025, primarily reflecting upward revisions to exports and investment. Meanwhile, PCE data came in as expected, with the pair of releases quelling some bets for easing out of the Fed this year.

CURRENCY FUTURES

US DOLLAR: The greenback held stable around 98.35 but is set to end the volatile week on a loss as shifting geopolitical dynamics unnerved investors, while PCE and GDP data supported the case for the Fed to pause on rate cuts. Headline PCE inflation accelerated to 2.8% from 2.7% as expected. Core PCE inflation also edged up to 2.8% from 2.7% in October and in line with expectations. The PCE index remains the Federal Reserve’s preferred inflation gauge. Third quarter GDP revisions surprised to the upside, showing the economy grew stronger than expected thanks to an uptick in exports mainly. President Trump announced on Wednesday that he would not impose tariffs on several European nations after he reached the “framework of a future deal” with NATO Secretary-General Mark Rutte, which helped spark a mild recovery in the greenback after it had tanked during the previous session.

EURO: The euro is lower against the dollar as traders digest PMI reading out of the eurozone. S&P Global data showed that private sector activity in the euro area expanded in January at a slightly slower-than-expected pace, with easing growth in services partially offset by a moderation in the manufacturing downturn. Germany’s data pointed to stronger-than-forecast growth during the month, while France’s business activity unexpectedly slipped into contraction as weaker services outweighed gains in manufacturing. The French government on Friday survived two no-confidence votes, with more expected after Prime Minister Sebastien Lecornu said he was invoking the constitution to force the expenditure part of the 2026 budget bill through parliament. Meeting minutes from the ECB’s policy meeting in December were unsurprising, and in line with prior guidance from officials. ECB policymakers noted that the central bank could afford to be patient, but stressed that this should not be interpreted as hesitancy to act or an asymmetric approach. The ECB views its monetary policy stance as appropriate, though not static. Officials observed that economic activity had proven more resilient than expected, unemployment remained at historically low levels, and the inflation outlook was favorable, with prices projected to stay around target over the forecast horizon.

BRITISH POUND: The pound is higher against the dollar and is set for its best week against the dollar since August, after stronger-than-expected UK retail sales and business activity figures ended a week of mixed economic data. UK retail sales rose 0.4% in December, compared to an expected 0.1% decline. The latest S&P Global UK Composite Purchasing Managers’ Index meanwhile rose to 53.9, also above forecasts, to a 21-month high. British businesses reported the fastest upturn since April 2024. Employment in the services sector, however, fell at a faster rate and inflation pressures increased. Other economic data out of the UK has painted somewhat of a mixed picture. Inflation picked up more than expected in December, while labor data reflected a weak, yet stabilized labor market. However, for policymakers at the Bank of England, the ease in labor market conditions – especially in regard to wage growth, will ease worries over persistent inflation. Still, the stronger inflation data does present risks that policy easing could come slower than expected in the first half of 2026. Money markets are favorable to a rate cut from the BoE come April or July, with July’s meeting being fully priced in.

JAPANESE YEN: The yen was slightly stronger against the dollar after a sudden spike raised market speculation that authorities had conducted a rate check, often a precursor to intervention. The yen had weakened to as soft as 159.2 per dollar, close to 18-month lows, during a press conference by Bank of Japan Governor Ueda after the BOJ held rates steady, but then it suddenly strengthened to 157.3 per dollar. Speculation as to what caused the move remains up in the air though it appears that authorities had not intervened directly but had run rate checks with banks. A rate check – asking what price it would get if it were to intervene – is something Japanese authorities can use to signal their readiness to enter the market. The BOJ held its policy rate at 0.75%, the highest level since 1995, and reaffirmed its readiness to raise rates if economic and price projections materialize, having revised four of six inflation forecasts upward. Governor Kazuo Ueda noted that the extent of price increases by companies in April would be a key factor in discussions about potential rate hikes.

AUSTRALIAN DOLLAR: The Aussie is higher against the dollar and is set for its best week in nine months as policy uncertainty stalled the dollar. Investors have ramped up wagers for an early rate rise from the Reserve Bank of Australia following a surprisingly strong jobs report for December. Employment in Australia grew by 65,200 in December, surpassing forecasts of 30,000, while the unemployment rate dropped to 4.1%, its lowest level in seven months, and below the RBA’s forecasts of 4.4%. The labor data comes after other domestic data showed a pickup in consumer spending, suggesting that the economy could be growing quicker than policymakers have anticipated. Recent data has been supportive of the view that the RBA will raise rates sometime this year. Money markets are favorable to a rate hike in March and April, with the later meeting being fully priced in. Focus now shifts to quarterly inflation data due next week, where a stronger reading could bolster the case for a February hike from the bank.

INTEREST RATE MARKET FUTURES

Yields edged higher at the front end and fell at the long end. Yesterday saw a busy day of data that is ultimately favorable to a pause in rates from the Fed. A delayed BEA release showed that private consumption among households expanded at a fast pace throughout the second half of the year. Additionally, lower levels of new unemployment claims added to evidence of low job cut levels in the labor market. The data consolidated the outlook of a hold by the Fed next week, while maintaining the uncertainty over the central bank’s path this year as core PCE inflation remained elevated, challenging recent calls to favor more accommodative policy by FOMC members. The PCE price index rose 0.2% month-over-month in November, the same as in October and in line with expectations. Prices for goods were up 0.2%, rebounding from a 0.1% fall in October while prices of services rose at a slower 0.2%, compared to 0.3% in October. Core PCE, which excludes food and energy, increased 0.2%

The spread between the two- and 10-year yields is 63.60 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.615%.

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