S&P Breaks 7000

STOCK INDEX FUTURES

The indexes are mixed ahead of major earnings reports and a Fed policy decision today. Microsoft, Meta, and Tesla will all report fourth-quarter results after the tell today. Their results are likely to play an outsized role in shaping near-term market sentiment with special attention centered around AI spending and corporate debt issuance plans. The tech space has been diving further into the world of corporate bond issuance, issuing nearly $700 billion in debt over the past quarter, close to the over $800 billion by the financial sector. The increased role of debt to fund spending plans has drawn scrutiny from investors as market-valuations remain historically high. Apple will report on Thursday.

Dow and the healthcare provider sector were held down by sharp losses in several insurance providers on Tuesday after the Trump administration proposed a starkly lower-than-expected increase to 2027 Medicare Advantage plans. The administration proposed a 0.09% rise vs. analyst expectations of a 6% rise. UnitedHealth shed more than 19%, while other major providers were down over 10%. Elsewhere, the Nasdaq and S&P moved higher as traders dug into a raft of corporate earnings.

The Fed will announce its policy decision today; the bank is expected to hold on rates and refrain from issuing strong guidance on further policy moves. Markets will scrutinize any dissenting votes for clues on the timing of the next policy move from the central bank.

CURRENCY FUTURES

US DOLLAR: The USD index is little changed, after hitting its lowest level since February 2022 on Tuesday. Trump said on Tuesday the value of the dollar was “great”, when asked if he thought it had declined too much. Traders took this comment as a stance that the administration is comfortable with the dollar’s recent decline, signaling comfort with a weaker greenback to support exports. Traders positioned themselves ahead of the Fed’s policy decision today, where it is likely that the central bank will hold on rates and refrain from issuing any strong guidance over future policy moves. Any strong shift in voting dynamics at Wednesday’s meeting is likely to influence dollar direction. Markets are expecting a larger contingent of policymakers to vote on the side of holding rates, with Bowman, Miran, and Waller being potential doves at the meeting. 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. Failure to

EURO: The euro fell against the dollar after hitting its highest level against the dollar in over five years on Tuesday. 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 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. The euro found strong support following the announcement of a free trade agreement between the EU and India – a deal which took nearly two decades of negotiations. The deal is expected to double EU goods exports to India by 2032 due to the reduction of tariff burdens on 96.6% of EU goods. Looking ahead, fourth-quarter GDP and CPI figures for some of the eurozone’s major economies will be out following releases of several domestic pieces of data throughout the week.

BRITISH POUND: The pound fell as traders took profits after the sterling hit 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 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 these 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 slipped against the dollar after surging over 1% to a three-month high of 152.10 on Tuesday. 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 is higher against the dollar fourth-quarter inflation data ramped up rate hike expectations for the Reserve Bank of Australia’s meeting next month. 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 inched higher across the curve ahead of today’s Fed decision, where rates are expected to be left on hold. Traders are bracing for an extended pause in the Fed’s rate cutting cycle as recent data has suggested that labor conditions are stable, with no meaningful uptrends in unemployment figures in both the nonfarm payrolls and JOLTS reports. Additionally, weekly initial claims data has been rather bland, with no indications of any major uptick in joblessness or layoffs, as the four-week MA of continued claims has continued its downtrend since early November. With inflation continuing to rest above the Fed’s 2% target, the bank has more room to hold rates steady in an effort to combat the rise in prices. Given the dynamics, focus will center around how many dissenting votes there are, likely the best gauge to help determine the timing of the next rate cut. We expect Chair Powell to emphasize that future policy moves will depend on how economic data evolves. US Fed Funds futures have priced in about 44 bps of easing, or less than two 25 bp cuts, for 2026. That is down from about 53 bps two weeks ago.

The bigger news for the Fed will be any developments regarding President Trump’s next pick for Fed Chair after Powell finishes his term for the position in May. BlackRock bond chief Rick Rieder has become the odds‑on favorite, with Polymarket giving him a 49% chance of taking the top job. Elsewhere, government shutdown fears remain present after Democratic leaders threatened to block a new funding package if it includes additional funding for the Department of Homeland Security.

The spread between the two- and 10-year yields is 67.00 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.571%.

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