The Pick is in…

STOCK INDEX FUTURES

The indexes are lower after getting hammered on Thursday but trimmed some losses following the nomination of Kevin Warsh to lead the Fed. Geopolitical factors are also weighing on the indexes, with tensions simmering in Iran, President Trump said on Thursday he planned to speak with leaders in Tehran, even as the US dispatched another warship to the Middle East and Pentagon chief Pete Hegseth said the military would be ready to carry out whatever the president decided. The White House also said Trump signed an executive order for tariffs on countries that provide oil to Cuba, while he threatened new tariffs on Canada and said the United States was decertifying business jets made there.

On the earnings front, shares of Apple were little changed ahead of the bell after it beat Wall Street estimates for quarterly revenue on Thursday, powered by strong demand for its iPhones and a sharp rebound in China. Microsoft shares continued lower after tumbling on Thursday after its earnings report spooked investors with higher-than-anticipated capital spending and a slowdown in quarterly cloud sales growth. Elsewhere, shares in Sandisk surged 20% following upbeat forward guidance from the data storage company.

PPI inflation data for December was not favorable to markets. US producer prices rose 0.5% month-over-month in December, the largest gain in three months, and jumping from a 0.2% increase in November and exceeding expectations of 0.2%. Services prices rebounded 0.5% after remaining flat in November, led by a 4.5% rise in margins for machinery and equipment wholesaling. Goods prices were flat following a 0.8% rise in the previous month.

CURRENCY FUTURES

US DOLLAR: The USD index is higher following President Trump’s nomination of former Fed governor Kevin Warsh as Fed Chair. Warsh has been critical of central bank policy in recent years and favors a lower neutral policy rate. Warsh also has experience serving as a Fed governor from 2006 to 2011. That experience is likely offering the dollar support, alleviating some nervousness in the markets that the Fed Chair pick would be a lot more dovish. The dollar has also found some support after Republican and Democratic lawmakers hammered out a deal to stave off a looming government shutdown. The dollar has faced a volatile week as concerns over domestic and foreign US policies hammered the currency, while a signaled prolonged wait in rate cuts did little to support the greenback as well. Treasury Secretary Scott Bessent said that the US maintains a “strong dollar policy,” while also refusing to acknowledge that the US would be intervening in the yen. The comments were in contrast to President Trump’s, who said the dollar was “great”, when asked if he thought it had declined too much.

EURO: The euro is lower as lower as data from the trade bloc was washed out by news of Warsh’s nomination as Fed Chair. Data out of the eurozone showed that the economy grew quicker than expected in the fourth-quarter as consumption and investment grew at a robust pace and offset a drop in exports.  The bloc’s economy grew by 0.3% in Q4, above forecasts for 0.2%, and 1.3% year-on-year. Spain remained the driver of growth, expanding a better-than-expected 0.8%, while Germany, the eurozone’s largest economy, grew 0.3%, above estimates of 0.2%. Despite the modest performance from Germany, the pace of growth marked the strongest yet in three years. Other figures have signaled the economy is off to a good start as well in 2026 as sentiment across all sectors has improved per a reading from the European Commission on Thursday. Meanwhile, industry is showing signs of stabilization, households have begun to reduce their high savings rate in favor of spending, unemployment remains at historical lows, and inflation is projected to hover around the bank’s 2% target for some time.

On the inflation front, Harmonized German CPI figures for January showed prices fell 0.1% on the month, while prices rose at a 2.1% rate on the year, both readings above forecasts. Growing concerns over the deflationary effects of a stronger euro have limited upside gains, with the $1.20 level serving as major resistance. Two ECB officials signaled that a stronger euro could shape future policy, warning it may weigh on inflation. Austria’s Martin Kocher said the ECB might consider another rate cut if euro strength dampens the inflation outlook, while France’s François Villeroy de Galhau said policymakers are closely watching the euro’s appreciation and its disinflationary effects. However, markets would need a clean break above the $1.20 level before getting excited about pricing in another rate cut. Reduced policy uncertainty, resilient economic growth, and strong equity market performance have provided structural support for the euro heading into 2026. In recent months, robust euro area equity returns have prompted asset managers to rotate out of the dollar, reinforcing euro-positive capital flows.

BRITISH POUND: The pound is lower as Kevin Warsh’s nomination to Fed Chair supports the greenback. The pound’s recent moves have largely been driven by developments elsewhere, though attention is starting to shift to next week’s Bank of England meeting. Strong domestic data in recent weeks have supported sterling and prompted markets to pare back expectations for near-term easing from the Bank of England. January figures from the British Retail Consortium showed retail prices rising at their fastest pace in nearly two years, while recent PMI surveys pointed to the strongest expansion in UK business activity since April 2024. The PMIs also signaled firming inflationary pressures across both services and manufacturing, with output price inflation climbing to a nine-month high, alongside softer employment trends.

This mix complicates the policy outlook ahead of next week’s BoE meeting. While recent meetings have delivered narrow 5–4 vote splits, the latest data suggest February’s decision is likely to be less contested, with policymakers expected to hold rates steady. UK inflation remains among the highest in the G7, and although it is projected to ease as wage growth cools and unemployment rises, there is limited evidence of this dynamic taking hold so far. As a result, the case for an imminent rate cut remains weak, and policymakers are likely to wait for further confirmation in the data. Markets currently price the first BoE rate cut for June or July, with July fully priced and around 36 bps of easing expected by year-end.

JAPANESE YEN: The yen slipped above 154 yen per dollar as the greenback gains broadly against most currencies. Still, the yen is poised for its second straight weekly gain after Japanese policymakers hinted at possible coordinated currency market intervention with the US to defend the currency that had tumbled to near 18-month lows. Tokyo Core CPI figures came in below forecasts, showing prices in the metropolitan area grew at a yearly rate of 2.0%. Forecasts were expecting a rise to 2.2%. The reading marks the lowest since October 2024 and in line with the Bank of Japan’s 2% target, reinforcing expectations that the central bank will remain cautious on further rate hikes. Elsewhere, Japan’s unemployment rate held at 2.6% in December, where it has held for four-straight months. The number of unemployed grew by 50,000 to a 17-month high of 1.86 million, employment fell by 50,000 to 68.46 million, while the labor force dropped 50,000 to 70.31 million. Rounding out the data calendar for the week is Japanese retail figures, which showed sales in Japan unexpectedly dropped 0.9% year-on-year in December. The reading reverses last month’s upwardly revised 1.1% growth to mark the first decline since August.  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.

AUSTRALIAN DOLLAR: The Aussie is sharply lower alongside a fall in metals prices. The Aussie topped a three-year peak on Thursday as expectations of a rate hike from the Reserve Bank of Australia next week 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 have upped odds for a quarter-point rate hike next week to around 75%, up from 63% before the CPI release.

INTEREST RATE MARKET FUTURES

Yields are higher across the curve as the bonds react to the nomination of former Fed Governor Kevin Warsh to head the Fed. Warsh previously served on the Fed’s board of governors from 2006 to 2011, notably serving during Washington’s rescue of Wall Street during the 2008 financial crisis. Warsh has offered criticism of the Fed in recent times, aligning himself with the views of President Trump, likely a factor as to why he got the nod from the President to succeed Powell. Recently, Warsh has indicated that the bank should be cutting rates faster. That desire is likely to face serious pushback from members at the FOMC who have been uneasy about cutting rates when inflation rests well above the target 2%, especially as the labor market has reflected signs of stabilization and avoided a rapid downturn in labor market conditions. Warsh is also likely to face pressure from the President to lower rates, despite a board that just voted 10-2 to keep rates steady.

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 51.3 bps of easing by year end.

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 69.60 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.547%.

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