SIFs Kickoff 2026 Higher

STOCK INDEX FUTURES

The indexes are higher on thinner trading conditions with the Nasdaq leading gains following the strong debut for Shanghai Biren in Hong Kong, while Baidu announced it filed an IPO for its chip unit. Additionally, President Trump postponed tariffs on selected furniture goods, lifting RH and Wayfair in premarket trading and supporting speculation that the White House may lighten some selective tariffs this year. Fed policy is likely to be a top item for Wall Street as markets try to gauge the extent of easing the economy could see in 2026 as divide among policymakers is likely to continue this year. President Trump has also promised to announce a new chair to replace Powell in January. Markets expect the central bank to hold steady on interest rates this month, though bets are more split for March’s meeting.

CURRENCY FUTURES

US DOLLAR: The dollar is higher to kick off the new year. A continuation of fiscal worries and monetary policy outlook themes are likely to drive dollar direction in 2026 as markets continue to speculate over the health of the labor market, the inflation picture, and Fed policy. The dollar held gains following the release of the Fed’s meeting minutes from its December meeting, which offered little direction or clues on future policy. Policymakers largely agreed to leave rates on hold for the time being until new data either reflects a sustained drop in inflation or a labor market that is cooling faster than expected. The holiday season has kept trading volume light, so market direction is a bit choppier than usual but still, the dollar nudged higher following the minutes.

EURO: The euro fell, while S&P Global revised eurozone manufacturing activity for December lower, further into contractionary territory. Manufacturing PMI fell to 48.8 in December, below the preliminary estimate of 49.2 and November’s reading of 49.6, marking the fastest pace of contraction since March. Declines in output and new orders led the downside in activity, as activity in Germany recorded the weakest performance since February. However, firms reported the most optimistic outlook since just before Russia’s invasion of Ukraine in 2022. The ECB signaled that interest rates are likely to remain unchanged for some time, as inflation is not expected to deviate much from its 2% target in 2026 and economic growth that has surprised to the upside. ECB policy is expected to remain on hold for 2026 and most of 2027 with the next move potentially being upwards.

BRITISH POUND: The pound slipped against the dollar as trading activity has been light around the Christmas and New Year holidays, with activity unlikely to pick up fully until next week. UK Manufacturing PMI was revised lower in December to 50.6  from an initial estimate of 51.2, although above November’s 50.2, marking the second consecutive month of expansion in the UK’s manufacturing sector after a full year of contractionary readings. Output rose with broad increases in consumer, intermediate, and investment goods sectors. However, employment decreased for the fourteenth consecutive month, while input and output inflation rose due to higher wage costs and higher metals prices. The Bank of England cut borrowing costs four times in 2025, though policymakers remained split and signaled that the already gradual pace of cuts could slow further. Inflation in the country has been gradually coming down but policymakers have signaled that they would like to see a sustained drop in inflation before moving again on rates. Money markets have priced in a June rate cut from the BoE, with just 40 bps of easing priced in for all of 2026, implying about a 60% chance of a second quarter-point rate cut by the end of the year. The outlook for monetary policy will depend on how the economy evolves.

JAPANESE YEN: The Japanese yen fell, inching closer to the 157 level and nearing a 10-month low of 157.90. Tokyo’s verbal warnings over government intervention in FX markets have briefly kept the yen out of the intervention zone, with Finance Minister Katayama emphasizing Japan’s freedom to act against excessive moves. However, worries over further weakening persist as Japan’s business lobby leaders have recently urged the government to address the weakening yen. The cabinet recently approved Prime Minister Takaichi’s 122.3 trillion yen budget, which aims to balance aggressive fiscal spending and debt management by curbing new bond issuance. However, Japan’s public debt is twice the size of the country’s economy, giving the government limited flexibility to implement further stimulus measures. These dynamics have led to strong downside pressure against the currency following Takaichi’s election, while signs that the Bank of Japan will potentially raise rates slower and more cautiously than expected disappointed markets.

AUSTRALIAN DOLLAR: The Aussie moved near 14-month highs to kick off the new year as markets await next week’s monthly inflation data, which could influence the central bank’s policy stance, although the bank has cautioned against reading into the data too much. Minutes from the Reserve Bank of Australia’s December meeting indicated the board is prepared to tighten policy if inflation does not ease as anticipated, putting the further importance on the fourth-quarter CPI report due in late January. A stronger-than-expected Q4 core inflation print is likely to support the case for a rate hike at the central bank’s February meeting, with market odds implying a 28% chance of a hike. In recent days, the Aussie has been supported by record-high commodity prices including gold, silver, and copper, reflecting commodity-linked performance of the currency due to the country’s reliance on exports.

INTEREST RATE MARKET FUTURES

Yields are little changed across the curve as trading activity is likely to remain light following the New Years holiday, while markets look ahead to December’s labor report next week following the release of the Fed’s December meeting minutes. The Fed’s minutes did little to offer clues on monetary policy other than that policymakers will likely want to hold on cutting rates until they see further, sustained evidence of cooling inflation and/or a labor market that is cooling faster than expected. However, policymakers do expect to cut rates again in 2026. November’s CPI inflation report was promising, showing that inflation cooled to 2.7% year-over-year, a steep drop from September’s 3.0%. However, the data required a technical fix to be applied to the data collection efforts, which likely biased the figures downwards. Upcoming reports could showcase a hotter inflation reading as data collection efforts resume to normalcy and price pressures are reflected more accurately. Last week’s GDP data also spurred some doubts regarding the amount of easing the economy could see in 2026 as the economy grew at an annualized rate of 4.3% in the third quarter, largely due to a strong uptick in consumer spending (+3.5%). If this pace of spending growth is maintained in the Q4 report, policymakers could error further on the cautious side. Still, this report also came with the same warnings that November’s inflation report brought regarding the accuracy of the figures due to data collection efforts.

The spread between the two- and 10-year yields is 69.20 bps, its highest level since early 2022, while the two-year yield, which reflects short-term interest rate expectations, is 3.473%.

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