There was a risk-off tone to the price action this week as investors remained concerned about AI prospects - despite solid earnings growth from Nvidia. The Treasury market rallied, with yields at both the front and long end of the curve were down by more than 10bps on the week. In FX, the USD gained against the JPY after the announcement of two dovish-leaning nominees to the BoJ and reservations expressed by PM Takaichi over rate hikes. Strong inflation data kept the AUD supported.
A May rate hike by the RBA was priced to a near lock by markets after inflation data for January was firmer than expected. Headline inflation held at 3.8%yr in January - defying forecasts to ease to 3.7% - while core inflation lifted a touch from 3.3% to 3.4%yr (see here). Inflation sitting above the target band (2-3%) keeps the pressure on the RBA, though Governor Bullock did not say anything during this week's fireside chat to suggest its measured approach - with the next hike likely in May - was set for a re-think.
A hike at the next meeting in March is probably an underpriced risk (around 15%), especially if next week's National Accounts (previewed here) deliver an upside surprise on GDP growth in the December quarter (expected at 0.5%q/q and 2%Y/Y), which would reinforce the RBA's concerns around capacity pressures. Additional inputs (public demand, inventories and trade) will sharpen estimates for GDP growth ahead of the National Accounts. Inputs this week were somewhat mixed: private sector construction work lifted solidly (see here) but business investment lost some momentum (see here).
In the US, there were some signs of Fed hawkishness. Governor Waller said that if the upcoming labour market data were to indicate a rebound from a weak year in 2025 was in train - after the strong January report - he would lean towards keeping rates on hold; however, he balanced those views by indicating he remains somewhat unconvinced by the turnaround given volatility in the data. Similarly, Boston Fed President Collins said the labour market data was 'promising', while Chicago Fed President Goolsbee highlighted that inflation was 'not good enough' to justify cuts.
Policymakers in the euro area and the UK were in the spotlight at their respective parliamentary appearances this week. ECB President Lagarde said the expectation that inflation will remain around the 2% target is keeping rates on hold. But there are risks to the inflation outlook, including the strength of the euro as well as uncertainty around global trade and policy. BoE Governor Bailey told the Treasury Committee that in his view a rate cut in March (expected by markets) was an 'open question' and depended on the incoming data. Bailey's vote is key. Last November he swung the majority to 5-4 in delivering a 25bps rate cut before reverting back to a hold in February.
