Markets face uncertainty as January's inflation surge pushes Fed rate cut expectations to December, while retail sales show significant decline. Trump's new 25% steel tariffs and mixed economic signals create market volatility. Gold hits near $3000 despite strong dollar, as traders seek safe havens amid trade war concerns. Wall Street remains divided on Fed's 2025 policy path.
Key Events and Data to Watch This Week
Tuesday, February 17:
03:30 - Australia: RBA Interest Rate Decision
07:00 - UK: Employment Change (Dec)
07:00 - UK: Claimant Count Change (Jan)
13:30 - Canada: Consumer Price Index (Jan)
Wednesday, February 18:
07:00 - UK: Consumer Price Index (Jan)
07:00 - UK: Producer Price Index (Jan)
19:00 - US: FOMC Minutes
Thursday, February 19:
00:30 - Australia: Employment Change (Jan)
01:15 - China: PBoC Interest Rate Decision
22:00 - Australia: Judo Bank Composite PMI (Feb) Preliminary
23:50 - Japan: National Consumer Price Index (Jan)
Friday, February 20:
07:00 - UK: Retail Sales (Jan)
09:00 - Eurozone: HCOB Composite PMI (Feb) Preliminary
09:30 - UK: S&P Global/CIPS Composite PMI (Feb) Preliminary
14:45 - US: S&P Global Composite PMI (Feb) Preliminary
15:00 - US: Michigan Consumer Sentiment Index (Jan)
Market Whiplash: Inflation Fears, Fed Uncertainty, and the Dollar's Dilemma
In the early days of last week, concerns about U.S. inflation intensified following data that showed the fastest increase in over a year, pushing expectations for the Federal Reserve's first rate cut back to as late as December. January's inflation rose by 0.5% month-over-month, though many economists attributed this increase to early-year price adjustments.
Indeed, factory-gate prices and retail sales figures, released after the consumer price index, eased fears that inflation was accelerating in the U.S., sending the dollar to its lowest level since the start of the year amid uncertainties caused by Donald Trump's tariff policies.
Retail sales in the U.S. surged strongly in the final months of 2024, largely reflecting front-loaded purchases due to tariff concerns. However, after this period of strong gains, January sales saw the biggest drop in nearly two years. According to figures released by the U.S. Census Bureau, the nominal value of retail purchases fell by 0.9% after a revised 0.7% increase in the previous month.
The control group category, which excludes spending on food services, auto dealerships, building materials stores, and gas stations—directly reflecting the components included in the GDP calculation for goods expenditures—declined by 0.8% after an upwardly revised 0.8% increase in the prior month.
Retail sales were likely affected by the Los Angeles wildfires and severe winter weather conditions. Additionally, after a surge in purchases driven by expectations of higher prices due to tariffs, the fading of this trend contributed to the weaker figures. However, it is difficult to determine whether the January decline in retail sales was driven by a drop in consumer sentiment amid uncertainty or by temporary factors.
Furthermore, while borrowing costs remain high, U.S. households are facing increasing debt burdens. The New York Fed reported last week that the share of consumer debt in delinquency rose to its highest level in nearly five years in the fourth quarter of last year.
Given expectations that the Fed will keep interest rates higher for longer, this could be weighing on consumption. However, delinquency rates remain historically low, and steady income growth continues to support consumer spending.
Following the retail sales report, U.S. Treasury yields declined, and the dollar continued to weaken throughout the week. After pushing back expectations for the first rate cut to December following the early-week inflation data, swap traders on Friday repriced a potential cut as early as September.
Additionally, expectations for total rate cuts this year, which had dropped to 30 basis points, have now risen back to 37 basis points.
Traders are unsure of their stance amid policy and market uncertainties, responding to incoming data and developments, which in turn amplifies volatility. This confusion among traders is mirrored by the diverging views of Wall Street banks.
While some major banks like Bank of America expect no action from the Fed this year, others, including Goldman Sachs and JPMorgan Chase, anticipate at least two quarter-point rate cuts in 2025.
The primary source of this confusion is the ambiguity surrounding Donald Trump's commitment to tariffs. Last week, Trump imposed a 25% tariff on all steel and aluminum imports, effective from March, and began preparing additional tariff measures to be implemented against multiple trading partners starting in April.
Markets cannot ignore the possibility of a global trade war, yet they are also considering the likelihood that Trump may be using tariffs merely as a negotiating tool. Traders who believe Trump will not launch a full-scale tariff offensive continue to exit their long-dollar positions.
According to data from the Commodity Futures Trading Commission, bullish dollar bets have declined for the fourth consecutive week. However, total long positions remain significantly high at $26.5 billion.
Ultimately, the fate of the dollar will depend on how seriously traders take Trump's tariff rhetoric. If Trump solidifies his tariff stance, particularly targeting European and Asian economies, it could trigger a return to bullish dollar positions.
Additionally, the upcoming release of personal consumption expenditures (PCE) data—the Fed's preferred inflation gauge—later this month will provide further insights into the central bank's policy path and shape expectations for the dollar.
Gold's Tug-of-War: Fed Bets, Trade Uncertainty, and Risk Appetite
Gold prices recorded their biggest single-day drop in two months on Friday, despite U.S. retail sales data easing inflation concerns and boosting bets that the Federal Reserve would start cutting interest rates sooner than previously expected.
Since the beginning of the year, traders have continued flocking to gold as a safe haven despite high U.S. yields and a strong dollar, driving prices to a fresh all-time high near $3,000. Concerns that President Donald Trump would impose sweeping global tariffs and ignite a trade war had been dampening risk appetite.
However, Trump's shift from broad-based tariffs to more targeted measures eased trade war concerns and revived risk appetite—prompting traders to move into relatively riskier assets. The S&P 500 remained near record highs, while the tech index surged past its previous peak.
That said, Trump's unpredictability continues to keep markets on edge, which could still support gold as a haven. Additionally, growing expectations of Fed rate cuts are typically favorable for non-yielding gold. As a result, while rising risk appetite may put short-term pressure on gold, the metal maintains its positive long-term outlook.
Australian Dollar on Edge as RBA Weighs First Rate Cut in Years
On Tuesday, the Reserve Bank of Australia (RBA) will announce its interest rate decision. Despite uncertainties surrounding global trade and the potential inflationary effects of election-related turmoil at home, the RBA is expected to deliver its first rate cut in four years.
A Bloomberg survey of economists and traders shows that the majority anticipate a quarter-point reduction, bringing borrowing costs down to 4.1%. Meanwhile, money markets are pricing in an 85% probability of a cut. If implemented, this would mark the RBA’s first rate reduction since November 2020.
However, economists warn that rising consumer spending, supported by tax cuts and government subsidies, along with uncertainties surrounding U.S. trade policy, could keep policymakers cautious. The Australian dollar, which has already benefited from President Donald Trump’s softening stance on global tariffs, could gain further momentum if the RBA surprises markets by keeping rates unchanged.
Japan’s Economy Surges, Strengthening BoJ Rate Hike Expectations
Japan’s economy grew faster than expected in the fourth quarter of 2024. Expanding at a 0.7% pace quarter-over-quarter—up from the previous 0.3%—the economy posted a significant 2.8% growth rate compared to a year earlier. These figures are likely to reinforce the Bank of Japan’s (BoJ) commitment to its rate hike trajectory.
As speculation over another BoJ rate hike intensifies, institutional traders have turned increasingly bullish on the yen, marking their most optimistic stance since March 2021. According to Commodity Futures Trading Commission data, net long positions on the yen have surged to their highest level in nearly four years. Swap traders are now pricing in an 80% probability that the BoJ will raise rates by July.
Traders are growing more confident in a hawkish BoJ, driven by rising nominal wages and persistent price pressures in Japan. For further clues, markets will closely watch January’s national consumer price index (CPI) data, set to be released early Friday. Additionally, traders are monitoring developments in U.S. trade policy, as the U.S. administration is expected to respond to Japan’s request for exemptions from tariffs on steel and aluminum.
China’s Central Bank Decision in Focus, but No Action Expected
On Thursday, traders will turn their attention to the People's Bank of China (PBoC) for its interest rate decision, though no policy changes are anticipated. Recent PBoC statements indicate that the central bank remains committed to stabilizing the yuan, which has depreciated significantly due to trade-related concerns.
At an event on Sunday, PBoC Governor Pan Gongsheng reaffirmed this stance, emphasizing that macroprudential measures will be implemented to maintain yuan stability. While policymakers acknowledge deflationary pressures, they are likely to delay further monetary easing to protect the local currency.
Key UK Inflation and Labor Market Data on the Radar
This week, the UK will release critical data on both the labor market and inflation. Inflation in January likely reached its highest level in ten months. According to a Bloomberg survey, economists’ median estimate points to a 2.8% year-over-year increase in consumer prices. Persistently high inflationary pressures could prompt the Bank of England (BoE) to adopt a more cautious approach toward rate cuts.
Meanwhile, labor market data will also be closely watched. Forecasts suggest that average earnings, excluding bonuses, rose by 5.9%—an increase from the previous 5.6%. Such strong wage pressures would reinforce expectations that the BoE will maintain a cautious stance on monetary policy.