WHERE’S YOUR FED AT?: The Fed doesn’t have to “do” anything to tighten at this point. Fed Funds and EuroDollars are pricing in rate cuts to the end of the year.

img_63E22D9C00A905D200870001_image004.png@01D93AE2.13EB06D0@bloomberg.net”alt=”Chart, histogram Description automatically generated”data-permanent-id=”1675767539_ATT00004_63E22EF3000117A731580001.png” src=”https://archr.com/wp-content/uploads/2026/02/69842b6810330.png”>
(source: Bloomberg Financial LP)

The Fed standing pat is a tightening phenomenon on the swaps markets which will feed into the risk free assumptions and become a drag on stocks – regardless of how good the economy looks without a recession priced in until later owing to the super strong jobs market. No Fed action is going to put the pain trade into macro land. Treasuries extended post NFP selloff, fully pricing the upper bound of the Fed Funds target rate reaching 5.25% for the first time since November. Swaps for the 4 FOMC meetings from May-Sept were all trading >5%, with a roughly 25bps drop still being factored in for December. Fed funds futures show another 25bps hike in March as nearly a done deal, c.75% chance of another one in May. The odds for a June hike have also risen to 28% from 8% last Monday. But markets still staring down the Fed with a pivot.

Note –  Powell will be interviewed at the Economic Club of Washington, scheduled for 5pm UK time today.

THE INFLATION GENIE: The base case assumption is that peak inflation is behind us – see the Bloomberg News Trends for “inflation”  mentions which peaked mid-last year:
img_63E22D9C00A905D200870001_image005.png@01D93AE2.13EB06D0@bloomberg.net”alt=”A screenshot of a computer Description automatically generated with medium confidence”data-permanent-id=”1675767539_ATT00005_63E22EF3000117A731580002.png” src=”https://archr.com/wp-content/uploads/2026/02/69842b6942c74.png”>
(source: Bloomberg Financial LP)

vs the Bloomberg News Trends for “disinflation” (albeit much smaller sample size)

img_63E22D9C00A905D200870001_image006.png@01D93AE2.13EB06D0@bloomberg.net”alt=”Graphical user interface Description automatically generated”data-permanent-id=”1675767539_ATT00006_63E22EF3000117A731580003.png” src=”https://archr.com/wp-content/uploads/2026/02/69842b6a6b73c.png”>
(source: Bloomberg Financial LP)

But there are signs that the genie has not been fully put back in the bottle. A snippet from the JP Morgan Global Composite PMI report (released on 3^rd Feb): “After easing in the prior eight months, January saw average input prices rise at a faster pace. Rates of increase picked up in both the manufacturing and service sectors, with the steeper inflation again signalled in the latter. Output prices meanwhile rose to the least marked extent in almost two years… New order rates remain depressed due to buyer and supplier disagreements regarding price levels”. The last comment underscores margin concerns and the ability to continue to pass on input costs. It also suggests a little bottleneck of demand while pricing friction is worked out.

It is always interesting to read industry comments within the ISM data. There are some bright spots…

 – Machinery: “Strong big ag demand continues to drive heightened demand for parts. Large construction/off highway original equipment manufacturers have strong demand as well.”
– Chems: “Conditions are reasonable. Sales are a little better than planned. Cost pressures are easing for most products.” 

… and some not-so-bright spots:

 – Electronics: “we have begun to see softening in some pricing, and lead times seem to be improving”
– Staples: “Forecast from the sales department is showing even lower sales then we expected. If this holds true, inventory levels will rise slightly”
– Transport Equip: “Transportation from our overseas suppliers is also contributing to delays. Lead times have doubled for critical electronics, gaskets, sealants, and specialised steel”
– Appliances & Components: “Supply chain issues continue to plague our production schedules. Some business segments showing demand softening globally. Many materials showing improved lead times as well as cost deflation.”
– Metals: “In the past two weeks, we are seeing a slowing of new orders.”
– Fabricated Metals: “outlook for the first half of 2023 looks very soft. Demand for our products has taken a sharp downward turn. Our inventories are high”.

THE INFLATION GENIE (Cont): ECB consumer inflation expectation report for 3yr out edged up from 2.9% to 3%, although the 12m outlook was unchanged; Japanese wages are climbing at their fastest pace since 1997 while inflation erodes spending power. A growing number of Japanese firms have signalled plans to raise wages following government requests to help workers cope with the highest inflation since 1981; The RBA  said further tightening will be needed to crush stubbornly-high inflation;

UK CONSUMER: Nielsen data for 12-week supermarket retailers sales growth continues to point to the low-cost providers ongoing outperformance.  Note UK food inflation reached a new high of 13.8% in January which belies the headline growth coming from higher price pass through rather than volume growth. Sainsbury 12-week sales +8.3%; Tesco 12-week sales +8.1%; Asda 12-week sales +21.9%;  Morrison 12-week sales -0.5%;  Aldi 12-week sales +21.9%; Lidl 12-week sales +17.3%; Ocado 12-week sales +3.7%. The BRC data this morning showed better-than-expected sales over Christmas, but now consumers are battling higher household bills and more expensive mortgages as interest rates rise… and the Xmas credit card bills have hit the doormats through January further crimping buyer appetite as brought forward demand has to be paid for.

SUM OF ALL FEARS: A US debt default is still an uncomfortable possibility, according to BofA CEO Moynihan. “You hope it doesn’t happen, but hope is not a strategy – so you prepare for it,” he warned in an interview.

AND FINALLY: There is always one reverse indicator to keep an eye on:

img_63E22D9C00A905D200870001_image009.png@01D93AE2.13EB06D0@bloomberg.net”alt=”Text Description automatically generated” data-permanent-id=”1675767539_ATT00009_63E22EF3000117A731580004.png” src=”https://archr.com/wp-content/uploads/2026/02/69842b6ba1553.png”>
(source: CNBC.com)

 

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