Market volatility persists as US CPI and trade turmoil take centre stage

WHERE WE STAND – Another day, another bout of risk aversion, was the general vibe of trade yesterday.

Well, it was, after Trump doubled tariffs on Canadian steel; then, it wasn’t, after reports Ukraine were prepared to agree a 30-day truce, and after Canada canned proposed levies on electricity exports to the States; then, it was again, after Trump noted he ‘isn’t concerned’ about the ongoing market jitters.

Anyone else confused? Anyone else struggling to keep up? Anyone else got a headache?

You’re not alone!!

Perhaps the spread trade of the week here is long caffeine & short market participants’ hairlines (and some of us were staring on a low base there anyway!).

Anyway, the nub of all that is really that we are still in the same place that we were 24 hours ago, grappling with incoherent, volatile, and bordering on insane policymaking from the Oval Office, which gives neither consumers nor businesses any confidence whatsoever, and leaves financial markets with no opportunity whatsoever to accurately price risk.

As if to evidence that, it’s now 6 times in the last 7 days that US trade policy towards its northern neighbour has changed. I’d wager it didn’t change 6 times in the last decade before this, though haven’t run the numbers. Frankly, the way in which political business is being conducted here is little short of nonsensical.

As a result, it is no surprise at all that participants continue to trim exposure to equities, as part of a broader de-risking of portfolios, as hiding in safe havens becomes a priority. Yesterday’s price action epitomised this well, albeit in incredibly choppy fashion. I’m happy to continue riding the momentum on all fronts for the time being – selling equity rallies, favouring further gains across the Treasury curve, and still reckoning that gold will test $3,000/oz.

What is perhaps of most interest is the dynamic surrounding the dollar, which participants logically don’t seem to want to touch with a 10ft barge pole at the moment.

As opposed to being the usual bastion of stability, and first choice haven for FX market operators, the greenback instead now stands as quite the opposite – being a synonym for instability, volatility, policy incoherence, and standing as the most exposed to the ever-changing US trade policy backdrop. It’s tough to see this dynamic changing soon, unless the degree of policy uncertainty lifts, hence further dollar downside remains my preference.

The dollar index (DXY) plumbed fresh YTD lows yesterday, dipping beneath 103.50 for the first time since last November, in losses that were broad-based across the G10 board, excluding the loonie which was predictably softer on the latest barrage of tariffs. Besides that, though, yesterday saw cable test 1.2950 to the upside, while also seeing the EUR clamber above the 1.09 figure.

Those gains for the common currency were helped along by conciliatory comments from the German Green Party leader, signalling that a deal on increased defence spending is likely to be done, potentially as soon as this week, contrary to some jitters that had crept in yesterday. In true EU fashion, what we’re getting here is a fudge to force the issue, and which gives all those involved just enough to ‘sell’ the deal to their own voters. Whatever, politics aside, a test of 1.10 – and subsequent free lunch for me! – still looks to be on the cards.

Amid all of that, it is worth noting that we did actually get some better than expected US data yesterday. JOLTS job openings came in at 7.74mln in January, up from a revised 7.51mln at the back end of 2024, in a somewhat surprising rise given the cold snap at the start of the year. In any case, just as one swallow doesn’t make a summer, one decent-ish second-tier datapoint won’t ease ongoing growth jitters; especially with Trump firing off tariff tirades left, right, and centre.

LOOK AHEAD – Finally, a day with a data docket that has some meat on the bones!

February’s US CPI figures are likely to be the highlight, with headline inflation expected to have risen 2.9% YoY last month, and core prices expected to have risen 3.2% YoY over the same period – both being 0.1pp slower than the prior print. Data of this ilk would reinforce the bumpy disinflationary path on which the US economy remains, and would be highly unlikely to materially alter the FOMC policy outlook. That said, given ongoing jitters over both economic growth, and potential risks of ‘stagflation’, a more adverse market reaction is likely to be experienced in the event of hotter-than-expected figures, than in the case of a cool surprise.

Elsewhere, today, the Bank of Canada should deliver a 25bp cut, with Macklem & Co. remaining the ‘only game in town’ to insulate the Canadian economy against the negative impacts of ongoing trade tensions with the US. Money markets, incidentally, fully discount a 25bp cut today, while pricing a total of 80bp of easing by year-end.

Lastly, a busy day of ECB speakers awaits, highlighted by remarks from Chief Economist Lane, while today’s earnings docket is again quiet, with only Adobe (ADBE) figures after the close of any particular note.