US: Firm core inflation. Markets were sanguine with the January personal consumption expenditure (PCE) inflation data release last week (ended 1 March). Both PCE (2.4% y/y) and core PCE (2.8% y/y) inflation readings were in line with expectations, supporting a mid-year rate cut scenario. However, the Dallas Fed’s trimmed mean PCE, an alternative measure of core, jumped by 5% y/y. This was driven by spikes in financial and hospital services, along with computer software and some beverage prices. Next week, consensus expects CPI inflation to increase again to 0.4% m/m in February after rising to 0.3% in January from 0.2% in the previous month. We believe caution is warranted.

Keeping an eye on the labour market. Friday’s Nonfarm Payrolls (NFP) will provide another pulse check on the labour market, which has proven resilient through this cycle. With two strong prints (333k and 353k in December and January respectively) in the bag, consensus is looking for a moderation to 200k, a level that is more consistent with full employment. Job creation at this pace with an unemployment rate below 4% could then translate into somewhat sticky wages (4.5% y/y in January). Based on these three metrics, the economy is doing remarkably well, and the Fed should be more cognisant of upside risks to inflation. That said, we note that the average weekly hours worked has dipped to 34.1, levels not seen since the early part of the pandemic in 2020. This divergence between firm NFP and lower hours worked is probably what is keeping a measure of caution in the markets.

Current market pricing (150 bps of rate cuts by end-2025) is about in line with the Fed’s December dot plot after the rates selloff over the past few weeks. However, February’s labour market and inflation data could have an impact on the Fed’s guidance at the Federal Open Market Committee (FOMC) meeting on 21 March. Another NFP print that is above 200k and/or another sticky Consumer Price Index (CPI) print could change the calculus. While recent Fed-speak point to a base case of cuts later this year, another month of upside surprises may prompt a tweak of the dot plot (perhaps less cuts in the dot plot) as worries tilt towards no-landing. If delayed/less cuts get worked in rates pricing, curve steepening would also be delayed.

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