Opinions

With the Fed in their self-imposed blackout period, a few inflation related US economic data will get a chance to do the talking ahead of the March 18th FOMC meeting. Of particular note will be the inflation data, namely Wednesday’s CPI report for February and Friday’s core PCE reading for January. But the highlight of next week might be Iran war. The Iran War is a new source of uncertainty for the economic outlook. We believe Brent prices can breach $100/bl levels next week as there is no off ramp from either Iran or Trump. For TACO trade to start and hostilities to end, US equities need to fall at least 5-10% more from Friday's close of 6740 or Brent needs to top $120/bl levels. Retail gasoline prices rose more than 30 cents per gallon this week according to AAA, which should put a dent on consumer spending. That said, the share of energy goods spending in total personal consumption is now around historical lows of ~2.0%. US Strategic Petroleum Reserve currently holds over 400 million barrels of crude oil, which could alleviate spot price pressure should Trump chose to use it. But Trump seems inclined not to use it for now. In US macro data, we have Feb CPI which we expect at .33% MoM for headline CPI & .24% MoM for core CPI. Supercore CPI inflation likely moderated in February, with airline fares slowing sharply following extreme strength in January. In other US macro data this week, we have PPI, Univ of Michigan, durable goods orders, trade balance & personal income & spending. In dated UST supply this week, we have $58 Billion supply of 3yr USTs on Tuesday, $39 Billion supply of 10yr USTs on Wednesday & $22 Billion supply of 30yr USTs on Thursday. On Fed policy front, we believe Fed might maintain status quo till Powell is Fed Chair followed by 2 rate cuts of 25 bps each in June & Sep as Kevin Warsh takes over as Fed Chair. We see markets more focused on Iran events in short term and Feb CPI data might not be market moving to an extent. We remain bearish on risk assets and bullish on Crude prices in short term. In European macro data this week, we have German factory orders, Euro Area Sentix survey & German industrial production. In UK, we now see 2 cuts of 25 bps each in April & July taking terminal policy rate to 3.25%. We have Jan GDP data for UK expected to be around .2% MoM.

We expect Core CPI inflation decelerated to 0.24% m-o-m in February from 0.29% in January. Core goods inflation likely remained subdued at 0.14% m-o-m due to another decline in used vehicle prices. Supercore CPI inflation likely moderated in February at .3% MoM (from .59% MoM in Jan), with airline fares slowing sharply following extreme strength in January. Based on our current forecasts for CPI and PPI, we expect core PCE inflation decelerated to 0.25% m-o-m in February from 0.44% in January, which would bring its y-o-y change down to 2.9%. Despite the anticipated moderation, monthly core PCE inflation of 0.25% (annual rate of 2.9%) remains too high for the Fed. In addition, elevated geopolitical risks pose upside risk to the inflation outlook. We believe Fed might maintain status quo till Powell is Fed Chair followed by 2 rate cuts of 25 bps each in June & Sep as Kevin Warsh takes over as Fed Chair. We see markets more focussed on Iran events in short term and Feb CPI data might not be market moving to an extent. We remain bearish on risk assets and bullish on Crude prices in short term. The TACO trade is still not there for us to change our view.

Based on markets over the weekend, initial reactions to the US and Israel military actions on Iran were largely as expected: broadly stronger USD (with relative “safe havens” benefiting), higher oil and gold prices, and US equities and bitcoin lower. However, despite news that Iran’s supreme leader Khamenei died after the attacks and Iran’s revolutionary guard and Iran new agencies suggesting the Strait of Hormuz is shut, Bitcoin (a proxy for risk assets but less the case with oil) have pulled back from most of the initial moves. There remains relatively high near-term uncertainty regarding further potential US/Israel/Iran (or related) exchanges, with global market concerns mainly centred on whether the impact on transit through the Strait of Hormuz will be prolonged, with oil flows through the strait accounting for around 20% of global supply. Our own view on Iran events is that it is going to be a multi week drawn event. Till then we will Brent moving higher to $90-100 levels, gold testing $6000 levels and S&P500 testing 6000 levels. 10yr UST yields might push lower towards 3.85 but beyond this level, it might not drop further. Post the initial risk off, there might be massive selling in US assets as inflation fears take centre stage. DXY might strengthen initially but finally fall. On economic data front, we have a series of US data points (ISM manufacturing, ISM services, Retail sales) including the crucial Feb NFP (NonFarm Payroll) data due for release on 6th March. We expect nonfarm payrolls growth slowed to 75k in February, down from January’s peak, but still well above the 2025 run rate. This would bring the 3m average of nonfarm payrolls growth up to 84k, the fastest pace since January 2025. The unemployment rate likely remained steady at 4.3%. Measures of layoffs remain near historic lows, but we have not seen a convincing pickup in hiring and labor demand. We expect February NFP to solidify the narrative that the labor market has stabilized following last year’s slowdown scare. As a result of this labor market improvement, we expect the FOMC to keep policy unchanged through the remainder of Powell’s term as chair, through the March and April meetings. We continue to expect 2 cuts of 25 bps each in June & Sep as insurance cuts under new Fed Chair Kevin Warsh. This week all eyes will be on crude. In today’s meeting, OPEC+ agreed to resume oil production increases next month as a conflict sparked by US-Israeli strikes on Iran threatened to bolster a rally in crude prices. Key members led by Saudi Arabia and Russia which had paused a series of hikes during the first quarter will add 206,000 barrels a day. But In our view, the above increase won’t move the needle for Brent bulls. As long as there are question marks over safety of ships in Strait of Hormuz, Brent might remain bid only. Our first target is $80 per barrel for Brent which was the high during last year June events when Israel & US had bombed Iran’s nuclear sites. The Islamic Republic itself pumps about 3.3 million barrels a day, or 3% of global output, making it the fourth-largest producer in OPEC. It exports currently 1.5 mbpd mostly to China. If this 1.5 mbpd gets offline due to Israel/US attacks on Iranian energy infrastructure, we see Brent going to $90 levels. In response if IRGC or the new Iranian political leadership decides to block strait of Hormuz, we expect $110 levels on Brent till the time US military is able to provide a guaranteed safety to ships transiting through Strait of Hormuz. In short term, Brent has more levers working for upward bias then any downtrend as long as there is no ceasefire from Iran or Israel/US front.

We expect nonfarm payrolls growth slowed to 75k in February, down from January’s peak, but still well above the 2025 run rate. If our estimates are correct, this would bring the 3m average of nonfarm payrolls growth up to 84k, the fastest pace since January 2025. The unemployment rate likely remained steady at 4.3%. Measures of layoffs remain near historic lows, but we have not seen a convincing pickup in hiring and labor demand. Average hourly earnings growth likely slowed modestly to 0.3% m-o-m, keeping y-o-y wage growth unchanged at 3.7%. January employment growth appeared to overshoot, with alternative indicators, including continuing claims and ADP, showing a more-muted acceleration to start the year. This raises the risk of negative payback in February and potential downward revisions to January. The underlying trend for employment appears positive though. Service sector surveys point to steady employment growth. The February household survey will incorporate new Census population estimates for 2025. Instead of backward revisions, the household survey simply switches over to new population controls in January, creating the risk of anomalous oneoff moves, especially for “counting” variables, like total employment or the size of the labor force, as well as some demographically sensitive measures, like labor force participation and the employment-population ratio. To summarise, we expect February to solidify the narrative that the labor market has stabilized following last year’s slowdown scare. As a result of labor market improvement, we expect the FOMC to keep policy unchanged through the remainder of Powell’s term as chair, through the March and April meetings. From a market perspective, while UST yields have fallen sharply to multi week lows due to Iran scare, we believe it is difficult to sustain 10yr USTs below 3.85% for long (current yield 3.93%). With tariff refund cases coming up soon, fiscal issues might soon come to forefront provided the Iran issue does not flare up further. 2*10 has already flattened to 30 levels but has scope to further flatten if there is an actual US attack on Iran. We wait to put on steepeners at around 25 levels or just before NFP data release on Friday. We exit our long UK gilts call given on 16th Nov’25 when 10yr UK gilts were at 4.58. Current yield is 4.23. Profit target was 4.2 https://macro-spectrum.com/trade-recommendation/buy-10yr-uk-gilts US equities are facing sustained head winds due to questions on AI capex returns as well as Iran scare. Even strong Nvidia results this week could not cheer up mag 7 equities. Hence, we exit our long S&P call given on 8th Nov when S&P was at 6729. CMP is 6878. https://macro-spectrum.com/trade-recommendation/buy-sp-500

This week’s data docket is relatively light with the main focus likely to be Friday’s January PPI release. What will be of greater interest will be global market reactions to the surprise Supreme Court decision last Friday as well as the Trump administration’s subsequent actions. the Supreme Court held in a 6-3 majority that the Trump administration’s use of the International Emergency Economic Powers Act (IEEPA) to implement sweeping tariffs was unconstitutional. In response, the Trump Administration has vowed to implement a 15% global tariff under section 122 authority. Trump also threatened potential tariff actions under other statutes (sections 301, 338 and section 232) but each has procedural limitations and/or political trade-offs. We expect the Section 122 tariffs to end up covering a similar range of items to the most recent IEEPA tariffs, which would cause the effective tariff rate to fall modestly by 1.6pp to to 12% from the current 13.6% levels. In US macro data this week, we have PPI for Jan, initial jobless claims & consumer confidence. In UST dated supply, we have $69 BN of 2 year supply, $70 BN of 5 year supply & $44 BN of 7 year supply. Considering the strong NFP nos of Jan, we don’t see any urgency in cutting rates as long as Powell remains as Fed Chair. But we continue to expect two more rate cuts of 25 bps each in CY26, one in the 17th June FOMC meeting & the last cut in the 16th Sep FOMC meeting. These two rate cuts might be more from an insurance cut perspective under the new Fed Chair Warsh. In RoW events, we have European HICP inflation & German IFO data, Canadian Q4 GDP & Australian Jan'26 CPI.

This week’s holiday-shortened data docket will consist of mostly re-scheduled releases that were delayed by the government shutdown toward the end of last year. Friday’s advance Q4 GDP release and December personal income / consumption reports will provide an important baseline for current-quarter expectations. In US macro data released last week, ior the Jan’26 employment report, the headline numbers 130k (against our expectations of 80k, market consensus of 60k) with the unemployment rate falling from 4.4% to 4.3% (as per our expectations)—should be good enough to continue to keep the Fed on hold till May when Fed Chair Powell term ends. Core CPI inflation came in weaker than we had expected, rising by 0.295% m-o-m, below our forecast of 0.4% (Consensus:0.3%). Our forecast miss was largely attributable to two volatile components (used vehicle prices and lodging-away-from-home prices). This week we have first estimate of Q4CY25 GDP (our estimate is at 3.0%), core PCE for Dec (our estimate is at .4% MoM), personal income & spending data for Dec amongst other tier 2 US macro data. In UST dated supply, we have $16 BN of 20 year UST auction on Wednesday & $9 BN of 30 year TIPS on Thursday. Considering the strong NFP nos of Jan, we don’t see any urgency in cutting rates as long as Powell remains as Fed Chair. But we continue to expect two more rate cuts of 25 bps each in CY26, one in the 17th June FOMC meeting & the last cut in the 16th Sep FOMC meeting. These two rate cuts might be more from an insurance cut perspective under the new Fed Chair Warsh. We had released a bear flattening view on US SOFR on 7th Feb as below and it has worked out well. We had recommended entry at 47 levels & currently it is at 40 levels. Our profit target is 35 and stop loss is at 53 levels. On US equities we are moderately bullish and expecting 7015 levels. We have released the following long S&P recommendation on 8th Nov’25: https://macro-spectrum.com/trade-recommendation/buy-sp-500 Currently S&P is at 6836. At the time of recommendation, S&P was at 6729. Profit target is 7015 and stop loss is at 6545. In RoW data, we have the all important UK CPI Jan data on Tuesday which we expect at 3% YoY. Recent UK surveys and official data have been mixed. The job market is slowing, as past policy restriction weighs on growth. Further monetary easing is needed, albeit tempered by sticky services prices. After having cut rates to 3.75%, dovish sentiment at its February policy meeting suggests earlier/more cuts than we had previously expected. We now see cuts in March and June for a terminal rate of 3.25%, which is close to neutral. We have been recommending receive on 10yr UK Gilts since 16th Nov’25 as seen below: https://macro-spectrum.com/trade-recommendation/buy-10yr-uk-gilts At the time of reco, 10yr UK gilts were trading at 4.58. Currently they are trading at 4.41. Our profit target is 4.2% and stop loss is at 4.8%. In European data, we have flash PMIs, ZEW survey and Euro area industrial production this week. Canada gets to see the Jan CPI data on Tuesday at 2.4% as per our estimates.