OPTIONS: Expiries for Feb21 NY cut 1000ET (Source DTCC)

• They are still only relatively small moves but 2Y GoC yields have pared most of their dip on the CAD CPI release, now just 0.5bp lower although still -3bp on the day. For context, 2Y Tsy yields are -1bp post-data for also -3bp on the day.
• The further acceleration in the BoC’s core to 3.5% annualized could be at play here, being a second month above the 1-3% target band and technically its highest since Sep 2023.
• It is however a volatile series, whilst the smoother six-month run rate increased a steadier 0.1pp back to 2.8% Y/Y to just about remain within that target band (although still its fastest since Jan 2024).

Bank of America write “the USD optically benefited from the sell-off in equities since mid-December. But this risk-off bid is less evident "under the hood" and likely driven more by the emergence of tariff risk premium, which affects both markets. This is evident in the gap between the DXY and the level implied by rate differentials, even after the Inauguration Day sell-off.”

• Looking ahead, they believe that “some risk premium is likely to sustain as there remains uncertainty around the timing of tariff increases.”
• Ultimately, they believe that “the bigger near-term risk for USD bulls is the proximity to CTA stop-loss levels. Tariff noise and CTA unwinds aside, a deceleration in U.S. services vs. manufacturing, of which there is little sign yet, remains a precondition for peak USD.”

The Philadelphia Fed's non-manufacturing regional business activity diffusion index fell to a 5-month low of -9.1 in January, from -3.4 prior (rev from -6.0). The Philadelphia Fed characterizes the implied activity as "soft" (in December it was described as "weak"), with the current general activity index dipping to 2.2 from 4.6 prior.

• The internals were mixed: new orders rose to 1.6 from -4.6, but sales were down to 2.6 from 3.2, full-time employment down to 1.5 from 3.2. Prices paid fell 2 points to 28.9 while prices received fell to -0.3 from 23.3.
• The latter comes after spiking 21+ points in December (after similar fluctuations between September and November), so it is hard to discern much signal here especially as the Philly manufacturing equivalent spiked in January, but some will see this as notable as the weakest since June 2023.
• The report maintains the theme of weakening regional services sector activity in recent months, though contrasts significantly from the prior two months in that the spike in forward expectations has reversed.
• The regional business activity expectations 6-months forward fell to 26.2 after averaging above 46 in Nov/Dec (29.8 in Oct), with firm-level business activity expectations showing a similar pattern. This is still elevated overall, though.
• Looking at the broader trends, current activity looks fairly flat over the last 2-plus years, when ignoring the large swings in a series that is volatile month-to-month.
• That's consistent with a softening rather than resurgent services sector, but this is looking increasingly like a regional than a national phenomenon, with ISM Services and Services PMI showing increasingly expansionary conditions in the last couple of months.