EM CEEMEA CREDIT: PKNPW: funding for distribution and integration of renewables

• Today’s January CPI report (0830ET) is the sole CPI release between the Jan 29 and Mar 12 decisions.
• Bloomberg consensus sees a one tenth acceleration across both headline CPI (to 1.9% Y/Y) and the main cores measures (CPI-median to 2.5% Y/Y, CPI-trim to 2.6% Y/Y). The BoC targets a range of 1-3%.
• Remember that Senior Dep Gov Rogers downplayed the strength seen in CPI-trim at last month’s BoC press conference, saying the way it’s calculated has led them not to put much weight on it at this point in time.
• That leaves only one of the Bank’s three 'new' core measures actively watched, CPI-median, having abandoned CPI-common earlier in the cycle. We imagine this will start to see greater market focus on the more traditional core metrics such as CPIxFE and CPIX.
• That said, headline and CPIxFE will continue to be impacted by the two-month GST/HST holiday that began in mid-Dec (i.e. January is the first full month with the distortion vs 18 days of Dec), but median, trim and CPIX all account for indirect tax changes.  
• CIBC note that the 0.0% M/M nsa that they forecast for January (which sees 1.8% Y/Y) would have been 0.4% M/M were it not for the GST impact.
• Our crude “underlying” inflation measure – an unweighted average of median, trim, CPIX and CPIxFE – stood at 3.1% annualized in the three months to December for its first time above the target range since Dec 2023 (despite CPIxFE biased lower). However, the slower moving six month run rate held at a more acceptable 2.4% annualized.
• The market currently sees a little less than 50/50 odds of another 25bp cut on Mar 12, in slight favour of a pause, although US tariff deliberations are likely a more important factor.
• The initial 25% tariffs on all Canadian products except for 10% on energy products saw a 30-day postponement until Mar 4 after Canada agreed to bolster border security, whilst 25% tariffs specifically on steel & aluminium are currently set for Mar 10.
• With downside risks to Canadian growth, GDP data for Q4 and the January advance on Feb 28 should also be watched increasingly closely after recent signs of prior monetary policy easing boosting activity. 

Summary table below. Note that CIBC, National and RBC aren't included in the Bloomberg survey whilst some of the more detailed estimates from analysts more broadly are missing this time around. 

Reuters carrying comments from Kremlin foreign policy aide Yuri Ushakov. He confirms that the bilateral talks in Riyadh between US and Russian delegations have concluded after four and a half hours. Says that the negotiations "went well", and that "It was a serious conversation on all issues". Goes on to say that a meeting between Presidents Vladimir Putin and Donald Trump is "unlikely to take place next week", although the conditions for such a meeting were discussed. The two sides also agreed on the identity of negotiators that would talk about possible peace talks in Ukraine. Ushakov says that any decision on when to begin formal talks on Ukraine would come from Putin. 

• Today's talks come as White House special envoy for Russia and Ukraine Keith Kellogg is in Brussels as part of a two-day visit for meetings with EU and NATO officials. Kellogg said on 17 Feb that no peace deal would be forced "on an elected leader of a sovereign nation", referring to Ukrainian President Volodymyr Zelenskyy.
• German Green MEP Sergey Lagodinsky posted on X earlier claims of what a Trump peace plan could look like: "According to my sources: the proposal by Trump consists of 3 stages: 1) a ceasefire 2) ELECTIONS in Ukraine 3) signing of a final agreement. [...] It must be very clear to us, Europeans, that elections MUST take place AFTER the final stage. Not before it. Also because the final agreement cannot be the result of a pro-Russia candidate possibly elected under stage 2)."

• The persistent and one-way slide in front-end implied vols signals the prevalence of vol-selling in G10 - a strategy that could be caught offguard by any renewed USD rally.
• No surprise to see atypically low FX options volumes yesterday given the US Presidents' Day holiday - and markets aren't doing much to make up for it today. Total notional traded is well below average for this time of day, and won't be helping the continued slide in vols: EUR/USD 1m implied has stabilised, but is still at a YTD low below 7 points.
• The persistent pullback in implied off January's highs may only run so far: realised 1m vols across EUR/USD and GBP/USD are still sticky and close to highs. While this will undoubtedly moderate given the recovery in spot, the realised/implied 1m vol ratio is abnormally high. This metric hit the highest level since 2022 this week - a further signal that the market's expectations for Trump to upend the market are yet to come to pass - likely due to the delayed installation of tariffs.
• That said, the pace of the decline in implied is significant: particularly as the market monitors a new tariff deadline for Canada & Mexico, an ECB projection meeting, the opening of US-Russia negotiations and the April 1st report on America First Trade Policy - all of which pose risks to the February fade in the USD Index, and present considerable event risk.

Figure 1: Realised/Implied vol rank, EUR/USD 1m realised/implied ratio