USD: Dollar bid on “reflationary” fears
The January ISM Services data arrived as a bit of a mixed bag, causing Treasury yields to pare back some of their earlier gains. On the surface, the headline index remained steady at 53.8, matching its highest level since October 2024 and staying safely in expansion territory, where readings above 50 indicate growth. However, the details weren’t quite as promising as the recent manufacturing report. Employment narrowly stayed in growth territory at 50.3, missing the expected 51.8, while new orders also cooled more than anticipated. Meanwhile, the Prices Paid component nudged upward to 66.6, suggesting that inflationary pressures are still a persistent thorn in the side of the services sector. In January, the US 10-Year Breakeven rate climbed from roughly 2.25% to 2.36%, reflecting the “reflationary” fears.
The internal industry dynamics tell an even more nuanced story. While 11 industries, led by healthcare, utilities, construction, and retail trade, reported growth, five sectors, including transportation and warehousing, saw a contraction. Global demand showed some signs of fatigue, with export bookings dropping at their fastest rate since March 2023. For equity investors, the software industry remains a particular sore spot, despite the broader sector’s expansion.
Looking ahead, ISM Chair Steve Miller noted that uncertainty is continuing to cloud the outlook. Respondent commentary highlighted concerns over tariff impacts and geopolitical tensions, likely triggered by annual contract renewals. While lower gasoline and diesel prices have provided some relief, the jump in the Supplier Deliveries and Business Activity indices suggests a busy landscape. The big question for the markets now is whether these recent price increases will stick or expand, which needs to be closely watched.
The US Dollar DXY Index has moved slightly higher, currently trading near the 97.7 level as markets digest the conflicting signals. Even as the labor market appears increasingly fragile following a disappointing ADP report, which showed private hiring slowing to just 22,000 jobs, the Greenback has remained bid.
CAD: Canadian services slump deepens
The Canadian service sector entered 2026 under growing pressure, with the S&P Global Canada Services PMI Business Activity Index slipping to 45.8 in January from 46.5 in December. This marks a third straight month of contraction, driven by a prolonged 14‑month decline in new business. Weakness in services continued to weigh on the broader economy, pulling the S&P Global Canada Composite PMI down to 46.4 from 46.7. While manufacturing showed signs of stabilizing, it wasn’t enough to offset the ongoing service-sector slump, leaving overall private‑sector activity below the 50.0 breakeven mark for a third consecutive month.
Several headwinds are keeping activity subdued, including trade tariffs and elevated market uncertainty. In response to soft demand, service firms cut staffing for a fifth month, largely by not replacing departing workers. One modest positive emerged on the inflation front, with input cost pressures easing to a 16‑month low. Even so, intense competition and weak demand have limited firms’ ability to raise prices. While businesses remain cautiously optimistic about the year ahead, confidence levels remain well below historical averages.
EUR: Soft core, softer euro risk
Yesterday, eurozone HICP inflation for January decelerated to 1.7% y/y from 2% (revised from 1.9%) in December, in line with expectations. More instructive was the downward surprise in the core component, which eased to 2.2% from 2.3% despite forecasts for an unchanged reading. The move was driven by a decline in services inflation, which slipped from 3.4% to 3.2%.
The clear deflationary bias may recalibrate how much weight any discussion around the possibility of another cut prompted by a stronger euro carries at today’s ECB policy meeting. In light of the release, we could see a mildly bearish reaction in the euro should Lagarde make more direct reference to such dynamics. That said, given the euro’s muted response to yesterday’s data outcome, we lean toward limited follow‑through in the currency.
Beyond the meeting, which is expected to deliver a steady hand, keep an eye on eurozone retail sales activity on the data front.
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Calendar: February 2 – 6
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