Dollar Consolidates Ahead of CPI Data

February 13, 2024
  • January inflation data take center stage; New York Fed reported January inflation expectations; U.S. small business optimism fell in January
  • U.K. wage growth remains sticky; U.K. unemployment rate unexpectedly dipped; German and eurozone ZEW survey for February came in mixed; Switzerland reported soft January CPI
  • Japan reported weak January machine tool orders; Australia’s economic outlook is mixed; New Zealand inflation expectations continue to fall

The dollar continues to consolidate ahead of CPI data. DXY is basically trading flat for the third straight day near 104.127. The euro is trading flat near $1.0775 while sterling is trading higher near $1.2665 on firm U.K. labor market data (see below). CHF is the worst performing major on soft Swiss CPI data (see below), while USD/JPY is trading flat near 149.35. When all is said and done, recent developments support our view that the Fed is unlikely to cut rates anytime soon. The data continued to come in on the firm side while Fed officials remain cautious about easing. We still believe that the current market easing expectations for the Fed still need to adjust significantly. These expectations have started to shift but more needs to be seen, even after the Fed’s hawkish hold and the January jobs data. Perhaps today’s CPI data will provide a spark.

AMERICAS

January inflation data take center stage. CPI will be reported today. Headline is expected at 2.9% y/y vs. 3.4% in December, while core is expected at 3.7% y/y vs. 3.9% in December. Of note, the Cleveland Fed’s inflation Nowcast model estimates headline and core CPI at 2.9% and 3.8%, respectively. For February, it sees 2.9% and 3.6%, respectively, which supports our view that inflation is likely to prove sticker than markets are anticipating.

New York Fed reported January inflation expectations. 1-year expectations were steady at 3.0%, 3-year expectations fell to 2.35% vs. 2.62% in December, and 5-year expectations were steady at 2.54%. All three of the New York Fed’s measures had been falling steadily and while we expect this to continue, policymakers are likely to be troubled by the fact that all tenors remain above its 2% target. This along with elevated inflation should support the Fed’s cautious stance. The market sees less than 20% odds of a cut in March, rising to 70% in May and fully priced in for June.

U.S. small business optimism fell in January. NFIB measure came in at 89.9 vs. 92.3 expected and 91.9 in December. This is the lowest since May 2023, while the drop of more than two full points was the largest since December 2022. NFIB official noted that “A more positive view of the future economy and economic policy would help stimulate longer term investment spending, but currently, owners’ views about the future are not supportive and financing costs are very high.”

EUROPE/MIDDLE EAST/AFRICA

U.K. wage growth remains sticky. Total estimated vacancies fell further in January, although they remained 131,000 above their pre-coronavirus levels in Q1 2020. Meanwhile, the slowdown in wages growth is proving stickier than anticipated. Regular (excluding bonuses) earnings rose 6.2% y/y in the three months ending in December vs. 6.0% expected, while total earning rose 5.8% y/y vs. 5.6% expected.

The U.K. unemployment rate unexpectedly dipped. It came in two ticks lower than expected at 3.8% in the three months ending in December vs. 3.9% previously and moves further below the Bank of England’s medium-term equilibrium level of around 4.5%. However, much of the drop came as more workers dropped out of the labor force. The drop wasn’t too much of a surprise as the ONS had warned that the unemployment rate may have fallen more quickly than the experimental indicator suggested. Regardless, ongoing challenges with response rates and levels mean that the BOE will likely pay more attention to the wages data. As things stand, the first cut is still priced in for August and only 75 bp of total easing is seen in 2024. Compare this to the start of this year, when markets saw the first cut in June and nearly 150 bp of total easing in 2024.

German and eurozone ZEW survey for February came in mixed. German expectations rose to 19.9 vs 17.5 expected and 15.2 in January, while current situation fell to -81.8 vs. -79.0 expected and -77.3 in January. Expectations are the highest since February 2023 while current situation is the lowest since June 2020. Eurozone expectations improved to 25.0 vs. 22.7 in January and is the highest since February 2023. The market sees 66% odds of the first ECB cut in June.

Switzerland reported soft January CPI. Headline came in at 1.3% y/y vs. 1.7% expected and actual in December, while core came in at 1.2% y/y vs. 1.6% expected and 1.5% in December. Changes to the weights of the CPI basket may partially explain the big drop in inflation. However, inflation has been running under the Swiss National Bank’s 2% target since June 2023, while the SNB projects headline CPI inflation to average 1.8% over Q1. Of note, the market sees nearly 60% odds of the first cut in March vs. June previously. A total of 75 bp of easing is now seen this year vs. 50 bp before the data. The Swiss franc has weakened, with EUR/CHF trading at the highest since mid-December and on track to test the December 14 high near 0.95452.

ASIA

Japan reported weak January machine tool orders. Orders fell l-14.1% y/y vs. -9.6% in December. This was the weakest since October and undoes two straight months of improvement. The mix was also worrisome, as domestic orders plunged -29.1% y/y and foreign orders fell -6.2% y/y. Elsewhere, January PPI was steady at 0.2% y/y, suggesting little in the way of pipeline price pressures. We know policymakers are worried about a sustainable economic recovery and removing accommodation too soon. Liftoff is still seen in June, as the BOJ will not be in a rush to normalize policy until after spring wage negotiations confirm that wage growth is picking up.

Australia’s economic outlook is mixed. The Westpac consumer sentiment index improved to a 21-month high of 86.0 in February, but the NAB business survey showed business conditions eased to a two-year low of 6 in January. Meanwhile, RBA Head of Economic Analysis Kohler reiterated the RBA’s message that “inflation is coming down, but it is still high and it will take some time before it is back in the RBA's 2% to 3% target range.” The market sees 85% odds that the first cut comes in August after being fully priced in for June at the start of this month.

New Zealand inflation expectations continue to fall. The RBNZ’s 2-year inflation expectations dropped to 2.5% in Q1 vs. 2.8% in Q3 and is the lowest since Q3 2021. Longer-term expectations also fell, with 1-year expectations dropping to 3.2% and 10-year expectations falling to 2.2%. This supports the case for less restrictive monetary policy settings. RBNZ Governor Orr’s speech Thursday titled “The changing drivers of inflation over the past couple of years and the shift from transitory to more stubborn underlying inflation” will offer more insights on the policy outlook.  

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