- December jobs report will be the highlight; Fed officials are in no hurry to cut rates; University of Michigan reports preliminary January consumer sentiment; Canada highlight will also be December jobs report; Brazil reports December IPCA inflation
- BOE finds itself on the horns of a dilemma; key eurozone industrial data for November were soft; Norway reported soft December CPI data
- Reports suggest the BOJ is still considering its rate decision for January; Australia reported soft household spending in November; PBOC took more steps to curtail yuan weakness
The dollar is treading water ahead of the jobs report. DXY is trading flat near 109.180 after three straight up days but remains on track to test and eventually surpass the cycle high near 109.533 from last Thursday. Sterling is stabilizing and trading flat near $1.23 but remains on track to test the October 2023 low near $1.2035 as fiscal concerns continue to hit U.K. assets (see below). Elsewhere, the euro is trading flat near $1.03 despite weak IP data (see below), while USD/JPY is trading lower near 158 on reports that the BOJ is still mulling its January decision and may raise its inflation forecasts (see below). More tariff noise is likely in the coming days and weeks but we continue to look through that and focus on the underlying fundamental backdrop, which remains unchanged. Simply put, the strong U.S. fundamental story of strong growth, elevated inflation, and a more hawkish Fed continues to favor higher U.S. yields and a stronger dollar. Today’s jobs report is key.
AMERICAS
December jobs report will be the highlight. Bloomberg consensus for NFP stands at 165k vs. 227k in November, while its whisper number stands at 184k. Given signs of ongoing strength in most other labor market data, we see risks of a 2-handle. Unemployment is expected to remain steady at 4.2%, while average hourly earnings are expected to remain steady at 4.0% y/y. Each monthly labor market print has taken on great importance now that the Fed has signaled a pause for January. The next cut isn’t priced in until June, but it will all come down to the data.
Fed officials are in no hurry to cut rates. Harker said “It’s appropriate for us to take a bit of a pause now and we can see how things shake out. And you know, we’re not talking about a long pause potentially, but let’s see how things shake out.” Collins said it was appropriate for the Fed to pause right now, adding it can stay where it is “for a little bit, not long.” She stressed that it was important for the Fed to watch how Trump’s policies evolve. Barkin said “There is no question in my mind that as a lot more federal debt comes onto the market, that it is at times overwhelming the demand, and that is what creates the increase in yields. I don’t think it is inflation, I think it is term premium.” Schmid said “I am in favor of adjusting policy gradually going forward and only in response to a sustained change in the tone of the data. The strength of the economy allows us to be patient.” Bowman said "Looking ahead, we should be cautious in considering changes to the policy rate as we move toward a more neutral setting."
University of Michigan reports preliminary January consumer sentiment. Headline is expected to remain steady at 74.0. Current conditions are expected to remain steady at 75.1, while expectations are expected at 72.7 vs. 73.3 in November. 1-year inflation expectations are seen steady at 2.8% and 5- to 10-year expectations are seen steady at 3.0%.
Growth remains solid. The New York Fed's Nowcast model is tracking Q4 growth at 1.9% SAAR and Q1 growth at 2.2% SAAR and will be updated today. Elsewhere, the Atlanta Fed GDPNow model is tracking Q4 growth at 2.7% SAAR and will be updated next Thursday after the data.
Canada highlight will also be December jobs report. Consensus sees 25.0k jobs created vs. 50.5k in November, while the unemployment rate is expected to rise a tick to 6.9%. If so, it would be the highest since September 2021. Canada’s labor market is softening and so the Bank of Canada has room to keep cutting the policy rate, which will be an ongoing drag on CAD. The market is pricing in 80% odds of a 25 bp cut to 3.0% at the January 29 meeting and the policy rate to bottom between 2.50-2.75% over the next 12 months.
Brazil reports December IPCA inflation. Headline is expected at 4.84% y/y vs. 4.87% in November. If so, it would be the first deceleration since August but would remain above the 1.5-4.5% target range. Next COPOM meeting is January 29 and the CDI market is pricing in a 125 bp hike to 13.5%. Looking ahead, the swaps market is pricing in a peak policy rate near 16.5% over the next 12 months.
EUROPE/MIDDLE EAST/AFRICA
The Bank of England finds itself on the horns of a dilemma. Deputy Governor Breeden acknowledged yesterday that the recent string of downside surprises in economic activity and upside surprises in inflation complicates the appropriate policy response. As such, the BOE’s limited scope to ease policy can worsen the already fragile U.K. growth outlook and lead to a further deterioration in the U.K. fiscal outlook. The sell-off in GBP and gilts reflect a deterioration in the UK’s fiscal prospects, driven by heightened risk the UK could be entering a period of stagflation. The implication here is that GBP and gilts are vulnerable to more downside until we have some positive U.K. economic growth and/or inflation surprise. November GDP, December CPI, and December retail sales data are due out next week. Stay tuned…
Key eurozone industrial data for November were soft. France and Spain reported November IP. France’s IP came in at 0.2% m/m vs. -0.1% expected and a revised -0.3% (was -0.1%) in October, while the y/y rate worsened to -1.1% vs. -1.3% expected and a revised -0.9% (was -0.6%) in October. Elsewhere, Spain’s IP came in at -0.8% m/m vs. 0.5% in October, while the y/y rate worsened to -0.4% vs. 1.5% expected and a revised 1.5% (was 1.9%) in October. Italy reports IP next Tuesday and is expected at 0.2% m/m vs. 0.0% in October, while eurozone reports IP next Wednesday and is expected at 0.3% m/m vs. 0.0% in October. The fact that the eurozone manufacturing PMI remains stuck near 45 suggests little relief on the horizon for IP.
Norway reported soft December CPI data. Headline came in at 2.2% y/y vs. 2.5% expected and 2.4% in November, while underlying came in at 2.7% y/y vs. 2.8% expected and 3.0% in October. Headline is the lowest since first time since December 2020 and is nearing the 2% target. At the last meeting December 19, Norges Bank kept rates on hold at 4.5% and indicated that “the policy rate will most likely be reduced in March 2025” which was in line with previous guidance as well as current market pricing. Next policy meeting is January 23 and the market sees 20% odds of a cut then, rising to nearly 75% March 27.
ASIA
Reports suggest the Bank of Japan is still considering its rate decision for January. In addition, the report suggests that the bank may raise its quarterly inflation forecasts this month due to higher rice prices and the weaker yen. USD/JPY dropped sharply on the news but has since recovered. We still expect the BOJ to wait until March at the earliest to raise rates again as wage trend will be clearer by then, and so view any dip in USD/JPY as a buying opportunity. The market sees over 50% odds of a hike this month, rising to 80% in March and nearly priced in for May.
Australia reported soft household spending in November. Spending rose 0.4% m/m vs. 0.7% expected and a revised 0.9% (was 0.8%) in October. As a result, the y/y rate slowed a tick more than expected to 2.4% vs. a revised 3.3% (was 2.8%) in October. The spending data mirror the soft retail sales data out earlier this week and supports expectations of a cut in February. Currently, the market sees about 75% odds of a cut then.
The PBOC took more steps to curtail yuan weakness. The PBOC announced overnight it will stop buying sovereign debt this month to boost bond yields, which have slumped to record lows. Yesterday, the PBOC announced plans to auction a record CNY60 bln of six-month bills in Hong Kong on January 15 to reduce the supply of yuan in the offshore market and make it more expensive to short the currency. Nevertheless, China’s record yield differential with the U.S. will maintain downward pressure on the yuan.