DXY peaked October 3. At that time, only CHF had notched YTD gains (0.4%) amongst the majors, while JPY (-12.0% YTD), NOK (-10.6%), and AUD (-7.5%) were the underperformers. The dollar weakened sharply in Q4 and so the final tally for 2023 saw CHF (9.9%), GBP (5.4%) and SEK (3.5%) outperform and JPY (-7.0% YTD), NOK (-3.6%), and NZD (-0.5%) underperform. Of note, DXY ended down -2% for the year. Until the dovish Fed narrative is challenged, the dollar is likely to remain under pressure.

AMERICAS

It’s déjà vu all over again. At the start of 2023, virtually everyone was calling for a weaker dollar. This call was largely predicated on the U.S. going into recession and the Fed cutting rates significantly. Instead, the U.S. economy continues to grow above trend and may have avoided recession altogether. Yet here we are at the beginning of 2024 and once again, consensus sees a weaker dollar. A soft landing has become the base case and yet the market is pricing in an aggressive easing cycle. It’s hard to square this circle. To us, a soft landing would likely require a couple of insurance cuts in 2024. As of this writing, the market is pricing in six cuts this year.

If the U.S. data remain firm in Q1, we are confident that the markets will undergo significant repricing of the easing cycle. If and when that happens, the dollar should get some traction but until then, the path of least resistance is down for the greenback. It’s worth noting that according to Bloomberg consensus, the U.S. economy will outperform the eurozone, Japan, and the U.K. in both 2024 and 2025. On that outperformance alone, the dollar should be doing better.

FOMC minutes Wednesday will be closely watched. At the December 12-13 meeting, the Fed delivered a dovish hold. Of note, the statement was fairly boilerplate, but the updated Dot Plots suggested three cuts in 2024. However, it was Chair Powell’s press conference that heralded the Fed pivot. There were no dissents, but the minutes will be scoured for any pushback from the hawks. WIRP suggests 15% odds of a cut January 31 and is nearly priced in March 20. Barkin speaks Wednesday and Friday. Logan speaks Saturday.

Financial conditions continue to loosen. The Chicago Fed’s measure has loosened for ten straight weeks to the loosest since the week ending January 21, 2022, nearly two months before the Fed started hiking rates. With equities higher, yields lower, spreads narrower, and the dollar weaker last week, we’ll likely get an 11th straight week of looser financial conditions when reported Thursday. This loosening is the major factor behind why we now believe the U.S. may avoid recession in 2024. However, this will likely come at a price of elevated inflation that may eventually require tighter policy.

The U.S. economy remains robust. The New York Fed’s Nowcast model has Q4 growth at 2.4% SAAR and Q1 growth at 2.2% SAAR. It will be updated Friday. Elsewhere, the Atlanta Fed’s GDPNow model has Q4 growth at 2.3% SAAR vs. 2.7% previously. It will be updated today after the data. Bottom line: the US economy is still growing above trend in Q4. Of note, the early Q4 reads were based largely on strike-depressed October data. If November and December data continue to bounce back as we’ve seen already, the Q4 growth estimates should rise accordingly. In turn, this momentum is likely to carry over into Q1.

The data highlight will be December jobs data Friday. Bloomberg consensus for NFP stands at 170k vs. 199k in November, while its whisper number stands at 175k. The unemployment rate is expected to rise a tick to 3.8% while average hourly earnings are expected to fall a tick to 3.9% y/y. Ahead of that, we get ADP private sector jobs data Thursday, and it is expected at 115k vs. 103k in November.

We get some other labor market readings. November JOLTS data will be reported Wednesday. Job openings are expected at 8.863 mln vs. 8.733 mln in October but keep an eye on hires and layoffs to get a fuller picture of the hiring situation. Hires have been edging lower in recent months, while layoffs have been edging higher. December Challenger job cuts and weekly jobless claims will be reported Thursday.

December ISM PMI readings will also be important. Manufacturing PMI will be reported Wednesday. Headline is expected at 47.2 vs. 46.7 in November but keep an eye on employment and prices paid, which stood at 45.8 and 49.9 in November, respectively. Services PMI will be reported Friday. Headline is expected at 52.5 vs. 52.7 in November but keep an eye on employment and prices paid, which stood at 50.7 and 58.3 in November, respectively. Prices paid in both sectors have been rising in recent months even as supply chain issues resolve, suggesting it is more demand led. Last week, Chicago PMI came in much weaker than expected at 46.9 vs. 55.8 in November.

We get some minor data as well. November construction spending will be reported Tuesday and is expected at 0.5% m/m vs. 0.6% in October. December vehicle sales will be reported Wednesday and are expected at an annual rate of 15.49 mln vs. 15.32 mln in November. November factory orders will be reported Friday and are expected at 2.2% m/m vs. -3.6% in October.

Canada highlight will be December jobs data Friday. Consensus sees 13.5k jobs added vs. 24.9k in November, while the unemployment rate is seen rising a tick to 5.9%. Like the U.S., job growth has been cooling but new jobs are still being created. December S&P Global manufacturing PMI will be reported Tuesday. Ivey PMI will be reported Friday.

Bank of Canada easing expectations remain elevated. WIRP suggests nearly 10% odds of a cut January 24, rising to 40% March 6 and fully priced in April 10. A total of five cuts are priced in for 2024.

EUROPE/MIDDLE EAST/AFRICA

December Eurozone CPI readings will continue rolling out. Germany and France report Thursday. Germany’s EU Harmonised inflation is expected at 3.9% y/y vs. 2.3% in November, while France’s EU Harmonised inflation is expected at 4.1% y/y vs. 3.9% in November. Italy and eurozone report Friday. Italy’s EU Harmonised inflation is expected at 0.5% y/y vs. 0.6% in November. Finally, eurozone headline inflation is expected at 3.0% y/y vs. 2.4% in November, while core is expected at 3.4% y/y vs. 3.6% in November. Last week, Spain’s EU Harmonised inflation came in as expected at 3.3% y/y, steady from November. Spain is one of the few eurozone countries to report core inflation and it came in at 3.8% y/y vs. 4.5% in November.

European Central Bank easing expectations remain elevated. WIRP suggests nearly 10% odds of a cut January 25, rising to 65% March 7 and fully priced in April 11. A total of six cuts are priced in for 2024, with over 50% odds of a seventh. Of note, ECB officials warned that inflation would rise temporarily and so markets are looking through this December spike.

Germany reports some key data. December unemployment will be reported Wednesday and is expected to remain steady at 5.9%. November retail sales will be reported Friday and is expected at -0.5% y/y vs. 0.1% in October. Last week, Spain reported sales at 5.2% y/y vs. 3.9% expected and a revised 5.3% (was 5.0%) in October.

Eurozone reports final December PMI readings. Manufacturing PMI will be reported Tuesday. Italy and Spain report for the first time and are expected at 44.2 and 46.3, respectively. Services and composite PMIs will be reported Thursday. Here too, Italy and Spain report for the first time and their services PMIs are expected at 50.0 and 51.2, respectively. In the preliminary December readings, the composite PMIs of the four biggest eurozone economies were below the key 50 boom/bust level.

U.K. reports final December PMI readings. Manufacturing PMI will be reported Tuesday. Services and composite PMIs will be reported Thursday. Construction will be reported Friday. The preliminary December composite PMI of 51.7 was the highest since June but we do not think it can remain above 50 in early 2024.

Bank of England reports its December Decision Maker Panel inflation survey Thursday. Both the 1- and 3-year measures remain well above the 2% target and yet BOE easing expectations remain elevated. WIRP suggests nearly 5% odds of a cut February 1, rising to 35% March 21 and fully priced in May 9. A total of six cuts are priced in for 2024, with over 50% odds of a seventh.

ASIA

Bank of Japan liftoff expectations have been pushed out again. Soft economic data and dovish BOJ comments have led markets to look for July 31 liftoff vs. June 14 previously. Elsewhere, the 10-year JGB yields stands near 0.61%, well below the 1% ceiling. This suggests the market sees no end to Yield Curve Control anytime soon. Of note, WIRP suggests less than 10% odds of liftoff January 23, rising to nearly 40% March 19, 60% April 26, and nearly 90% June 14.

Japan reports final December PMI readings. Manufacturing PMI will be reported Thursday. Services and composite PMIs will be reported Friday. Of note, the economy continues to flirt with recession as the 50.4 preliminary composite PMI basically reversed the drop to 49.6 in November.

Reserve Bank of Australia easing expectations remain elevated. WIRP suggests 10% odds of a cut February 6, rising to 25% March 19 and 85% May 7. Nearly three cuts are priced in for 2024.

Australia reports final December PMI readings. Manufacturing PMI will be reported Tuesday. Services and composite PMIs will be reported Thursday. Of note, the composite PMI has been under 50 for three straight months and five of the past six.