• November CPI data will take center stage today; PPI will be reported tomorrow; BOC is expected to cut rates 50 bp to 3.25%; Brazil COPOM is expected to hike rates 75 bp to 12.0%
  
• German Chancellor Scholz plans to request a December 16 confidence vote that will trigger snap elections February 23; French President Macron plans to appoint a new prime minister by Thursday; two-day ECB meeting began today; South Africa reported soft November CPI data
  
• Reports suggest BOJ officials see little cost to delaying the next rate hike; Japan Q3 BSI survey came in firm; China is considering allowing the yuan to weaken in 2025 in response to the threat of higher U.S. tariffs; China’s annual two-day closed-door Central Economic Work Conference kicked off today

The dollar is firm ahead of CPI data. DXY is trading higher for the fourth straight day near 106.660 ahead of key U.S. inflation data that should provide fresh clues to Fed policy. USD/JPY is trading higher near 152.60 on falling odds of a December BOJ hike (see below). Elsewhere, the euro is trading lower near $1.05 and sterling is trading lower near $1.2735. EM FX is broadly weaker after reports suggest China will allow the yuan to weaken next year (see below). We look for the dollar rally to continue after this period of consolidation. While the U.S. election results have turbo-charged this dollar move, faithful readers will recall that we have been resolute in our belief that the strong U.S. fundamental story continues to favor higher UST yields and a higher dollar. Last week’s jobs report as well as other key data still to come this week and next should confirm our thesis. Market pricing for the Fed has already adjusted, which has given the dollar a huge lift.

AMERICAS

November CPI data will take center stage today. Headline is expected to pick up a tick to 2.7% y/y, while core is expected to remain steady at 3.3% y/y. This is right in line with the Cleveland Fed’s Nowcast model forecasts. Looking ahead to December, that model has headline at 2.8% and core at 3.3%, respectively. Inflation has eased significantly over the past two years, but recent data have raised the possibility that progress on inflation may be stalling well above 2%. Indeed, super core CPI accelerated to 4.4% y/y in October. While there is still some key data to come, we suspect today’s CPI report will have the final say on the Fed’s decision next week.

There are no Fed speakers this week due to the media blackout. As such, there can be no further verbal pushback to markets viewing a December cut as a done deal. Instead, the data will do all the talking. It’s clear from Fed comments last week that officials (ex-Goolsbee) are worried about sticky inflation and therefore preparing the markets for a pause. The market is pricing in 85% odds of a cut next week. If the Fed does indeed cut then, we are very confident that it will be a hawkish cut that sets up a pause in January and perhaps beyond (depending on the data).

Bank of Canada is expected to cut rates 50 bp to 3.25%. However, the market is somewhat split. Nearly a third of the 31 analysts polled by Bloomberg look for a smaller 25 bp cut, while the swaps market sees over 80% odds of a 50 bp cut. We believe the BOC has room to deliver a follow-up 50 bp rate cut, as inflation is close to 2% and inflationary pressures are no longer broad-based. Additionally, monetary policy remains too tight, heightening the downside risk to the economy. At 3.75%, the BOC policy rate remains above the bank’s nominal neutral interest rate estimate of 2.25-3.25%. The next Monetary Policy Report will be released at the January 29 meeting.

Brazil COPOM is expected to hike rates 75 bp to 12.0%. A few analysts polled by Bloomberg look for a smaller 50 bp hike. Yesterday, November IPCA inflation came in two ticks higher than expected at 4.87% y/y vs. 4.76% in October. It was the third straight month of acceleration to the highest since September 2023 and further above the 1.5-4.5% target range. Looking ahead, the swaps market is pricing in 450 bp of total tightening over the next 12 months that would see the policy rate peak near 15.75%.

EUROPE/MIDDLE EAST/AFRICA

German Chancellor Scholz plans to request a December 16 confidence vote that will trigger snap elections February 23. Polls currently show the opposition conservatives under Friedrich Merz lead by a wide margin at around 31%, followed by the far-right Alternative for Germany at about 18%, and Scholz’s SPD at 17%. Encouragingly, Merz is open to relax the so-called debt brake (which restricts annual structural deficits to 0.35% of GDP in any fiscal year), “if extra borrowing were to boost investment.” Nonetheless, fiscal support to the weak Germany economy will require time to take shape as the formation of a new coalition government could take weeks or months.

French President Macron plans to appoint a new prime minister by Thursday. However, the deeply divided parliament will make it hard for any new government to implement major fiscal changes. Importantly, the political drama faces additional twists and turns because new parliamentary elections cannot be held before June 2025 and Macron has pledged to stay in place until his term end in May 2027.

Two-day European Central Bank meeting began today. It is widely expected to cut rates 25 bp. We also expect the ECB to stick to its data-dependent guidance by reiterating that it “is not pre-committing to a particular rate path.” President Lagarde’s press conference should provide more color on the decision. Attention will also be on the update macroeconomic projections. Of note, 2027 will be added to the forecast horizon. Judging from the recent soft batch of eurozone economic data, the ECB will likely tweak lower its inflation and real GDP growth forecasts. This can lead to a downward adjustment to ECB easing expectations that would likely weigh on the euro. The market is currently pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom near 1.75%, but we think it could go even lower.

South Africa reported soft November CPI data. Headline came in two ticks lower than expected at 2.9% y/y vs. 2.8% in October, while core came in a tick lower than expected at 3.7% y/y vs. 3.9% in October. While headline accelerated for the first time since February, it remains below the 3-6% target range while core is the lowest since February 2022. At the last meeting November 21, the South African Reserve Bank cut rates 25 bp to 7.75% and Governor Kganyago said, “As a central bank in a small, open economy, caution is what going be at play here.” The swaps market has become slightly more dovish and now sees the policy rate bottoming near 6.75% vs. 7.0% at the start of this week. Either way, it would be a relatively shallow easing cycle and could help support the rand. Next meeting is January 30 and another 25 bp cut to 7.5% seems likely.

ASIA

Reports suggest Bank of Japan officials see little cost to delaying the next rate hike. According to unnamed sources, the bank is still open to a hike next week but it will depend on data and market developments. By waiting until January or later to hike, bank officials see very little risk that inflation might overshoot, the people said. We agree. Japan’s disinflationary trend is intact, and the growth outlook is unimpressive. October earnings data reported last week were mixed and did not call out for more tightening. Odds of a hike next week have been volatile of late. After rising as high as 65% earlier this month, the odds have plunged to below 20% on several stories regarding a pause.

USD/JPY continues to move higher. The pair has broken above the 200-day moving average near 152 today. More importantly, USD/JPY is on the verge of a so-called Golden Cross within a day or so, as the 50-day moving average is about to cross above 200-day moving average). This will set up further gains for the pair. Of note, the US 10-year yield is also on the verge of a Golden Cross that would set up a further rise.

Japan Q3 BSI survey came in firm. Large all industry business conditions came in at 5.7 vs. 5.1 in Q3 and was the biggest quarterly increase since Q3 2023. Large manufacturing conditions came in at 6.3 vs. 4.5 in Q2 while large non-manufacturing conditions came in at 5.4 and was the same as Q2. Business conditions as measured by the BSI have improved in recent quarters, but headwinds may be building as all industry large firms outlook fell to 3.9 in Q1 and 2.6 in Q2. Elsewhere, the Bank of Japan’s Tankan survey will be reported Friday. In that survey, conditions for large companies have improved in recent quarters but are expected to remain steady or fall modestly in Q4. These Tankan readings would still be indicative of a continued modest recovery in real GDP growth.

Japan reported soft machine tool orders for November. Total orders slowed to 3.0% y/y vs. 9.4% in October. Domestic orders picked up to 5.0% y/y vs. -0.6% in October, while foreign orders came in at 2.2% y/y vs. 13.6% in October.

Reports suggest that China policymakers are considering allowing the yuan to weaken in 2025 in response to the threat of higher U.S. tariffs. In recent weeks, PBOC has kept the daily fix below 7.20 in an effort to lean against yuan weakness. Keep an eye on these fixes for signs of a shift in policy. Of course, a significantly weaker yuan would likely raise the ire of the incoming Trump administration.

In the meantime, China’s annual two-day closed-door Central Economic Work Conference kicked off today. At that conclave, GDP growth target and stimulus plans for 2025 are set. Earlier this week, the Politburo signaled a “more proactive” fiscal policy and a “moderately loose” monetary stance in order to “vigorously boost consumption” next year. We remain skeptical that policymakers will unveil anything that will address its many problems related to the property bubble.