• Another day, another tariff story; we believe graduated tariffs will be the eventual plan; the two-day FOMC meeting begins today; Conference Board consumer confidence for January will be reported; Chile is expected to keep rates steady at 5.0%
  
• Eurozone banks tightened credit standards the most since 2023; U.K. BRC January shop prices remain in deflationary mode; Hungary is expected to keep rates steady at 6.5%
  
• Australia December NAB business survey improved modestly

The dollar recovered on tough tariff talk from Trump. DXY is trading higher for the first time since last Wednesday near 107.915 after Trump promised “much bigger” tariffs than the reports of a graduated plan that starts at 2.5% (see below). USD/JPY traded back near 156 after trading below 154 yesterday for the first time since mid-December. Sterling is trading lower near $1.2435 and the euro is trading lower near $1.0430. More and 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. This week’s G-10 central meetings should underscore monetary policy divergences that favor the dollar.

AMERICAS

Another day, another tariff story. Yesterday, the FT reported that Treasury Secretary Bessent is in favor of universal tariffs on all imports initially set at 2.5% and raised gradually. This is in line with reports this past month of a gradual tariff plan, though talk of universal tariffs had died down in favor of more targeted ones. Reports suggest the tariffs would rise by 2.5 percentage points per month, which would give U.S. businesses more time to adjust, and would top out at 20%. However, one inside source noted that “There is not a single plan the president is ready to decide on yet.”

We believe graduated tariffs will be the eventual plan. We once again encourage our faithful readers to read Stephen Miran’s (nominated to head the Council of Economic Advisers) essay “A User’s Guide to Restructuring the Global Trading System” to understand the range of possible tariff/currency policies that could be implemented by the Trump administration. A graduate implementation of tariffs is one of the options cited as it would offer credible forward guidance and minimize uncertainty. Moreover, tariffs are unlikely to be uniform across countries. In an article published last October, Bessent proposed putting countries into different buckets with different tariff rates based on common security and economic systems. In such a system, trade and national security are joined at the hip.

Asked about the Bessent story, Trump said that he wants tariffs that are “much bigger” than 2.5%. He also pledged to target specific industries such as semiconductors, pharmaceuticals, steel, copper, and aluminum. For good measure, Trump stressed that “We’re going to protect our people and our businesses, and we’re going to protect our country, with tariffs.” We’ve said it before and we’ll say it again: It’s a fool’s errand to try and trade on the tariff noise. Instead, we focus on the underlying fundamental drivers that favor the dollar regardless of the final tariff plan. Indeed, this week’s G10 central bank meetings will reassert the monetary policy divergence theme underpinning USD strength.

The two-day FOMC meeting begins today. The Fed is widely expected to deliver a hawkish hold tomorrow. We see some risks that the Fed’s decision is not unanimous after Governor Waller went full dove ahead of the media blackout. However, we believe he is in the clear minority, with most other officials preferring to keep policy on hold until the economic outlook becomes clearer. There are no updated Summary of Economic Projections, as the next one will be published in March.

Chair Powell’s post meeting press conference will be key. We expect Powell to emphasize again that the FOMC can be “more cautious as we consider further adjustments to our policy rate.” Of note, the next cut is now fully priced in for June and a second hike is now nearly priced in. Both are slightly more dovish than previous pricing but as always, it will all come down to the data.

Conference Board consumer confidence for January will be reported. Headline is expected at 105.9 vs. 104.7 in December. If so, it would remain within the same narrow range that’s held throughout the past two years. Positive real wage growth, encouraging labor demand, and strong household balance sheets suggest household spending will remain an important tailwind to GDP growth. Watch out for the labor index (jobs plentiful minus jobs hard to get). In December, that index rose to a seven-month high of 22.2, suggesting consumers are more optimistic about future labor market conditions.

Growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q4 growth at 3.0% SAAR and will be updated today after the data. Elsewhere, the New York Fed's Nowcast model is tracking Q4 growth at 2.6% SAAR and Q1 growth at 3.0% SAAR and will be updated Friday. In between, we get our first official read for Q4 GDP Thursday. Consensus sees growth of 2.7% SAAR vs. 3.1% in Q3, driven in large part by strong personal consumption of 3.2% SAAR expected vs. 3.7% in Q3.

Chicago Fed National Activity Index for December was firm. Headline came in at 0.15 vs. -0.06 expected and a revised -0.01 (was -0.12) in November. As a result, the three-month moving average rose to -0.13 vs. -0.23 expected and a revised vs. -0.26 (was -0.31) in November. Headline was the highest since May 2024 and the three-month moving average was the highest since July 2024 and moves away from the -0.7 threshold that typically signals recession.

Regional Fed surveys for January will wrap up. Dallas Fed services and Richmond Fed manufacturing (expected to remain steady at -10) and services will be reported today. Yesterday, Dallas Fed manufacturing came in at 14.1 vs. 0.0 expected and a revised 4.5 (was 3.4) in December. December durable goods orders will also be reported today and are expected at 0.6% m/m s. -1.2% in November.

Chile central bank is expected to keep rates steady at 5.0%. At the last meeting December 17, the bank cut rates 25 bp to 5.0% and signaled a new phase as Governor Costa noted that inflation will be around 5% in early 2025, a level that she called “uncomfortable” even as she stressed that “From here on, it shouldn’t be surprising that we enter a stage in which there are pauses.” The swaps market is not pricing in any further easing for this cycle.

EUROPE/MIDDLE EAST/AFRICA

Eurozone banks tightened credit standards the most since 2023. In its quarterly lending survey, the ECB said the tightening of standards in Q4 “was mainly owing to banks in Germany and France in an environment of increased political uncertainty, whereas credit standards eased in Italy.” The survey showed that credit demand increased slightly across the eurozone and “was supported mainly by declining interest rates, with fixed investment having a still-muted impact after its small positive contribution in the previous quarter.” However, the ECB noted that loan demand remained weak overall. Lastly, banks saw further tightening of credit standards in Q1. The survey should keep the ECB firmly in dovish mode as it meets this week.

U.K. BRC January shop prices remain in deflationary mode. Shop prices came in as expected at -0.7% y/y vs. -1.0% in December. This offers some hope that official CPI inflation due out February 19 will show some improvement. With the economy weakening and services inflation cooling, the Bank of England has room to resume easing policy. Markets are pricing in a 25 bp cut to 4.5% at the next meeting February 6, as well as 75 bp of total easing over the next 12 months that would see the policy rate near 4.0%. There are around 50% odds of another 25 bp after that.

National Bank of Hungary is expected to keep rates steady at 6.5%. At the last meeting December 17, the bank delivered a hawkish hold. Only one MPC member recommended a rate cut, suggesting the bar for the bank to resume easing is high. Indeed, the bank emphasized that “geopolitical tensions, volatile financial market developments and the risks to the outlook for inflation warrant further pause in cutting interest rates.” The market is pricing in one 25 bp cut over the next 12 months.

ASIA

Australia December NAB business survey improved modestly. Business confidence edged up 1 point to -2 but remains well below the long-run average of around 5. Business conditions rose 3 points to 6 and almost returned to the long-run average of 6.6. However, it does not move the dial on near-term RBA rate expectations. Instead, the Q4 CPI print tomorrow will either lock in a rate cut at the next meeting February 18 or give the RBA space to delay the start of easing a bit longer. Headline is expected at 2.5% vs. 2.8% in Q3, reflecting the government’s cost-of-living subsidy measures introduced in July 2024. The markets are pricing in roughly 80% odds of a 25 bp cut in February.