Drivers for the Week of December 10, 2023

December 10, 2023
Here's a look at the main drivers in Developed Markets this week.

The dollar made a broad-based recovery last week on the back of firm U.S. data that helped push U.S. yields higher. JPY, CAD, and SEK outperformed while NOK, AUD, and NZD underperformed. This week is likely to bring a hawkish hold from the Fed as well as an elevated core CPI reading in the U.S.; these should help the dollar continue to grind higher by maintaining upward pressure U.S. yields.


The strong jobs report Friday brings the dovish Fed narrative into question. After sinking all week, U.S. yields finally recovered. The 10-year yield traded as low as 4.10% last week before closing near 4.23%, while the 30-year yield traded as low as 4.21% last week before closing near 4.30%. The 2-year yield traded as low as 4.54% this month before closing near 4.72%. We look for a double whammy of elevated core CPI inflation and a hawkish hold from the Fed to help keep this move higher in yields going this week. Supply should also help, as Treasure auctions $50 bln of 3-year notes and $37 bln of 10-year notes Monday followed by $21 bln of 30-year bonds Tuesday.

The two-day FOMC meeting ends Wednesday with a widely expected hold. However, we expect the Fed to push firmly back against the elevated rate cut expectations. WIRP suggests no change either this week or in January but after that, it’s all about the cuts. There are 50% odds of a cut March 20 and is fully priced in for May 1. Four cuts are fully priced in by end-2024, with nearly 50% odds of a fifth one. While we disagree with this market pricing, it will take a string of stronger data to shift the narrative.

New macro forecasts and Dot Plots will be released. Of note, the extra hike this year that was in the September Dots will be taken off. Will two cuts still be seen in 2024 for a Dot of 4.875% vs. 5.125% in September? Or will the Fed opt for a more dovish Dot of 4.625%? Of note, the September Dots showed five cuts in 2025 and four in 2026.

Chair Powell’s press conference is typically important. However, the markets didn’t respond to his hawkish comments right before the blackout period. Recall that Powell said that the Fed was prepared to tighten more if it becomes appropriate and stress that it was premature to speculate on when the Fed might ease. He said policy is “well into restrictive territory” and that the Fed is committed to staying restrictive until inflation is on a path to the 2% target. Really, it's become a little too late for Powell and the Fed to change the narrative; it's become so ingrained in the markets that it will take several stronger than expected data reports to change it.

November inflation data will be key. CPI will be reported Tuesday. Headline is expected to fall a tick to 3.1% y/y while core is expected to remain steady at 4.0% y/y. Of note, the Cleveland Fed’s Nowcast model has headline and core at 3.0% and 4.1% in November, followed by 3.3% and 4.0% in December. Many are looking for CPI readings to pick up into year-end, which will test the market’s faith in the dovish Fed narrative. PPI will be reported Wednesday. Headline is expected to fall two ticks to 1.1% y/y while core is expected fall two ticks to 2.2% y/y.

Retail sales data Thursday will be very important. Headline is expected at -0.1% m/m vs. -0.1% in October, while ex-autos is expected at -0.1% m/m vs. 0.1% in October. The so-called control group used for calculating GDP is expected at 0.2% m/m vs. 0.2% in October. Consumption continues to hold up relatively well despite softening in some consumer confidence measures. We continue to believe that as long as jobs are being created, consumption should remain robust.

The U.S. economy itself remains relatively robust. The Atlanta Fed’s GDPNow model is now tracking Q4 growth at 1.2% SAAR vs. 1.3% previously. Next update will be Thursday. This stands in contrast to the NY Fed Nowcast model that is still tracking 2.3% SAAR. This model will be updated Friday. Readings early in the quarter are typically volatile as more and more data are incorporated into the models. Lastly, we’d note that the current early reads are based largely on strike-depressed October data. If November data continue to bounce back as we expect, the Q4 estimates should rise accordingly.

Surveys for December will start rolling out. S&P Global PMIs will be reported Friday. Manufacturing is expected at 49.3 vs. 49.4 in October, services is expected at 50.7 vs. 50.8 in October, and the composite is expected at 50.4 vs. 50.7 in October. Empire manufacturing survey kicks things off for the regional Fed surveys Friday too. It is expected at 2.0 vs. 9.1 in November.

Other minor data will be reported. November NFIB small business optimism and budget statement will be reported Tuesday. Weekly jobless claims, November import/export prices, and October business inventories will be reported Thursday. November IP and October TIC data will be reported Friday.


The two-day European Central Bank meeting ends Thursday with a widely expected hold. Despite efforts to push back against the market, easing expectations have picked up. WIRP suggests 5% odds of a cut this week, rising to 10% January 25, 65% for March 7 and fully priced in for April 11. Five cuts by the end of next year are fully priced in. The bank will discuss adjusting both its PEPP reinvestments and its Minimum Reserve Requirements. ECB hawks have been pushing for changes to both sooner rather than later. While the bank may give some hints of these discussions, we do not think a decision on either will be made until 2024.

Updated macro forecasts will be released. Inflation forecasts are likely to be revised down in light of the recent data. However, the ECB cannot cut the forecasts by too much without running the risk of validating market easing expectations. Growth forecasts should also be cut marginally in light of the recent data.

President Lagarde will most likely use her press conference to try to push back against the dovish narrative. However, we note that her October conference was quite downbeat, and the growth outlook has gotten worse since then. Similar to Powell and the Fed, her protestations are likely to fall on deaf ears. Vasle, Kazimir, Muller, Scicluna, Simkus, and Vujcic all speak Friday.

Eurozone preliminary December PMIs will be reported Friday. Headline manufacturing is expected at 44.5 vs. 44.2 in October, services is expected at 49.0 vs. 48.7 in October, and the composite is expected at 48.0 vs. 47.6 in October. If so, this would be the highest composite reading since July. Looking at the country breakdown, the German composite is expected at 48.2 vs. 47.8 in October and the French composite is expected at 45.0 vs. 44.6 in October. Italy and Spain will be reported with the final November PMIs in early January.

Germany ZEW survey for December will be reported Tuesday. Expectations are expected at 8.0 vs. 9.8 in November, while current situation is expected at -76.0 vs. -79.8 in November.

October eurozone IP will be reported Tuesday. IP is expected at -0.3% m/m vs. -1.1% in September, while the y/y WDA is expected at -4.5% vs. -6.9% in September. Trade data will be reported Friday.

The Bank of England meeting ends Thursday with a widely expected hold. Here too, the bank is likely to push back against market easing expectations. WIRP suggests no odds of a hike this week, rising modestly to top out near 10% February 1. After that, rate cuts are priced in. WIRP suggests 10% odds of a cut March 21, rising to nearly 45% May 9 and nearly 90% June 20. Three cuts are priced in by the end of 2024. Ramsden speaks Friday.

The monthly U.K. data dump begins. Labor market data will be reported Tuesday. Average weekly earnings for the three months ending in October are expected at 7.6% y/y vs. 7.9% previously. The ONS continues to estimate a new experimental unemployment rate, which remained steady at 4.2% for the three months ending in September.

October GDP, IP, services, construction, and trade will all be reported Wednesday. GDP is expected at -0.1% m/m vs. 0.1% in September, IP is expected at -0.1% m/m vs. 0.0% in September, services is expected at 0.0% m/m vs. 0.2% in September, and construction is expected at -0.2% m/m vs. 0.4% in September. December GfK consumer confidence will be reported Thursday and is expected at -22 vs. -24 in November.

U.K. preliminary December PMIs will be reported Friday. Manufacturing is expected at 47.5 vs. 47.2 in October, services is expected at 51.0 vs. 50.9 in October, and the composite is expected at 50.9 vs. 50.7 in October. If so, this would be the highest composite reading since June.

The Swiss National Bank meets Thursday and is expected to keep rates steady at 1.75%. After EUR/CHF traded last week at the lowest since January 2015, we expect the SNB to push back against this CHF strength, first by jawboning and threatening intervention if needed. CPI inflation cooled to 1.4% y/y in November, the lowest headline reading since October 2021 and the sixth straight month that it has been below the 2% target. As such, a stronger franc is clearly not desirable. At the last policy meeting September 21, the bank unexpectedly kept rates steady at 1.75% vs. an expected 25 bp hike but said that "From today's perspective, it cannot be ruled out that a further tightening of monetary policy may become necessary to ensure price stability over the medium term.” The market only sees easing ahead. WIRP suggests nearly 20% odds of a cut this week, rising to nearly 70% March 21 and fully priced in for June 20. A second cut is fully priced in for September 26.

Norges Bank meets Thursday and is expected to keep rates steady at 4.25%. A couple of analysts look for a 25 bp hike while WIRP suggests around 30% odds of a hike. Ahead of the decision, Norway reports November CPI Monday. Headline is expected at 4.9% y/y vs. 4.0% in October, while underlying is expected at 5.9% y/y vs. 6.0% in October. If so, headline would be the highest since July and further above the 2% target. At the last meeting November 2, Norges Bank kept rates steady at 4.25% and it was a dovish hold. While the bank repeated its September statement that another raise was “likely” at the December meeting based on the economic outlook, it left the door open to another hold if it becomes “more assured that underlying inflation is on the decline.” Updated macro forecasts and expected rate path will be released at this week’s meeting.

Sweden reports November CPI Thursday. Headline is expected at 6.0% y/y vs. 6.5% in October, CPIF is expected at 3.9% y/y vs. 4.2% in October, and CPIF ex-energy is expected at 5.9% y/y vs. 6.1% in October. If so, CPIF would be the lowest since November 2021 but still well above the 2% target. Next policy meeting is February 1, and no change is expected currently. At the last meeting November 23, the Riksbank kept rates steady for the first time in this tightening cycle. The minutes showed some confidence that previous rate hikes were slowing the economy, as “The labor market is slowing down from a strong initial position. Forward-looking indicators, such as companies’ price plans, also point to inflation continuing to fall.” The swaps market is pricing in steady rates over the next three months, followed by 25 bp of easing over the subsequent three months.


The Bank of Japan liftoff expectations have eased a bit ahead of its December 18-19 meeting. WIRP now suggests only 10% odds of a move this month vs. 35% last week, as the soft data provide a bit of a reality check for the markets. Weak wage growth, lower than expected November Tokyo CPI data, and downward revisions to Q3 GDP data all argue for caution in removing accommodation too soon. Still, expected Bank of Japan liftoff has shifted back to April vs. June at the start of last week.

Japan reports two key surveys for Q4. BSI will be reported Monday. Both large and all industry readings have improved over the course of this year, but further gains will be difficult.

BOJ Tankan survey will be reported Wednesday. Large manufacturing index is expected to rise a point to 10, while large non-manufacturing index is expected to remain steady at 27. Large manufacturing outlook is expected to fall a point to 9, while large non-manufacturing outlook is expected to rise four points to 25. Lastly, all industry capex is expected at 12.7% vs. 13.6% in Q3.

Orders data will also be important. November machine tool orders will be reported Monday. October core machine orders will be reported Thursday and are expected at -5.7% y/y vs. -2.2% in September.

Japan preliminary December PMIs will be reported Friday. The composite reading of 49.6 in November was the first reading below 50 since December 2022 and the lowest since November 2022.

Australia highlight will be November jobs data Thursday. Consensus sees 11.0k jobs created vs. 55.0k in October, while the unemployment rate is seen rising a tick to 3.8%. Recent softness in the data has led markets to start pricing in an RBA easing cycle. WIRP suggests no cut either February 6 or March 19, but the odds of a cut rise to 25% May 7, 40% June 18, 80% September 24, and fully priced in November 5.

Australia preliminary December PMIs will be reported Friday. The composite reading of 46.2 in November was the lowest since August 2021.

New Zealand reports key Q3 data. Current account data will be reported Wednesday and is expected at -7.4% of GDP vs. -7.5% in Q2. GDP data will be reported Thursday. Growth is expected at 0.2% q/q vs. 0.9% in Q2, while the y/y rate is expected at 0.5% vs. 1.8% in Q2. However, we see downside risks after weak retail sales and manufacturing activity data were reported. Here too, recent softness in the data has led markets to start pricing in an RBNZ easing cycle. WIRP suggests 10% odds of a hike February 26, but the odds of a cut come in at 25% May 22, 65% July 10, and fully priced in August 14.

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