Dollar Bounce Continues on Soft Eurozone CPI Data

November 30, 2023
  • Some Fed officials are finally starting to push back against the dovish narrative; financial conditions index loosened again last week; Fed’s Beige Book report is worth discussing; data highlight will be October PCE and personal income and spending; Canada reports GDP data; Banco de Mexico said a rate cut in early 2024 was possible
  • Eurozone November CPI ran cool; data have fed into ECB easing expectations; Germany reported firm October retail sales; U.K. inflation expectations continue to fall, albeit slowly
  • Japan reported mixed October data; BOJ officials remain dovish; China reported soft official November PMIs; Korea kept rates steady at 3.5%, as expected

The dollar is trading higher as the correction continues. DXY is trading higher near 103.33 after support held yesterday at the key 62% retracement level from the July-October move near 102.546. The euro is underperforming and trading lower near $1.0920 on soft CPI data (see below). It appears that this week’s break above its 62% retracement objective near $1.0960 may have been a false breakout. Sterling is going along for the ride and is trading lower near $1.2640 after testing its key 62% retracement objective yesterday near $1.2720. USD/JPY is trading higher near 147.65, helped by some more dovish BOJ comments (see below). Some Fed officials are starting to push back (see below), but it will take some firm U.S. data to challenge the current dovish Fed narrative. We stress that the U.S. economy continues to grow above trend even as the rest of the world slips into recession, while price pressures remain persistent enough that the Fed will not be able to cut rates as soon and by as much as the markets think. That said, the dollar remains vulnerable until we see a shift in market expectations for the Fed and that may be a 2024 story.


Some Fed officials are finally starting to push back against the dovish narrative. Barkin said he won’t take another rate hike off the table. It’s a bit surprising that it's coming from Barkin, who has been one of the leading doves this year. Barkin also claimed that the markets and the Fed have been having a forecasting battle. We wholeheartedly disagree with this. The Fed and the markets have been in an echo chamber, with each feeding off the other's sanguine views about inflation. It's a bit disingenuous of Barkin to imply that the Fed didn't have a hand in this move lower in rates. Williams speaks today.

That said, any efforts by the Fed at damage control are likely too little, too late. In our view, the Fed was too busy patting itself on the back to notice that markets had come down with a bad case of rate cut fever. WIRP still suggests less than 5% odds of a hike December 13. After that, it’s all about the cuts and the first one is fully priced in for May 1 vs. June 12 at the start of this week. Furthermore, a fifth cut by end-2024 is nearly 65% priced in.

Chicago Fed financial conditions index loosened again last week. Conditions are now the lowest since the first week of February 2022. With yields lower, the dollar lower, and equities higher so far this week, financial conditions are likely to continue loosening. Yet Bostic said tighter financial conditions are “biting harder” while Mester said broad tightening in financial conditions are helping to curb demand. What are they looking at? Their own Chicago Fed's measure shows nothing but loose and looser. The New York Fed’s FCI-G measure too, while private sector estimates show the same loosening. Have Fed officials not noticed the nearly full percentage point drop in long yields? Or the spread compression? Or the nearly 12% jump in the S&P 500 off the October lows? Who's doing all the heavy lifting now?

The Fed’s Beige Book report is worth discussing. Overall Economic Activity: On balance, economic activity slowed since the previous report, with four Districts reporting modest growth, two indicating conditions were flat to slightly down, and six noting slight declines in activity. The economic outlook for the next six to twelve months diminished over the reporting period. Labor Markets: Demand for labor continued to ease, as most Districts reported flat to modest increases in overall employment. Some wage pressures did persist, however, and there were some reports of continued difficulty attracting and retaining high performers and workers with specialized skills. Prices: Price increases largely moderated across Districts, though prices remained elevated. Most Districts expect moderate price increases to continue into next year. Bottom line: another hold in December is likely but there is nothing here to suggest imminent rate cuts.

Data highlight will be October PCE. Headline PCE is expected at 3.0% y/y vs. 3.4% in September, while core PCE is expected at 3.5% y/y vs. 3.7% in September. If so, headline would be the lowest since March 2021 but still above the Fed’s 2% target. Of note, the Cleveland Fed’s Nowcast model sees headline PCE at 3.09% y/y and core PCE at 3.55% y/y.

Personal income and spending will be reported at the same time. Income is expected at 0.2% m/m vs. 0.3% in September, while spending is expected at 0.2% m/m vs. 0.7% in September. Real personal spending is expected at 0.1% m/m vs. 0.4% in September. Retail sales, which measures spending on goods, held up well in October. The personal spending data contains services spending and are also expected to hold up.

Q3 GDP growth was revised higher. Headline growth came in at 5.2% SAAR vs. 4.9% in the advance report. Looking at the components, private consumption’s contribution to growth fell to 2.44 ppt. Howeer, this was offset by greater contributions from fixed investment at 0.42 ppt, government spending at 0.94 ppt, and net exports at -0.04. Of note, the contribution of inventories rose to 1.40 ppt even as final sales improved to 3.7% SAAR vs. 3.5% in the advance report. We know it's old news but it appears the U.S. economy had even more momentum than we thought going into Q4.

Indeed, Q4 growth looks to be solid. The Atlanta Fed’s GDPNow model is tracking Q4 growth at 2.1% SAAR and the next update will come today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q4 at 2.2% SAAR and the next update will come tomorrow. Despite the Fed’s tightening campaign, the economy continues to grow at or above trend at a time when below trend growth is needed to limit inflation.

November Chicago PMI will be reported. Headline is expected at 46.0 vs. 44.0 in October. ISM manufacturing PMI will be reported tomorrow and the headline is expected at 47.8 vs. 46.7 in October Last week, S&P Global manufacturing PMI came in at 49.4 vs. 49.9 expected and 50.0 in October.

Weekly jobless claims will be of interest. That’s because continuing claims are for the BLS survey week containing the 12th of the month and are expected at 1.865 mln vs. 1.840 mln the previous week. Elsewhere, initial claims are expected at 218k vs. 209k the previous week. That 209k reading was for the BLS survey week and was the lowest since mid-October. Of note, Bloomberg consensus for NFP currently stands at 175k vs. in October, while its whisper number comes in lower at 145k.

Housing data will remain in focus. October pending home sales will be reported and are expected at -2.0% m/m vs. 1.1% in September. This sector has been showing some modest signs of improvement and will be closely watched in light of the sharp drop in mortgage rates. The 30-year fixed rate national average has fallen to 7.66% vs. the 8.09% peak in late October.

Canada reports GDP data. Q3 growth is expected at 0.1% SAAR vs. -0.2% in Q2, while September alone is expected to slow a tick to 0.8% y/y. If so, that would be the slowest monthly reading since February 2021. Bank of Canada easing expectations have intensified. WIRP suggests nearly 25% odds of a rate cut December 6 vs. 5% at the start of this week, then rising over the course of Q1 to become fully priced by April 10 vs. June 5 at the start of this week. Tomorrow’s jobs report will be very important.

Banco de Mexico Governor Rodriguez said a rate cut in early 2024 was possible. Specifically, she said “I see a possibility that at the start of the meetings next year we put on the table the start of discussions on a rate cut. We’ve come a long way and that has allowed us to change the forward guidance.” Deputy Governor Espinosa was against the change in guidance, noting that inflationary risks remain and are growing. The two spoke at the presentation of the bank’s quarterly inflation report. Next policy meeting is December 14 and no change is expected. November CPI data will be reported December 7; the November and December inflation readings will be key in determining if a cut is possible at the February 8 or March 21 meetings. The swaps market is pricing in around 50% odds of a cut at the February meeting, while 50 bp of total easing is priced in over the next six months.


Eurozone November CPI ran cool. Headline came at 2.4% y/y vs. 2.7% expected and 2.9% in October, while core came in at 3.6% y/y vs. 3.9% expected and 4.2% in October. Headline was the lowest since July 2021 and is quickly approaching the 2% target. Of note, France and Italy also reported CPI data. France’s EU Harmonised inflation came in at 3.8% y/y vs. 4.1% expected and 4.5% in October, while Italy’s came in at 0.7% y/y vs. 1.1% expected and 1.8% in October.

The data have fed into European Central Bank easing expectations. WIRP suggests around 5% odds of a cut either December 14 or January 25. After that, those odds rise to 50% March 7 and fully priced in for April 11 vs. June 6 at the start of this week. A total of four cuts are priced in by the October meeting. Panetta was his usual dovish self in his new role as Governor of the Bank of Italy, stressing that “Disinflation is well under way. We need to avoid unnecessary damage to economic activity and risks to financial stability, which would ultimately jeopardize price stability.” Lagarde and Nagel speak later today.

Germany reported firm October retail sales. Sales came in at 1.1% m/m vs. 0.4% expected and a revised -0.1% (was -0.8%) in September. Germany also reported a one tick rise in October unemployment to 5.9%. Elsewhere, France reported October consumer spending at -0.9% m/m vs. -0.2% expected and a revised 0.0% (was 0.2%) in September, while final Q3 GDP was unexpectedly revised down two ticks to -0.1% q/q. Eurozone retail sales will be reported December 6 and Italy then reports December 7.

U.K. inflation expectations continue to fall, albeit slowly. The Bank of England’s so-called Decision Maker Panel survey for November showed 1-year expectations falling to 4.4% vs. 4.6% in October, the lowest since this series began in May 2022. However, 3-year expectations rose a tick to 3.2%, and both measures remain well above the 2% target. Yet the dovish Bank of England narrative remains intact. WIRP suggests no odds of a hike December 14, rising modestly to top out near 15% in Q1 vs. 25% at the start of this week. After that, a cut is about 65% priced in for June 20 and fully priced in for August 1 vs. September 19 at the start of this week. Greene speaks later today. She was one of the three dissents (the others were Mann and Haskel) in favor of a 25 bp hike at the last decision November 2.


Japan reported mixed October data. Retail sales came in at 4.2% y/y vs. 6.0% expected and 6.2% in September, IP came in at 0.9% y/y vs. 0.4% expected and -4.4% in September, and housing starts came in at -6.3% y/y vs. -7.0% expected and -6.8% in September. The economy has been weakening for the most part, as evidenced by the larger than expected -0.5% q/q contraction in Q3 GDP. No wonder the government is pushing through another stimulus package.

Bank of Japan officials remain dovish. Today, it was board member Nakamura’s turn as he said "I believe we need a little more time before we can modify monetary easing." Nakamura added "We are now seeing a one-in-a-thousand chance to achieve a virtuous cycle of wages and prices." BOJ liftoff expectations continue to get pushed out. At the end of September, the market was pricing in liftoff in March; by early November, it was seen in April and now liftoff is seen in June. Weak economic data has been the main culprit here as markets debate under what conditions the BOJ will feel comfortable hiking.

Australia reported October private sector credit and building approvals as well as Q3 private capital expenditure. Credit came in a tick lower than expected at 0.3% m/m vs. 0.5% in September and approvals came in at 7.5% m/m vs. 1.4% expected and a revised -4.0% (was -4.6%) in September. Elsewhere, capital expenditure came in at 0.6% q/q vs. 1.0% expected and a revised 3.4% (was 2.8%) in Q2. Soft data this week have weighted in RBA tightening expectations. WIRP suggests no odds of a hike December 5, 20% odds February 6 vs. 35% at the start of this week, then rising modestly to top out near 25% in Q2 vs. 75% at the start of this week.

China reported soft official November PMIs. Manufacturing came in at 49.4 vs. 49.8 expected and 49.5 in October, while non-manufacturing came in at 50.2 vs. 50.9 expected and 50.6 in October. As a result, the composite PMI fell to 50.4 vs. 50.7 in October and was the lowest since December 2022. Caixin reports November manufacturing PMI Friday and is expected to rise a tick to 49.6. We remain skeptical of any significant recovery in China given the very modest measures taken so far. Of note, Australia’s composite PMI fell to 46.4 in November, the lowest since August 2021, which suggests very little regional impact from China stimulus.

Bank of Korea kept rates steady at 3.5%, as expected. Governor Rhee said the current policy rate was sufficiently restrictive but stressed that the bank is not thinking of stimulus at the moment. He said inflation was likely to converge with the 2% target by end-2024 or early 2025. Indeed, the bank raised its 2023 inflation forecast by a tick to 3.6% and raised its 2024 forecast two ticks to 2.6%. It also kept its 2023 growth forecast unchanged at 1.4% and cut its 2024 forecast a tick to 2.1%. The swaps market is pricing in steady rates over the next six months followed by some odds of 25 bp of easing over the subsequent six months.

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