• After going out with a whimper in 2023, the dollar is starting off 2024 with a bang; the U.S. economy remains robust; if the U.S. data remain firm in Q1, we are confident that the markets will undergo significant repricing of the easing cycle; Canada reports December S&P Global manufacturing PMI
  
• Eurozone money supply continues to contract; eurozone reported firm final December manufacturing PMI readings; U.K. food price inflation continues to ease; U.K. reported soft final December manufacturing PMI; Israel Supreme Court overturned the law limiting judicial oversight; Israel cut rates 25 bp to 4.5% yesterday, as expected
  
• Australia reported soft final December manufacturing PMI; Singapore reported strong advance Q4 GDP data; Caixin reported firm December manufacturing PMI

The dollar is getting more traction as 2024 gets under way. DXY is trading higher for the third straight day near 101.833 after making a new cycle low near 100.617 on December 28. The euro is trading lower near $1.0980 after making a new cycle high $1.1140 on December 28, while sterling is trading lower near $1.2670 after making a new cycle high near $1.2825 on December 28. Japan remains on holiday with markets reopening Thursday. USD/JPY is trading higher near 142 after making a new cycle low near 140.25 on December 28. Last month’s dovish Fed decision was a game changer for the dollar, but we believe markets are coming to realize that the U.S. economy remains robust in Q4 and likely to remain so in 2024, which certainly wouldn’t require six rate cuts from the Fed this year. A sustained dollar recovery will really come down to the U.S. data. Over the past few weeks, the readings have all come in quite firm and so we continue to believe that the current market easing expectations are wrong. Until these expectations shift, however, the dollar is likely to remain under vulnerable.

AMERICAS

After going out with a whimper in 2023, the dollar is starting off 2024 with a bang. There has been no fundamental news and so we chalk up today’s price action to overstretched positioning. Q4 saw Fed rate cuts bets intensify, which in turn took a toll on the greenback as markets piled into dollar shorts. Were things really that bad here? We note that a soft landing in the U.S. has become the base case and yet the market is pricing in an aggressive easing cycle while UST yields have plunged. It’s hard to square this circle. To us, a soft landing would likely lead to 2-3 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.

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. November construction spending is expected at 0.5% m/m vs. 0.6% in October. Bottom line: the US economy is still growing above trend in Q4, and that momentum should carry over into 2024 as financial conditions continue to loosen.

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, just as it did in 2023. On that economic outperformance alone, the dollar should be doing better.

Canada reports December S&P Global manufacturing PMI. Its services and composite PMIs will be reported Thursday. Of note, the November reading of 44.8 for the composite PMI was the low for this cycle. Ivey PMI will be reported Friday. With the economy softening, 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, with over 50% odds of a sixth.

EUROPE/MIDDLE EAST/AFRICA

Eurozone money supply continues to contract. November eurozone M3 came in at -0.9% y/y vs. -1.0% expected and actual in October. This was the third straight monthly improvement but remains very weak overall. Of note, loans to households came in steady from October at 0.2% y/y while loans to non-financial companies came in at -0.4% y/y vs. vs. -0.9% in October. European Central Bank easing expectations remain elevated. WIRP suggests nearly 10% odds of a cut January 25, rising to 60% 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. De Cos said that “The question of how long it will be necessary to keep interest rates at current level before starting to reduce them will depend on the future evolution of data, in a context in which uncertainty continues to be high.” Of note,

Eurozone reported firm final December manufacturing PMI readings. Headline rose two ticks from the preliminary to 44.4. Looking at the country breakdown, Germany rose two ticks from the preliminary to 43.3 and France rose one tick to 42.1. Italy and Spain reported for the first time and came in at 45.3 and 46.2, 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 all below the key 50 boom/bust level.

U.K. food price inflation continues to ease. The British Retail Consortium reported that food priced rose 6.7% y/y in December v. 7.7% in November and is the lowest since June 2022. However, overall shop prices rose 4.3% y/y and was steady from November, which suggests that the disinflation process will likely be bumpy. BOE easing expectations remain elevated. WIRP suggests 5% odds of a cut February 1, rising to 33% March 21 and fully priced in May 9. A total of six cuts are priced in for 2024.

U.K. reported soft final December manufacturing PMI. Headline fell two ticks from the preliminary to 46.2. This was the first drop since August. Services and composite PMIs will be reported Thursday and 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.

Israel Supreme Court overturned the law limiting judicial oversight. The vote was 8-7 and the court wrote that the law barring judges from reversing government decisions was “unreasonable” and “causes severe and unprecedented harm to the core characteristics of Israel as a democratic state.” This was the main plank in Prime Minister Netanyahu’s judicial reforms. Furthermore, the court voted 12-3 that it has the authority “to carry out judicial review of Basic Laws, and to intervene in those rare and exceptional cases wherein the Knesset exceeds its constitutive authority.” With the war in Gaza showing no sign of ending soon, we expect the government will put judicial reforms on the back burner for now.

The Bank of Israel cut rates 25 bp to 4.5% yesterday, as expected. Governor Yaron warned that “A risky fiscal policy can affect rate decisions moving forward. If the markets perceive that Israel is moving toward a prolonged path of rising debt, it’s likely to lead to increased yields, depreciation and inflation, such that a higher central bank interest rate will be required.” The swaps market is pricing in another 25 bp of easing over the next three months, followed by another 50 bp of easing over the subsequent three months.

ASIA

Australia reported soft final December manufacturing PMI. Headline dropped two ticks from the preliminary to 47.6 and is a new low for this cycle. 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. Reserve Bank of Australia easing expectations remain elevated. WIRP suggests 5% odds of a cut February 6, rising to 10% March 19 and 80% May 7. Nearly three cuts are priced in for 2024.

Singapore reported strong advance Q4 GDP data. Growth came in at 1.7% q/q vs. 0.7% expected and a revised 1.3% (was 1.4%) in Q3, while the y/y rate came in at 2.8% vs. 1.8% expected and a revised 1.0% (was 1.1%) in Q3. Regional activity has been subdued and so it’s a bit surprising that Singapore growth picked up so much. As a bellwether for the export-oriented economies in the region, the data bode well for Asian trade and activity. November retail sales will be reported Friday and are expected at 2.2% y/y vs. -0.1% in October.

Caixin reported firm December manufacturing PMI. It came in at 50.8 vs. 50.3 expected and 50.7 in November. Caixin reports services and composite PMIs Thursday. Services is expected at 51.6 vs. 51.5 in November. Over the weekend, official PMI readings came in mixed. Manufacturing came in at 49.0 vs. 49.6 expected and 49.4 in November, while non-manufacturing came in at 50.4 vs. 50.5 expected and 50.2 in November. As a result, the composite fell a tick to 50.3 and was the third straight drop. It’s clear that past stimulus measures are having no lasting impact and so further stimulus is likely in the coming weeks after the PBOC injected CNY350 bln ($50 bln) into so-called policy banks at the end of December via its Pledged Supplemental Lending program.