• Fed officials remain cautious; financial conditions loosened for the 13th straight week last week; weekly jobless claims support our view that the labor market remains robust; University of Michigan reports preliminary January consumer sentiment; Canada reports November retail sales data
  
• There were no surprises from the ECB’s account of the December policy meeting; U.K. reported very weak December retail sales data
  
• Japan reported December national CPI; BOJ meeting is likely to end with a dovish hold next Tuesday; China is taking measures to prop up its slumping equity markets

The dollar is consolidating its recent gains ahead of the weekend. DXY is trading lower for the first time since last Thursday near 103.308 after trading Wednesday at the highest since December 13 near 103.692. The 200- day moving average near 103.456 is providing some resistance but we believe DXY is on track to test the December 8 high near 104.263. The euro is trading flat near $1.0885 after testing its 200-day moving average again yesterday near $1.0845, while sterling is underperforming after weak retail sales data (see below) and trading lower near $1.2685. USD/JPY is trading lower near 148 after it traded at the highest level since November 28 earlier today near 148.80. The pair remains on track to test the November 13 high near 152 if the BOJ delivers a dovish hold next Tuesday as we expect (see below). All indications are that the U.S. economy remains robust in Q4 and likely to remain so in early 2024. Over the past few weeks, the data have mostly come in on the firm side and so we continue to believe that the current market easing expectations still need to adjust significantly. These expectations have started to shift but more needs to be seen.

AMERICAS

Fed officials remain cautious. Bostic said that “In such an unpredictable environment, it would be unwise to lock in an emphatic approach to monetary policy. That is why I believe we should allow events to continue to unfold before beginning the process of normalizing policy.” Bostic has become one of the most hawkish FOMC members in recent weeks after being one of the most dovish for much of last year. In the December Dot Plots, he penciled in two cuts this year beginning in Q3, which is consistent with his cautious stance. Goolsbee, Barr, and Daly (twice) speak today. At midnight tonight, the media blackout goes into effect and there will be no Fed speakers until Chair Powell’s press conference January 31.

Fed easing expectations are adjusting modestly. WIRP suggests only 55% odds of a cut March 20 vs. 85% at the start of this week. Furthermore, the swaps market is now pricing in slightly less than 150 bp of easing this year vs. nearly 175 bp at the start of this week. More needs to be done.

The Chicago Fed’s measure of financial conditions loosened for the 13th straight week last week. They are now the loosest since mid-January 2022, about two months before the Fed started hiking rates. Absent some sort of exogenous shock, there is nothing that's really slowing down the U.S. economy right now and so we expect Q1 GDP growth to remain north of 2% SAAR.

No wonder the U.S. economy remains robust. The Atlanta Fed’s GDPNow model is tracking Q4 growth at 2.4% SAAR and will be updated today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q4 growth at 2.4% SAAR and Q1 growth at 2.5% SAAR and will also be updated today. Official GDP data will be reported next Thursday and is expected at 1.9% SAAR vs. 4.9% in Q3. Obviously, there are upside risks. Bottom line: the U.S. economy continues to grow at or above trend for the sixth straight quarter and seems likely to extend that streak in Q1.

Weekly jobless claims support our view that the labor market remains robust. That’s because initial claims were for the BLS survey week containing the 12th of the month and came in at 187k vs. 205k expected and a revised 203k (was 202k) the previous week, the lowest since September 2022. The 4-week average for initial claims fell to 203.5k, the lowest since early February 2023. Of note, NFP for that month was 248k. There is no Bloomberg consensus yet for January NFP, but its whisper number stands at 161k vs. 216k in December. Continuing claims are reported with a 1-week lag and so next week’s reading is for the BLS survey week. These fell to 1.806 mln vs. 1.845 mln expected and a revised 1.832 mln (was 1.834 mln) the previous week, the lowest since mid-October.

Housing data will remain in focus. Existing home sales are expected at 0.3% m/m vs. 0.8% in November. Yesterday, December building permits and housing starts came in 1.9% m/m and -4.3% m/m, respectively. Both were slightly stronger than expected. Earlier this week, January NAHB housing index came in at 44 vs. 39 expected and 37 in December. With the average national 30-year fixed rate mortgage falling below 7% recently, the housing sector should pick up further in the coming months.

University of Michigan reports preliminary January consumer sentiment. Headline is expected to rise four ticks to 70.1. Inflation expectations will be important. 1-year expectations are expected to remain steady at 3.1% while 5- to 10-year expectations are expected to rise a tick to 3.0%. Both remain well above the Fed’s 2% target.

November TIC data will also be reported. This data is not a market mover, but it’s a good indicator of foreign appetite for U.S. securities (Treasury, agency, corporate bonds, and equities). China continues to pare its holdings of USTs, while Japan holdings have been fairly steady in recent months.

Canada reports November retail sales data. Headline is expected flat m/m vs. 0.7% in October, while ex-autos is expected at -0.1% m/m vs. 0.6% in October. This is likely to be a non-event, as Statistics Canada advanced retail indicator suggests sales were relatively unchanged in November. Of note, odds of an April rate cut have fallen to around 70% after being fully priced in earlier this month.

EUROPE/MIDDLE EAST/AFRICA

There were no surprises from the ECB’s account of the December policy meeting. The key takeaway was that members were already uncomfortable with the dovish pricing in interest rate expectations. According to the account “it was widely felt that market expectations reflected significant optimism and were inconsistent with the outlook in the staff projections.” ECB members also warned that “the sharp market repricing threatened to loosen financial conditions excessively, which could derail the disinflationary process.” Since that meeting, many ECB policymakers have pushed back further against market bets on policy loosening. Nonetheless, those bets continue to imply an aggressive easing cycle, with 150 bp of easing seen in 2024. Next Thursday’s ECB decision will be very important in resetting market expectations. President Lagarde speaks in panel session today on “creating growth and jobs for a new era.”

U.K. reported very weak December retail sales data. Headline came in at -3.2% m/m vs. -0.5% expected and a revised 1.4% (was 1.3%) in November, while ex-auto fuel came in at -3.3% m/m vs. -0.7% expected and a revised 1.5% (was 1.3%) in November. This was the largest monthly fall since January 2021 and largely reflects a decline in non-food and food store sales. Of note, the y/y rates fell sharply to -2.4% an -2.1%, respectively. Overall, poor UK consumer spending activity and high underlying inflation complicates the BOE’s task of achieving price stability in a way that helps sustain growth. Market is still pricing in 125 bp of rate cuts over the course of 2024 but that is likely to adjust lower if the data remain soft. This would be a drag on sterling.

ASIA

Japan reported December national CPI. Headline came in a tick higher than expected at 2.6% y/y vs. 2.8% in November, core (ex-fresh food) came in as expected at 2.3% y/y vs. 2.5% in November, and core ex-energy came in as expected at 3.7% y/y vs. 3.8% in November. Core was the lowest since June 2022 and nearing the 2% target. January Tokyo CPI will be reported next Friday, with headline expected at 2.0% y/y vs. 2.4% in December, core expected at 1.9% y/y vs. 2.1% in December, and core ex-energy expected at 2.4% y/y vs. 3.5% in December.

The two-day Bank of Japan meeting is likely to end with a dovish hold next Tuesday. With data softening, there is no other choice for policymakers. WIRP suggests liftoff is priced in for July 31 as the timing continues to get pushed out by the soft data. The yen tends to weaken on BOJ decision days. It has done so for the past six straight and seven of the past eight. Reports suggest the BOJ will cut its inflation forecasts in its Outlook Report for this meeting.

China is taking measures to prop up its slumping equity markets. State-owned broker Citic Securities suspended short selling for individual investors and raised requirements for institutional investors earlier this week. Local equity markets are off to their worst start since 2016 as economic problems persist. Reports of increased trading activity in some major ETFs this week suggests support from state-owned institutions. One casualty has been local asset management, as mutual funds closures last year were the most since 2018. This year, 14 have closed already and dozens more are warning of likely closure. Until policymakers address the huge debt overhang in the nation, China’s economy and asset markets are likely to continue underperforming.