Dollar Consolidates Ahead of the Weekend

December 20, 2024

Win Thin

Risks of a U.S. government shutdown have risen; longer-term yields continue to rise; TIC data showed underlying demand for dollar assets remains robust; November PCE data Friday will be closely watched; Canada reports October retail sales; Colombia is expected to cut rates 50 bp to 9.25%
President-elect Trump has turned his gaze towards the EU; BOE meeting ended with a dovish hold; U.K. reported soft November retail sales data
Japan reported November national CPI data; Japan officials have started jawboning

The dollar is consolidating ahead of the weekend. DXY is trading lower for the first time since Monday near 108.116 after trading earlier at a new cycle high near 108.541. The yen is outperforming after Japan official jawboning picked up (see below), with USD/JPY trading lower near 156.75. Sterling is trading flat near $1.25 after of the dovish BOE hold and soft U.K. data (see below), while the euro is trading higher near $1.04 despite renewed Trump tariff threats (see below). We look for the dollar rally to continue due to the ongoing economic and monetary policy divergences theme. While the U.S. election results have turbo-charged this dollar move, faithful readers will recall that we have been resolute in our belief that the strong U.S. fundamental story continues to favor higher UST yields and a higher dollar. With the Fed signaling a much shallower easing cycle ahead even as the BOE and BOJ delivered dovish holds this week, we believe that monetary policy divergences will continue to favor the dollar.

AMERICAS

Risks of a U.S. government shutdown have risen after House Republicans were unable to pass a funding deal last night. That said, a temporary shutdown will likely have minimal impact on markets. Lawmakers must reach a deal on a stopgap spending bill and pass it before midnight tonight. Failure to act could lead the government to temporarily close. In the past, shutdowns lasted only a few days, minimizing the impact on the economy. Moreover, there are ways for the Treasury to keep paying its bills for several more months before the severe consequences of a debt default becomes an issue. Stay tuned.

Longer-term yields continue to rise. The 10-year yield traded yesterday near 4.60%, the highest since May and on track to test the April high near 4.75%. Similarly, the 30-year yield traded yesterday at 4.77%, also the highest since May and on track to test the April high near 4.85%. Yields at the short end have not risen as much and so the 3-month to 10-year curve is the steepest since October 2022 near 22 bp. Fed speakers today include Daly and Williams.

The US TIC data showed underlying demand for dollar assets remains robust. Cumulative net foreign purchases of long-term U.S. securities increased to a 15-month high of $1282 bln in the 12-month period to October vs. $1102 bln previously, eclipsing the cumulative trade deficit of -$866 bln over the same period. The surge in net foreign purchases of long-term U.S. securities was driven by private sector purchases of Treasury bonds and U.S. equities. We expect these inflows to continue in 2025.

November PCE data Friday will be closely watched. Headline is expected at 2.5% y/y vs. 2.3% in October, while core PCE is expected at 2.9% y/y vs. 2.8% in October. If so, headline would be the highest since July and would move further above the 2% target. Of note, the Cleveland Fed’s Nowcast model sees headline at 2.6% and core at 3.0%. For December, that model sees headline at 2.8% and core at 3.0%. That is why we expect the Fed to remain on hold for the time being.

Personal income and spending will be reported at the same time. Income is expected at 0.4% m/m vs. 0.6% in October, while spending is expected at 0.5% m/m vs. 0.4% in October. Real spending is expected at 0.3% m/m vs. 0.1% in October. After the firm retail sales data, we see upside risks to the personal spending readings as the U.S. consumer remains alive and well.

Weekly jobless claims Thursday are worth discussing. That’s because initial claims were for the BLS survey week containing the 12th of the month and came in at 220k vs. 230k expected and 242k previously. The 4-week moving average rose slightly to 226k but remains quite low. There is no Bloomberg consensus yet for December NFP but its whisper number stands at 201k vs. 227k actual in November. Continuing claims are reported with a one-week lag and came in at 1.874 mln vs. 1.892 mln expected and a revised 1.879 mln (was 1.886 mln) previously.

We got a strong final revision to Q3 GDP. Overall growth came in three ticks higher than expected at 3.1% SAAR, as personal consumption picked up two ticks to 3.7% SAAR. While this is old news, it does mean that the economy had even stronger momentum going into Q4. The Atlanta Fed GDPNow model has Q4 growth at 3.2% SAAR and will be updated today after the data. Elsewhere, the New York Fed's Nowcast model is tracking Q4 growth at 1.9% SAAR and Q1 growth at 2.3% SAAR and will also be updated today.

Canada reports October retail sales. Statistics Canada’s advanced retail indicator suggests sales increased 0.7% m/m after rising 0.4% in September. Sales ex-autos are expected at 0.4% m/m vs. 0.9% in September.

Colombia central bank is expected to cut rates 50 bp to 9.25%. At the last meeting October 31, the central bank cut rates 50 bp to 9.75% and Governor Villar noted that “Today’s interest rate cut continues to support economic growth and maintains the necessary prudence given the inflation risks that remain.” Since then, headline inflation has fallen to 5.2% y/y in November, the lowest since October 2021. The swaps market is pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom near 8.25%.

EUROPE/MIDDLE EAST/AFRICA

President-elect Trump has turned his gaze towards the EU. Specifically, he posted on social media that “I told the European Union that they must make up their tremendous deficit with the United States by the large scale purchase of our oil and gas. Otherwise, it is TARIFFS all the way!!!.” It’s worth noting that the EU has already considered this, as European Commission President Ursula von der Leyen said last month that “We still get a whole lot of LNG via Russia, from Russia. And why not replace it with American LNG, which is cheaper, and brings down our energy prices.”

Bank of England meeting ended with a dovish hold. The bank kept rates at 4.75% and maintained its cautious guidance by noting that “monetary policy will need to continue to remain restrictive for sufficiently long.” However, the BOE signaled that the bar for resuming the easing cycle is low. The BOE noted that “most indicators of UK near-term activity have declined” and “there has been progress in disinflation.” Additionally, the MPC voted by a majority of 6–3 to stand pat with three members (Dhingra, Ramsden and Taylor in favor of cut vs. an 8-1 split at the previous meeting. Stubbornly high services price inflation is a key factor behind the BOE’s cautious easing guidance, but it’s clear that recent softness in the real sector data has led more MPC members to lean more dovish. Markets are pricing in 50-75 bp of easing over the next 12 months. The next Monetary Policy Report with updated macro forecasts will come at the next meeting February 6.

U.K. reported soft November retail sales data. Headline sales came in at 0.2% m/m vs. 0.5% expected and -0.7% in October, while sales ex-auto fuel came in at 0.3% m/m vs. 0.5% expected and -0.9% in October. In y/y terms, both slowed sharply from October to 0.5% and 0.1%, respectively. The data do not capture the full effect of the Black Friday deals, which will be reflected in the December figures. However, recent data suggest the economy is slowing even as price pressures remain elevated. If this continues, the BOE will find itself on the horns of a dilemma.

ASIA

Japan reported November national CPI data. Headline came in as expected at 2.9% y/y vs. 2.3% in October, core (ex-fresh food) came in a tick higher than expected at 2.7% y/y vs. 2.3% in October, and core ex-energy came in as expected at 2.4% y/y vs. 2.3% in October. Core was the highest since August and moves further above the 2% target. However, the BOJ signaled that it is in no rush to resume normalizing rates. Indeed, Governor Ueda suggested that the BOJ could wait until spring to raise rates again as wage trends will be clearer by then. market sees about 40% odds of a hike in January, rising to 80% in March and fully priced in by May.

Japan officials have started jawboning. Finance Minister Kato said “The government’s deeply concerned about recent currency moves, including those driven by speculators. We will take appropriate action if there are excessive moves in the currency market.” Elsewhere, the Finance Ministry’s top currency official Mimura said “we’re deeply concerned about recent foreign exchange moves. For now I think it’s best not to say more beyond saying we’ll take appropriate responses against any excessive moves.” USD/JPY will likely find heavy resistance as it approaches the likely intervention zone around 160.00. That said, the yen will tend to weaken until the monetary policy divergences narrow.

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