• January CPI ran hot; Fed easing expectations continue to adjust
  
• U.K. January CPI came in soft; we doubt the BOE will be in any rush to move to less restrictive policy settings; Norway reported firm Q4 GDP; Hungary reported disappointing Q4 GDP
  
• Verbal intervention from top Japanese government officials has picked up; RBNZ Governor Orr speaks this afternoon

The dollar is consolidating yesterday’s post-CPI gains. DXY is trading flat near 104.90 after trading at a new cycle high today near 104.976. Clean break above 104.632 sets up a test of the November 1 high near 107.113. The euro is trading flat near $1.07 after briefly trading below the figure, while sterling is underperforming and trading lower near $1.2555 on soft U.K. CPI data (see below). NOK is the best performing major on firm Norwegian GDP data. USD/JPY is trading lower near 150.55 after some official jawboning (see below), but we believe the pair remains on track to test the November 13 high near 151.90. When all is said and done, recent developments support our view that the Fed is unlikely to cut rates anytime soon. The data continue to come in firm while Fed officials remain cautious about easing. We still believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should see further gains after this current period of consolidation.

AMERICAS

January CPI ran hot. Headline came in a tick higher than expected at 0.3% m/m vs. a revised 0.2% (was 0.3%) in December, while core came in a tick higher than expected at 0.4% m/m vs. 0.3% in December. However, the y/y rates saw bigger misses. Headline came in two ticks higher than expected at 3.1% vs. 3.4% in December, while core came in two ticks higher than expected and steady at 3.9%. Super core (services ex-housing) picked up to 4.3% y/y vs. 3.9% in December. This is the highest since May 2023 and something that will be very concerning to the Fed. Goods and energy have been driving the recent disinflation whilst service inflation has been quite sticky. Of note, the Cleveland Fed’s inflation Nowcast model estimates February headline and core CPI at 3.1% and 3.7%, respectively. The CPI readings point to upside risks to PCE data due out February 29. Here, the Cleveland Fed’s inflation Nowcast model estimates January headline and core PCE at 2.3% and 2.7%, respectively. PPI will be reported Friday.

Fed easing expectations continue to adjust. The Fed is not cutting rates in March, though the market sees odds at around 10%. Odds of a May cut have fallen to around 45% but becomes fully priced in for June. Of note, only 100 bp of easing in 2024 is priced in now vs. 125 bp at the start of this month and 150 bp at the start of this year. Goolsbee and Barr speak today. Most Fed officials are mirroring Chair Powell’s cautious tone, and we expect that to continue. That said, Goolsbee has emerged as the leading dove on the FOMC and so he may stray from the message a bit. As markets continue to adjust their Fed expectations, U.S. yields should continue to march higher and lend the dollar more support.

EUROPE/MIDDLE EAST/AFRICA

U.K. January CPI came in soft. Headline came in a tick lower than expected and remained steady at 4.0% y/y, core came in a tick lower than expected and remained steady at 5.1% y/y, and CPIH came in two ticks lower than expected and remained steady at 4.2% y/y. The largest downward contribution to -0.6% m/m change in headline came from furniture and household goods as well as food and non-alcoholic beverages. Importantly, services CPI inflation - the BOE’s key indicator of domestic inflationary pressure – came in at 6.5% y/y vs. 6.8% expected and 6.4% in December. Of note, the BOE expected services inflation at 6.6% y/y.

Overall, we doubt the BOE will be in any rush to move to less restrictive policy settings. The first cut is now priced in for August and only 75 bp of total easing is seen in 2024. Compare this to the start of this year, when markets saw the first cut in June and nearly 125 bp of total easing in 2024. This remains GBP supportive, particularly versus EUR. Labor market conditions remain tight to a certain degree, while the improving inflation backdrop will boost real earnings growth and underpin consumer spending. Today, Bank of England Governor Andrew Bailey testifies to the House of Lords Economic Affairs Committee.

Norway reported firm Q4 GDP data. Mainland GDP growth came in a tick higher than expected at 0.2% q/q vs. 0.1% in Q3 and was driven by consumer spending and net exports. Of note, total GDP came in at 1.5% q/q vs. a revised -0.4% (was -0.5%) in Q3. the Norges Bank projects mainland GDP to be flat in Q4 and so the firm reading validates its guidance that the policy rate will likely remain at 4.5% for some time ahead. However, the swaps market is pricing in around 50% odds that the first rate cut will be seen over the next six months and is fully priced in over the subsequent six months.

Hungary reported disappointing Q4 GDP data. Real GDP was flat q/q vs. 0.3% expected and a revised 0.8% (was 0.9%) in Q3. The y/y rate was also flat vs. 0.6% expected and -0.4% in Q3. Overall, stagnant economic activity and strong disinflationary pressure (CPI inflation slowed to a three-year low of 3.8% y/y in January) leaves plenty of room for the Hungarian central bank to ease more aggressively. The swaps market is pricing in 400 bp of easing over the next 12 months that would see the policy rate bottom at 6.0%. In the meantime, the minutes of the January Hungary central bank meeting later today will offer more details behind the surprise decision to cut the policy rate by 75 bp to 10% vs. 100 bp expected.

ASIA

Verbal intervention from top Japanese government officials has picked up. After USD/JPY broke above 150 yesterday, Vice Finance Minister for International Affairs Kanda warned that “Recent moves by the yen have been pretty rapid” and added that a 10 yen move over one month is considered rapid. Finance Minister Suzuki shortly afterwards emphasized that he’s watching FX market developments with an even stronger sense of urgency. The BOJ last intervened to stem JPY weakness back in September and October 2022. USD/JPY ultimately peaked at 151.95 on October 21, 2022. While the pair fell slightly after today’s jawboning, we believe it will ultimately test and eventually surpass that 2022 high the longer that BOJ liftoff is delayed.

RBNZ Governor Orr speaks this afternoon. It will be very interesting to see if his tone validates the recent call from a major New Zealand bank for a 25 bp hike to 5.75% this month followed by another 25 bp hike to 6.0% in April. It’s worth recalling that at the last meeting November 29, the bank delivered a hawkish hold as the bank discussed a rate hike before deciding on no change. The expected rate path showed an end-2024 policy rate of 5.7% vs. 5.5% previously, suggesting high odds of one last hike. In underscoring the higher for longer theme, the RBNZ saw an end-2025 policy rate of 4.9% vs. 4.5% previously while the first cut was forecast around Q2 2025 vs. Q1 2025 previously. The market is pricing in nearly 30% odds of a hike February 28 vs. 10% at the start of last week. Those odds rise to 45% April 10 and 60% May 22. However, the market is not pricing in any odds of a second hike.