• The FOMC delivered a hawkish 25 bp cut; Chair Powell was suitably hawkish at his press conference; odds of a government shutdown have risen; Mexico is expected to cut rates 25 bp to 10.0%; Brazil central bank publishes its quarterly inflation report
  
• Some ECB officials remain cautious; BOE meeting ends shortly with a widely expected hold; Riksbank cut rates 25 bp to 2.5%; Norges Bank kept rates on hold at 4.5%; CNB is expected to keep rates steady at 4.0%
  
• The two-day BOJ meeting ended with a dovish hold; New Zealand reported weak Q3 GDP data; Philippines cut rates 25 bp to 5.75%; Taiwan kept rates steady at 2.0%

The dollar is consolidating its post-FOMC gains. DXY is trading lower near 107.917 after trading at a new cycle high yesterday near 108.269. The yen is the worst performing major after the BOJ delivered a dovish hold (see below), with USD/JPY trading at highest since July near 157.15. Sterling is trading higher near $1.2630 ahead of the BOE decision (see below), while the euro is trading higher near $1.04. We look for the dollar rally to continue after the Fed delivered a hawkish cut (see below) due to the ongoing the economic divergence story. 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, we believe that monetary policy divergences will continue to favor the dollar.

AMERICAS

The two-day FOMC meeting ended with a hawkish 25 bp cut. There was one dissent in favor of keeping rates on hold, but it was Cleveland Fed President Hammack and not previous dissenter Governor Bowman. There were no significant changes to the policy statement except for the addition of phrase “the extent and timing” with regards to additional adjustments to policy, which sets up a pause or a skip in 2025. Lastly, the Fed lowered the overnight reverse repo rate by 30 bp to match the bottom of the Fed Funds target range, which was basically a technical adjustment with no policy significance.

Updated macro forecasts and Dot Plots were released. As expected, we got upward revisions to the growth and inflation forecasts that in turn supported the hawkish shift in the Dot Plots. Of note, four Fed policymakers saw a 2024 dot of 4.625%, which implies that Hammack was not the only one that did not want to cut today even though she was only official dissent. The 2025 median dot moved up to 3.875% vs. 3.375% in September, moving to two cuts vs. four previously. The 2026 median dot moved up to 3.375% vs. 2.875% in September and the 2027 median dot moved up to 3.125% vs. 2.875% in September. Lastly, the long-term median dot moved up to 3.0% vs. 2.875% in September.

Chair Powell was suitably hawkish at his press conference. He acknowledged that the decision was a closer call. Powell said that the slower pace of rate cuts seen in the Dot Plots reflects higher inflation readings and added that the policy statement signals that the Fed is at or near time when the fed slows or pauses its easing. He said the labor market is in solid shape and that downside risks have diminished, adding that the Fed feels very good about where the economy is and where it’s going. Lastly, Powell stressed that the Fed is in a new phase of rate adjustments where the Fed needs to see progress on inflation. Bottom line: Powell still doesn’t sound like he’s in any hurry to cut rates.

The Fed and Powell more than accomplished what they wanted. The market got the message loud and clear and is pricing in only one cut next year and around 45% odds of a second cut. Meanwhile, the Chicago Fed's measure of financial conditions loosened for the ninth straight week. Through last Friday, conditions were the loosest since mid-July 2021. Yes, mid-July 2021. This begs the question of whether the Fed really needed to cut again. Stay tuned.

Odds of a government shutdown have risen. President-elect Trump called on Republican lawmakers to reject the compromise spending bill that House Speaker Johnson had crafted that would keep the government funded through March. If the spending bill is not passed, there could be a partial shutdown over the weekend and just in time for the holidays. At the same time, Trump said he supported an increase in the debt ceiling. The situation is still evolving but for now, markets seem to be ignoring these machinations.

Weekly jobless claims will be of interest. That’s because initial claims are for the BLS survey week containing the 12th of the month and are expected at 230k vs. 242k previously. There is no Bloomberg consensus yet for December NFP but its whisper number stands at 203k vs. 227k actual in November. Continuing claims are reported with a one-week lag and are expected at 1.892 mln vs. 1.886 mln previously.

December regional Fed surveys will continue rolling out. Philly (2.8 expected) and Kansas City (-1 expected) Fed manufacturing surveys will be reported today. Kansas City services survey will be reported tomorrow. Earlier this week, Empire manufacturing survey kicked things off and came in at 0.2 vs. 10.0 expected and 31.2 in November and New York Fed services survey followed up at -5.2 vs. -0.5 in November.

We get a final revision to Q3 GDP. Overall growth is expected to remain steady at 2.8% SAAR, while personal consumption is expected to pick up two ticks to 3.7% SAAR. However, this is old news as the markets look ahead to Q4 and Q1. The Atlanta Fed GDPNow model has Q4 growth at 3.2% SAAR and will be updated tomorrow 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 tomorrow.

Banco de Mexico is expected to cut rates 25 bp to 10.0%. However, over a quarter of the 29 analysts polled by Bloomberg look for a larger 50 bp move. With the peso under pressure, we believe a larger cut would be too risky. At the last meeting November 14, the bank cut rates 25 bp to 10.25% and signaled more easing to come. Since then, price pressures have eased, with core inflation falling to 3.58% y/y in November, the lowest since March 2019. Looking ahead, the swaps market is pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom near 8.75%.

Brazil central bank publishes its quarterly inflation report. We expect significant upward revisions to its inflation forecasts after the bank unexpectedly hiked rates 100 bp to 12.25% last week and promised more jumbo cuts ahead. The minutes were hawkish, noting that “Upside inflation risks, such as the resilience of services inflation, the deanchoring of expectations, and exchange rate depreciation, have materialized.” Meanwhile, the plunging real is only making things worse and so the central bank will be forced to respond with more intervention and more rate hikes. The swaps market is now pricing in a terminal policy rate of 17.5% but this has been very volatile this week.

EUROPE/MIDDLE EAST/AFRICA

Some ECB officials remain cautious. Chief Economist Lane said, “In the current environment of elevated uncertainty, it is prudent to maintain agility on a meeting-by-meeting basis and not pre-commit to any particular rate path.” Elsewhere, GC member Simkus said “Speaking of decisions in the future, they’ll be dictated by data available at the time. But the best scenario would be a rhythmic, consistent pace downward toward the neutral rate.” The swaps market is now pricing in 125 bp of easing over the next 12 months that would see the policy rate bottom near 1.75%, back to where it was prior to last week’s 25 bp cut.

Bank of England meeting ends shortly with a widely expected hold. The MPC will likely vote by a majority of 8–1 to stand pat with one member (Swati Dhingra) in favor of a cut. We also expect the BOE to reiterate that “monetary policy will need to continue to remain restrictive for sufficiently long.” Stubbornly high services price inflation is a key factor behind the BOE’s cautious easing guidance. Markets are pricing in 50 bp of easing over the next 12 months, followed by another 25 bp over the subsequent 12 months that would see the policy rate bottom near 4.0%, which is about right in our view. The next Monetary Policy Report with updated macro forecasts will come at the February 6 meeting.

The Riksbank cut rates 25 bp to 2.5%, as expected. However, the bank signaled that the easing cycle is nearing an end by saying “the policy rate may be cut once again during the first half of 2025” while emphasizing it will “carefully evaluate the need for future interest rate adjustments.” The Riksbank still projects the policy rate to bottom at 2.25% while the market sees it bottoming at 2.00% over the next 12 months. As such, there is room for market expectations to adjust higher in favor of SEK.

Norges Bank kept rates on hold at 4.5%, as expected. The bank indicated “the policy rate will most likely be reduced in March 2025” which is in line with previous guidance as well as current market pricing. However, the bank’s updated policy rate path projections points to fewer rate cuts in the coming years as it sees the policy rate to bottom at 3.00% over the next two years vs. 2.75% previously. The swaps market disagrees and sees it bottoming near 3.5%.

Czech National Bank is expected to keep rates steady at 4.0%. At the last meeting November 7, the bank cut rates 25 bp to 4.0% and Governor Michl warned that it would be very cautious with further cuts. Since then, Michl has focused on core inflation and noted “That’s why we are very likely to pause the process of lowering interest rates soon. We will choose stability of interest rates for some time, assess the new forecast with a goal to bring core inflation slightly below 2% and the overall inflation to the target.” Looking ahead, the swaps market is pricing in 25 bp of total easing over the next 12 months that would see the policy rate bottom near 3.75%.

ASIA

The two-day Bank of Japan meeting ended with a dovish hold. The vote was 8-1, with the lone dissent Tamura in favor of a 25 bp hike to 0.50%. The bank noted that uncertainties remain high for the economy and inflation and added that FX developments are more likely to affect prices than in the past. Governor Ueda reiterated the bank will continue to raise rates if the outlook for economic activity and prices is realized. However, Ueda indicated that the BOJ is in no rush to resume normalizing rates as “It will take a long time before the full picture is clear for both the spring wage negotiations and the Trump administration’s policies.” Ueda added that the big picture on wages should be clearer by March or April, suggesting the BOJ could wait until then to raise rates again. The odds of a hike at the January 23-24 meeting have fallen below 50% vs. 70% at the start of this week, while he first hike is not fully priced in until May. Japanese officials will likely ramp up currency jawboning as we approach the intervention zone around 160.00. However, the USD/JPY uptrend is intact and supported by widening US-Japan 10-year bond yields spreads.

New Zealand reported weak Q3 GDP data. The economy contracted -1.0% q/q vs. -0.2% expected and a revised -1.1% (was -0.2%) in Q2, while the y/y rate came in at -1.5% vs. -0.4% expected and -0.5% in Q2. The poor data will validate the RBNZ’s dovish guidance. At the November meeting, the RBNZ slashed the Official Cash rate 50 bp to 4.25% and noted it “expects to be able to lower the OCR further early next year.” RBNZ Governor Orr pointed out that the bank’s updated projections are consistent with another 50 bp cut at its next decision February 19, which is what the market is pricing in right now.

Philippine central bank cut rates 25 bp to 5.75%, as expected. It noted that “The balance of risks to the inflation outlook continues to lean to the upside due largely to potential upward adjustments in transport fares and electricity rates.” Governor Remolona said that “In our discussion today, there was a sense that maybe 100 basis points over 2025 would be too much, but zero would also be too little. We have to see what the data says.” The swaps market disagrees and is pricing in 175 bp of total easing over the next 12 months that would see the policy rate bottom near 4.0%.

Taiwan central bank kept rates steady at 2.0%, as expected. At the last two meetings in June and September, the bank tightened liquidity by raising commercial bank reserve ratios 25 bp and tightening home-buying rules. This time, the bank said it would keep reviewing plans by banks to improve their mortgage positions. Governor Yang noted that “We still don’t know when the tariff policy will be implemented and how big it will be. How other countries will retaliate is very uncertain.” Yang added that updated forecasts for the March and June meetings next year “would be more important than this time around because by then we can see a clearer message by the Trump administration.” Of note, the swaps market has nearly priced in a 12.5 bp hike over the next 12 months.