• Markets are marking time ahead of key data and central bank meetings later this week; regional Fed surveys for January continue rolling out
  
• ECB released the results of it bank lending survey; this comes ahead of the ECB decision Thursday; U.K. reported lower December public sector net borrowing
  
• BOJ meeting ended with a hold, as expected; Australia NAB business survey showed business conditions eased further; RBNZ announced it has begun consultations on changing mortgage requirements; reports suggest China is mulling measures to support its equity markets; Singapore December CPI ran hot

The dollar is drifting higher in the absence of any major developments. DXY is trading slightly higher near 103.444. The 200-day moving average near 103.456 is still providing some resistance but we believe DXY is on track to test the December 8 high near 104.263. The euro is trading lower near $1.0865 while sterling is trading flat near $1.2705. USD/JPY has been a bit volatile but is trading slightly lower near 148 as the BOJ delivered another hold (see below). All indications are that the U.S. economy remains robust in Q4 and likely to remain so in Q1 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

Markets are marking time ahead of key data and central bank meetings later this week. The lack of any major data isn’t helping matters, nor is the absence of any Fed speakers. Still, when all is said and done, the underlying message has not changed: the U.S. economy remains robust, and the Fed is unlikely to cut rates as aggressively as market expect. The market is pricing in 125 bp of easing over the course of 2024, down from nearly 175 bp earlier this month. The market sees the easing cycle starting in May vs. March earlier this month. Both still seem unlikely to us but at least expectations are moving in the right direction. If the data remain firm as we expect, there is room for Fed funds future pricing to converge towards the FOMC’s projections for only three cuts this year and this would support a firmer USD.

Regional Fed surveys for January continue rolling out. Philly Fed non-manufacturing and Richmond manufacturing (-6 expected) and non-manufacturing indices will be reported today. Kansas City manufacturing index will be reported Thursday, followed by its services index Friday.

EUROPE/MIDDLE EAST/AFRICA

The ECB released the results of it bank lending survey. The survey reinforces the case for looser ECB policy settings. Banks again reported net decreases in demand for loans and credit in Q4 (albeit less than in the previous quarter), driven by the general level of interest rates. Encouragingly, for the first time since early 2022, banks expect a small net increase in demand for loans (to firms and for housing loans) in Q1. Meanwhile, tight credit supply conditions eased in Q4, but more tightening is expected in Q1.

The survey comes ahead of the ECB decision Thursday. The eurozone OIS curve continues to imply nearly 150 bp of rate cuts in 2024. ECB President Lagarde will likely further lean against these market bets on policy loosening during her post-meeting press conference Thursday. The ECB’s account of the December policy meeting noted that “it was widely regarded as important not to accommodate market expectations in the post-meeting communication” as it could derail the disinflationary process. After the decision, Panetta, Kazaks, and Vujcic speak Friday.

U.K. reported lower December public sector net borrowing. PSNB ex-banking groups came in at GBP7.8 bln vs. GBP14.1 bln expected and a revised GBP13.7 bln (was GBP14.3) bln in November. Interest costs were only GBP4 bln vs. GBP18.1 bln a year ago and GBP less than forecast by the Office of Budget Responsibility. The data support recent reports that Chancellor Hunt will have GBP6-10 bln of leeway ahead of his March 6 budget, which could be used to fund some modest tax relief. Other reports suggest Hunt is also mulling some spending cuts to fund tax cuts as the Tories try to win back some support ahead of general elections.

ASIA

The two-day Bank of Japan meeting ended with a hold, as expected. As reports suggested, the bank cut its FY24 forecast for core inflation to 2.4% vs. 2.8% in October, while the FY25 forecast was raised a tick to 1.8%. There were no changes to the core ex-energy inflation forecasts, while the growth forecasts saw minor tweaks. However, Governor Ueda spooked financial markets with a less dovish tone when he pointed out that labor unions are asking for higher pay gains in annual wage negotiations and also warned of some side effects of negative rates. That said, we do not think Ueda was preparing markets for eventual liftoff. The encouraging disinflation backdrop suggests it can afford to be patient with policy normalization. However, markets moved up the timing of liftoff to June from July at the start of this week.

Australia NAB business survey showed business conditions eased further in December. Conditions fell 2 points to 7 index points, the lowest since January 2022, while confidence rose 7 points to -1, the highest since September. Inflation indicators improving with sharp declines in price and labor cost growth. Market pricing for RBA rate cuts picked up marginally but AUD recovered above 0.6600 on firmer iron ore prices before falling back. Iron ore futures in Singapore are up almost 3% this week as Chinese steel demand is anticipated to improve ahead of the mid-February Lunar New Year.

The RBNZ announced it has begun consultations on changing some mortgage requirements. Specifically, the bank will likely activate debt to income (DTI) restrictions whilst loosening loan to value ratios (LVR) for residential lending. We believe that there are no material monetary policy implications from these offsetting macroprudential measures aimed at improving financial stability. Consultation will close March 12 and the RBNZ expects to communicate their decisions around the middle of this year. Of note, Q4 CPI data will be reported overnight. Headline CPI is expected to increase by 0.5% q/q and 4.7% y/y vs. 5.6% y/y in Q3. The RBNZ’s Q4 CPI projection is higher at 0.8% q/q and 5.0% y/y.

Reports suggest China is mulling measures to support its equity markets. Policymakers are reportedly eyeing the use of CNY2 trln ($278 bln) held mainly in offshore accounts of the state-owned enterprises. Those funds would reportedly be used to buy shares onshore via the Hong Kong exchange link. Policymakers have also earmarked at least CNY300 bln of onshore funds to invest in the equity markets. These plans as well as others being discussed have not been finalized but may be announced this week.
We would fade any bounce in China equities. After making new cycle lows yesterday, both MSCI China and MSCI Hong Kong are up nearly 2.5% today due to potential official support. While these measures may help slow the move lower, they cannot reverse it. That would take a shift in the fundamentals, which are unlikely to improve until 2025 at the earliest.

Singapore December CPI ran hot. Headline came in two ticks higher than expected at 3.7% y/y vs. 3.6% in November, while core came in three ticks higher than expected at 3.3% y/y vs. 3.2% in November. The Monetary Authority of Singapore meets next Monday and no change in policy is expected, especially after this CPI print. While the MAS does not have an explicit inflation target, sticky inflation should keep it on hold for the time being. Whether it can ease at the April meeting will depend on how the data evolve.