• Fed speakers continue to mirror Chair Powell’s cautious tone; Treasury Secretary Yellen weighed in on the regional bank concerns; BOC will release its summary of deliberations
  
• ECB officials continue to push back against easing expectations; BOE continues to shift more dovish; Riksbank released its minutes; Poland is expected to keep rates steady at 5.75%
  
• New Zealand reported solid Q4 employment data; Taiwan reported strong December trade data; Thailand left rates steady at 2.5%, as expected

The dollar is trading softer in the absence of new drivers. DXY is trading lower for the second straight day near 104.075 after trading at a new cycle high near 104.064 Monday. Break above 104.632 is needed to set up a test of the November 1 high near 107.113. The euro is trading higher near $1.0770 while sterling is trading higher near $1.2630. USD/JPY is trading heavy near 148 after it failed to break above the January high near 148.80 earlier this week. In the absence of any topline U.S. data until next week, the dollar could drift even lower near-term. However, when all is said and done, recent developments support our view that the Fed is unlikely to cut rates anytime soon. The data continued to come in on the firm side and so we still believe that the current market easing expectations for the Fed still need to adjust significantly. These expectations have started to shift but more needs to be seen, even after the Fed’s hawkish hold and January jobs data.

AMERICAS

Fed speakers continue to mirror Chair Powell’s cautious tone. Mester said “It would be a mistake to move rates down too soon or too quickly without sufficient evidence that inflation was on a sustainable and timely path back to 2%. If the economy evolves as expected, I think we will gain that confidence later this year, and then we can begin moving rates down.” Mester added that she still expects three cuts this year but doesn’t feel any need rush them. Mester also noted that bank reserves are “more than ample,” which suggests little urgency to slow the pace of QT. Kashkari said “We’re not all the way there yet, but we’ve made a lot of progress on inflation. If we just think we’re going to continue what we’ve been experiencing, we’re on track to get back to our 2% target.” Harker said, “Now certainly we haven’t touched down, and we’re going to have to keep our seatbelts on, but with inflation continuing to fall back to our 2% target, with employment remaining strong, and with consumer sentiment looking up, the runway at our destination is in sight.” Kugler, Collins, Barkin, and Bowman speak today.

Between the hawkish Fed and strong data, rate cut expectations have fallen. Odds of a March cut have fallen just below 25% from being fully priced in at the start of 2024. A May cut is no longer seen as a sure thing either, with odds falling to around 80%. A total 125 bp of easing is still priced in for 2024, however. While the repricing process has begun, there is a long way to go.

Treasury Secretary Yellen weighed in on the regional bank concerns. Testifying before Congress, she admitted that “I’m concerned. I believe it’s manageable, although there may be some institutions that are quite stressed by this problem.” When asked about NYCB, Yellen responded that “I don’t want to comment on the situation of an individual bank, but commercial real estate is an area that we’ve long been aware could create financial stability risks or losses in the banking system, and this is something that requires careful supervisory attention.” Yellen is taking the right tone. Yes, some banks will indeed come under stress but the "too big to fail" banks will undoubtedly survive. The Fed could extend its emergency bank funding program beyond March, but it will not cut rates just to address CRE-related stresses. As she pointed out, that is up to the regulators.

Growth remains strong in Q1. The Atlanta Fed’s GDPNow model’s first update came in at 4.2% SAAR vs. the first estimate of 3.0%. The early estimates are often volatile, and the next update comes today after the data. December trade and consumer credit will be reported. Elsewhere, the New York Fed’s Nowcast model’s Q1 estimate stands at 3.3% SAAR vs. 2.8% previously and will be updated Friday. Its estimates for Q2 will begin in early March.

The Bank of Canada will release its summary of deliberations. The summary should offer more detail behind their dovish hold decisions. Recall that at the January 24 meeting, the BOC abandoned its cautious tightening bias as it removed the wording in its statement that it “remains prepared to raise the policy rate further if needed.” However, Governor Macklem pushed back against aggressive rate cut bets in his press conference and said that the risk of another hike is “not zero.” Macklem stressed that it’s premature to discuss rate cuts and that the bank needs to see further progress before beginning that discussion. Of note, the odds of a 25 bp cut in April have fallen to around 35% now vs. nearly 75% right before that decision.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank officials continue to push back against easing expectations. Schnabel said that due to current macro uncertainty, “It means we must be patient and cautious because we know also from historical experience that inflation can flare up again.” He added that “I would argue that we are now entering a critical phase where the calibration and transmission of monetary policy become especially important because it is all about containing the second-round effects.” Despite ongoing pushback, markets still see 66% odds that the easing cycle begins April 11, while a total 125 bp of easing is still seen this year.

Eurozone countries reported soft December IP data. Germany IP came in at -1.6% m/m vs. -0.5% expected and a revised -0.2% (was -0.7%) in November, while the y/y rate came in at -3.0%. Spain IP came in at -0.3% m/m vs. -0.1% expected and a revised 1.1% (was 1.0%) in November, while the y/y rate came in at -0.2%. Italy reports IP Friday and is expected at 0.9% m/m vs. -1.5% in November. Eurozone IP won’t be reported until next Wednesday.

Bank of England continues to shift more dovish. MPC member Breeden said that bank is “likely at a turning point” and acknowledged that her concerns about persistent inflation “have diminished.” Breeden added that the MPC is “less concerned that rates might need to be tightened further. Instead my focus, and indeed the focus of many on the MPC, has shifted to thinking about how long rates need to remain at their current level.” Lastly, she stressed that “I am now more confident that downside risks to demand are less likely to materialize beyond that embodied in our February forecast.” The MPC was split last week. Breeden was one of the six that voted to keep rates steady, Dhingra voted for a 25 bp cut, and Mann and Haskel voted for a 25 bp hike. Mann speaks tomorrow. The market still sees 100 bp of rate cuts this year, starting in Q2.

The Riksbank released its minutes. The minutes showed the decision last week to leave the repo rate at 4%, increase the pace of government bond sales, and lower the projected policy rate path was unanimous. Interestingly, Deputy Governor Jansson noted that to guard against upside risk to inflation from a sharp depreciation in the krona, “the timing of rate cuts at the major central banks abroad is a factor that may have significant bearing on when it is appropriate to also start relaxing monetary policy in Sweden.” As such, interest rate differentials are unlikely to be significant drivers near-term for USD/SEK or EUR/SEK. Markets see nearly 25% probability of a 25 bp rate cut in March. Over the next 12 months, the OIS curve is pricing in 125 bp of easing, which seems too aggressive.

National Bank of Poland is expected to keep rates steady at 5.75%. The market is pricing in 50-75 bp of easing over the next 12 months as the slowdown in core and headline CPI inflation are intact. The extent to which the NBP eases further will depend in large part on the impact of fiscal and regulatory policies on inflation. Indeed, NBP Governor Adam Glapinski warned that a rate increase cannot be ruled out if the policy committee learns in March that inflation will surge. The NBP publishes new economic projections in March and uncertainty over fiscal policy should wane by then. Minutes to the January 9 meeting will be released Friday.

ASIA

New Zealand reported solid Q4 employment data. Employment rose a tick more than expected at 0.4% q/q vs. a revised -0.1% (was -0.2%) in Q3, while the unemployment rate came in at 4.0% vs. 4.3% expected and 3.9% in Q3. Private wages rose two ticks more than expected at 1.0% q/q vs. 0.9% in Q3. Overall, the data were a bit firmer than forecast by the RBNZ back in November and so it will likely remain patient before shifting away from its restrictive policy settings. Indeed, the first cut is not priced in by the market until August vs. July at the start of this year.

Taiwan reported strong December trade data. Exports came in at 18.1% y/y vs. 19.5% expected and 11.8% in December, while imports came in at 19.0% y/y vs. -4.8% expected and -6.5% in December. While the improvement is welcome, much of it was due to low base effects from last year. Lastly, the recent weakness in export orders suggest a bumpy ride ahead for exports.

The Bank of Thailand left rates steady at 2.5%, as expected. This hold came despite heavy jawboning for a cut this week from Prime Minister Thavisin and Deputy Finance Minister Amornvivat. However, it was a dovish hold as the 7-2 vote was the first in nearly a year and a half. The two dissents favored a 25 bp cut and so the bank took the first steps toward an easing cycle. While outright deflation makes a strong case for easing, this sort of interference should be troubling for investors. Assistant Governor Piti said “We still haven’t seen a sharp drop in consumption. We expect inflation rate to rise in the future.” Next policy meetings are April 10 and June 12. Of note, the swaps market is pricing in the start of an easing cycle with 25 bp of easing over the next three months.