• Financial conditions remain loose and should help maintain underlying strength in the economy; New York Fed President Williams speaks this afternoon
  
• France reported November IP; ECB officials continue to lean dovish; BOE Governor Bailey testifies before parliament; Norway reported soft December CPI; Sweden reported soft economic data for November; National Bank of Hungary releases its minutes
  
• Japan reported weak November cash earnings; Australia reported soft November CPI data

The dollar is drifting lower in the absence of any new market developments. DXY is trading lower near 102.478. The euro is consolidating near $1.0945 while sterling is trading heavy near $1.2720. USD/JPY is trading lower today as the yen underperforms due to soft wage data (see below). AUD has recovered some of yesterday’s losses despite soft CPI data, while NOK has largely ignored the soft December CPI print (see below). While U.S. economic data have mostly come in on the firm side, current market easing expectations for the Fed still need to adjust significantly. Until that happens, the dollar remains vulnerable. Perhaps this week’s U.S. inflation data will provide some impetus.

AMERICAS

Financial conditions remain loose. Chicago Fed reports its weekly measure today for last week. For the previous week ending December 29, conditions loosened for the 11th straight week and are the loosest since early February 2022. Elsewhere, the New York Fed’s FCI-G measure is likely to show that monetary policy turned accommodative in December.

Loose financial conditions should help maintain underlying strength in the economy. The Atlanta Fed’s GDPNow model has Q4 growth at 2.2% SAAR vs. 2.5% previously and will be updated today after November wholesale inventories and trade sales are reported. Elsewhere, the New York Fed’s Nowcast model has Q4 growth at 2.5% SAAR and Q1 growth at 2.7% SAAR and will be updated Friday. Bottom line: the US economy is still growing above trend in Q4 and quite possibly Q1.

New York Fed President Williams speaks this afternoon. He will be speaking on the 2024 economic outlook. At this point, we’d consider Williams to be one of the centrists on the FOMC and so his remarks should provide a good window into current Fed thinking. WIRP suggests 5% odds of a cut January 31 and rising to nearly 70% March 20 after being nearly priced in at the start of last week. Five rate cuts are priced in vs. six at the start of last week, though there are still over 60% odds of a sixth cut.

EUROPE/MIDDLE EAST/AFRICA

France reported November IP data. IP came in at 0.5% m/m vs. 0.0% expected and -0.3% in October, but the y/y rate still slowed to 0.6% vs. a revised 2.0% (was 1.6%) in October. Italy and Spain report IP tomorrow. Italy is expected at -0.2% m/m vs. -0.2% in October and Spain is expected at 0.2% m/m vs. -0.5% in October. Eurozone-wide IP will be reported next Monday,

European Central Bank officials continue to lean dovish. Villeroy reaffirmed that he expects the ECB to cut rates at some point in 2024. Guindos said “Soft indicators point to an economic contraction in December too, confirming the possibility of a technical recession in the second half of 2023. Incoming data indicate that the future remains uncertain, and the prospects are tilted to the downside.” WIRP suggests 5% odds of a cut January 25, rising to 40% March 7 and fully priced in April 11. Six cuts are priced in for 2024.

Bank of England Governor Bailey testifies before parliament. Breeden, Wilkins, and Hall will also testify before the Treasury Committee on the bank’s financial stability report released in December. However, we suspect they will also be grilled about monetary policy matters. Bank of England easing expectations remain elevated. WIRP suggests nearly 5% odds of a cut February 1, rising to 25% March 21, 75% May 9, and fully priced in June 20. Five cuts are priced in for 2024.

Norway reported soft December CPI. Headline is expected to remain steady at 4.8% y/y, while underlying is expected at 5.6% y/y vs. 5.8% in November. At the last meeting December 14, Norges Bank delivered a hawkish surprise and hiked rates 25 bp to 4.5% and warned that “the policy rate will likely be kept at 4.50% for some time ahead.” However, the market doesn’t believe it. WIRP suggests no odds of a cut January 25 but rising to 15% March 21, 75% May 3, and fully priced in June 20. Looking ahead, 100 bp of easing is priced in for 2024. Norges Bank releases its Q4 survey of bank lending tomorrow.

Sweden reported soft economic data for November. GDP grew by 0.2% m/m and 0.9% y/y, but the details point to sluggish domestic demand as retail sales and household consumption both fell -0.5% m/m. Indeed, weakness in imports was the main growth driver. The only real bright spot was the 1.0% y/y gain in industrial orders. Interest rate futures have now fully priced out the probability of another Riksbank hike and WIRP suggests 25% odds of a cut at the next meeting February 1. No wonder SEK is trading on the defensive versus USD and EUR. For all of 2024, 125 bp of easing is priced in.

National Bank of Hungary releases its minutes. At that meeting December 19, the central bank cut the base rate 75 bp for the third straight time to 10.75% but Deputy Governor Virag said the bank had also discussed a 100 bp move. He added that “The key interest rate will be in the single-digit in the near future.” December CPI will be reported Friday. Headline is expected at 5.9% y/y vs. 7.9% in November. If so, it would be the lowest since September 2021 but still well above the 2-4% target range. The swaps market is pricing in 150 bp of easing over the next three months followed by another 225 bp over the subsequent three months.

ASIA

Japan reported weak November cash earnings. Nominal earnings came in at 0.2% y/y vs. 1.5% expected and actual in October, while real earnings came in at -3.0% y/y vs. -2.0% expected and -2.3% in October. Nominal earnings rose at the slowest rate since December 2021 while real earnings fell the most since April. No wonder November household spending came in at -2.9% y/y vs. -2.3% expected and -2.5% in October. Lastly, the annual increase in scheduled cash earnings (less volatile than total cash earnings) remained muted at just 1.2% y/y and is consistent with a further slowdown in underlying CPI inflation. The BOJ has made rising wages an important factor for removing policy accommodation and we have yet to see significant upward wage pressures. Market pricing for the timing of liftoff has been pushed out to July now.

Australia reported soft November CPI data. Headline came in 4.3% y/y vs. 4.4% expected and 4.9% in October. This is the lowest since December 2021 but still well above the 2-3% target range. Elsewhere, trimmed mean inflation was 4.6% y/y in November, down from 5.3% in October. Cash rate futures continue to imply about 50 bp of policy rate cuts this year (starting in Q3), which seems about right.