Dollar Firm Ahead of CPI Revisions

February 09, 2024
  • Fed officials remain cautious; annual CPI revisions will be reported; Canada highlight will be January jobs data; Mexico kept rates steady at 11.25%, as expected
  • ECB officials continue to push back against market easing expectations; Norway reported January CPI; Poland delivered a hawkish hold; Czech Republic delivered a dovish surprise
  • BOJ Governor Ueda sounded dovish; RBA Governor Bullock delivered a balanced view; major New Zealand bank sees the RBNZ hiking rates still; China credit growth surged in January

The dollar is firm ahead of CPI revisions. DXY is trading modestly higher for the second straight day near 104.221 after two straight down days. The euro is trading lower near $1.0770 while sterling is trading lower near $1.2605. USD/JPY is trading at a new high for this move near 149.60 after dovish comments from BOJ Governor Ueda (see below). The pair is on track to test the November high near 152. Lastly, NZD is the top performing major today after a major New Zealand bank called for two more RBNZ rate hikes (see below). 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 while Fed officials remain cautious about easing (see below). 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 the January jobs data.


Fed officials remain cautious. Barkin said the Fed doesn’t have to be in a hurry to cut rates and that he’d like to see disinflation continue for a few more months. He said the tight job market means wage pressures are likely to persist, and that the rebound in consumer sentiment and looser financial conditions pose risks to the inflation outlook. Lastly, Barkin added that it’s conceivable that r* has risen post-pandemic. This is a very cautious view on cutting rates that's shared by most of the FOMC. Odds of a March cut have fallen just below 20% 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 70%. 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. Logan speaks today.

Growth remains strong in Q1. The New York Fed’s Nowcast model’s Q1 estimate stands at 3.3% SAAR vs. 2.8% previously and will be updated today. Its estimates for Q2 will begin in early March. Elsewhere, the Atlanta Fed’s GDPNow model is tracking Q1 growth at 3.4% SAAR vs. the first estimate of 3.0%. The early estimates are often volatile, and the next update comes next Thursday after the data.

The annual CPI revisions will be reported. From the BLS: “Each year with the release of the January CPI, seasonal adjustment factors are recalculated to reflect price movements from the just-completed calendar year. This routine annual recalculation may result in revisions to seasonally adjusted indexes for the previous 5 years. Recalculated seasonally adjusted indexes as well as recalculated seasonal adjustment factors for the period January 2019 through December 2023 will be made available on Friday, February 9, 2024.” We note that the adjustments to the seasonal factors would only impact the m/m rates but will not affect the y/y rates. In related news, January CPI data next Tuesday will be key. Consensus sees headline coming in at 0.2% m/m vs. 0.3% in December, with the y/y rate falling to 2.9% vs. 3.4% in December. Elsewhere, core is expected at 0.3% m/m and 3.7% y/y.

Canada highlight will be January jobs data. Consensus sees 15.0k jobs create% m/m and d vs. 100 (yes, 100) in December, while the unemployment rate is expected to rise a tick to 5.9%. Overall, labor market conditions have eased but wage growth is still elevated. Average hourly earnings to slow to 5.3% y/y vs. 5.7% in December. The market now sees 75 bp of rate cuts this year, down from 100 bp seen in early January. More evidence of sticky wage growth could lead to a further upward adjustment to Canadian interest rate expectations in favor of CAD.

Mexico kept rates steady at 11.25%, as expected. The decision was unanimous. The bank removed the phrase about holding rates “for some time” and instead said it would make its decisions at the next meetings “depending on available information.” It might be a stretch to say this is a dovish hold, but the bank is clearly setting up the start of the easing cycle. That said, it doesn't sound like they're ready to cut at the next meeting March 21. We think May 9 is more likely but of course, it will all depend on the data. The swaps market is pricing in 25 bp of easing over the next three months, followed by another 50 bp over the subsequent three months.


European Central Bank officials continue to push back against market easing expectations. Holzmann said “There is a certain chance that there will be no interest-rate cut at all this year or only at the very end of the year.” Kazaks said, “At the moment, there are expectations that the rates could be cut in the spring, in March or April - I wouldn’t be optimistic.” Lane said, “In terms of an overall evaluation of our policy trajectory, we need to be further along in the disinflation process before we can be sufficiently confident that inflation will hit the target in a timely manner and settle at target sustainably.” The ongoing pushback is having some impact, as markets see only 55% odds of a cut April 11 vs. nearly priced in at the beginning of this month. Nagel and Cipollone speak today.

Norway reported January CPI. Headline came in a tick higher than expected at 4.7% y/y vs. 4.8% in December, while underlying came in as expected at 5.3% y/y vs. 5.5% in December. The data validates the Norges Bank’s guidance that the policy rate will likely remain at 4.5% for some time ahead. Headline inflation has declined over the past six months but remains well above the 2% target. The swaps market sees steady rates over the next three months, followed by the start of an easing cycle with 25 bp of easing over the subsequent three months.

Poland delivered a hawkish hold. After leaving rates steady at 5.75% Wednesday, Governor Glapinski held a press conference yesterday and said “I don’t see prospects for a MPC majority to cut rates if data matches our forecasts this year. In fact, I don’t see a majority for rate moves in either direction.” He added that while inflation may fall to around 2.5% in March, the outlook for H2 is “highly uncertain.” The swaps market sees steady rates over the next three months followed by 25 bp of easing over the subsequent three months. The hawkish message from Glapinski is helping EUR/PLN trade near the lows for this recent move just above 4.30.

Czech National Bank delivered a dovish surprise. It cut rates 50 bp to 6.25% vs. 25 bp expected, though nearly half the analysts polled by Bloomberg looked for the larger move. The vote was 6-1, with the dissent in favor of an even larger 75 bp cut. The dovish surprise will weigh on the currency, as markets ramp up easing expectations. The swaps market is pricing another 300 bp of easing over the next 12 months that would see the policy rate bottom at 3.25%. This is well below market expectations for Poland and Hungary, both at 5.5% over the next 12 months. EUR/CZK trading at a new high for this move near 25.268 today and on track to test the May 2022 high near 25.486 and then the March 2022 high near 25.936.

With DM rates on hold for now at the peaks, EM rate cuts are a very risky move. If EM central banks cut too aggreessively, the differential narrows too much and the currency sells off, which add to inflation pressures. Many EM central banks have been forced to adjust their easing pace (Chile, Poland) and we suspect Czech may eventually have to. That said, much of EM is already in recession and so the need for rate cuts is there. It's just that policymakers have to balance that with the FX impact.


Bank of Japan Governor Ueda sounded dovish. Similar to Deputy Governor Uchida’s comments yesterday, Ueda warned that “Even if we end minus rates, the accommodative financial conditions will likely continue.” As we noted yesterday, The market was already pricing in a very modest tightening cycle. Before the dovish comments this week, the swaps market saw 25 bp of tightening over the next 12 months, followed by only 35 bp more over the subsequent two years. Those expectations remain little changed today. Of note, liftoff is still seen in June.

RBA Governor Bullock delivered a balanced view. Speaking to the House of Representatives Standing Committee on Economics. Bullock reiterated that further increase in interest rates cannot be ruled out but neither have they been ruled in. Bullock added again that services inflation needs to be quite a bit lower than it currently is (4.6%) but not necessarily at the midpoint of the 2-3% range to meet the RBA’s inflation target. The market still sees the first cut in August and a total of 50 bp of easing this year.

A major New Zealand bank sees the RBNZ hiking rates still. It forecasts a 25 bp to 5.75% this month followed by another 25 bp hike to 6.0% in April and added that "The RBNZ has a job to do: to get inflation sustainably down to 2% in the medium term. We just don't think the RBNZ Committee will feel confident that they've done enough to meet their inflation mandate.” Of note, the market is now pricing in nearly 45% odds of a hike February 28 vs.10% at the start of this week. Those odds rise to 85% April 10 and over 90% May 22. However, the market is not pricing in a second hike.

China credit growth surged in January. New loans came in at CNY4.92 trln vs. CNY4.5 trln expected and CNR1.17 trln in December, while aggregate financing came in at CNY6.5 trln vs. CNY5.6 trln expected and CNY1.94 trln in December. It appears policymakers have ramped up policy support to address the significant economic headwinds. Regardless, a sustained increase in demand for credit by households and businesses is highly unlikely amidst ongoing stress in the property sector. Of note, China is now on Lunar New Year holiday until markets reopen Monday February 19.

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