• The data highlight will be December jobs data; other labor market data suggest upside risks; December ISM services PMI will also be important; the St. Louis Fed has chosen Alberto Musalem as its next president; Canada also reports December jobs data
  
• December eurozone CPI readings were mixed; Germany reported very weak November retail sales; U.K Prime Minister Sunak confirmed that a general election is likely this year
  
• Japan reported soft final December services and composite PMIs; China shadow bank Zhonghi has filed for bankruptcy

The dollar is firm ahead of the jobs report. DXY is trading higher near 102.743 and a break above 102.87 is needed to set up a test of the December high near 104.263. The euro remains heavy near $1.0915 and a break below $1.0885 is needed to set up a test of the December low near $1.0725. Likewise, sterling is trading lower near $1.2655 and a break below $1.2625 is needed to set up a test of the December low near $1.25. USD/JPY traded today at the highest level since mid-December near 145.40 and the pair is on track to test the December high near 147.50. We believe markets are coming to realize that the U.S. economy remains robust in Q4 and likely to remain so in 2024, which certainly wouldn’t require six rate cuts from the Fed this year. That said, a sustained dollar recovery will really come down to the U.S. data. Over the past few weeks, the readings have mostly come in quite firm and so we continue to believe that the current market easing expectations are dead wrong. These expectations have started to shift but more needs to be seen. Perhaps today’s jobs report will provide some impetus.

AMERICAS

The dollar correction following the December FOMC minutes was brief and shallow. The greenback edged higher overnight against all major currencies as the rates markets trimmed near-term Fed rate cut bets as data suggest that the U.S. labor market remains resilient and the U.S. economy remains robust (see below). WIRP suggests only 5% odds of a cut January 31 and rise to 66% March 20 after being nearly priced in at the start of this week. Five rate cuts are priced in vs. six at the start of this week, though there are still 33% odds of a sixth cut. We continue to expect this repricing to continue, which of course would help support the dollar. Barkin speaks today and Logan speaks Saturday.

Financial conditions continue to loosen. The Chicago Fed’s measure has loosened for eleven straight weeks through last Friday. This loosening is the major factor behind why we now believe the U.S. may avoid recession in 2024. However, this will likely come at a price of elevated inflation that may eventually require tighter policy.

The U.S. economy remains robust. The New York Fed’s Nowcast model has Q4 growth at 2.4% SAAR and Q1 growth at 2.2% SAAR and will be updated later today. Elsewhere, the Atlanta Fed’s GDPNow model has Q4 growth at 2.5% SAAR vs. 2.0% previously and will be updated next Tuesday after the data. Bottom line: the US economy is still growing above trend in Q4. Of note, the early Q4 reads were based largely on strike-depressed October data. If November and December data continue to bounce back as we’ve seen already, the Q4 growth estimates should rise accordingly. In turn, this momentum is likely to carry over into Q1.

The data highlight will be December jobs data. Bloomberg consensus for NFP stands at 175k vs. 199k in November, while its whisper number has edged up to 189k. The unemployment rate is expected to rise a tick to 3.8% while average hourly earnings are expected to fall a tick to 3.9% y/y. With US labor demand and supply moving gradually into better alignment, the pace of wage growth will likely be a bigger market mover than the pace of job gains. ADP private sector jobs estimate came in yesterday at 164k vs. 125k expected and a revised 101k (was 103k) in November. For what it’s worth, NFP has outperformed ADP the past three months.

Other labor market data suggest upside risks to jobs data. Challenger layoffs fell to 34.817k in December, the lowest since July. Elsewhere, initial jobless claims came in at 202k for the week ended December 30, while the 4-week moving average came in at 208k vs. 213k the previous week. Both were the lowest since mid-October. Elsewhere, continuing claims came in at 1.855 mln vs. 1.881 mln expected and a revised 1.886 mln (as 1.875 mln) the previous week. This was the lowest since mid-November. Taken all together, the labor market seems to be quite firm.

December ISM services PMI will also be important. Headline is expected at 52.5 vs. 52.7 in November but keep an eye on employment and prices paid, which are expected at 51.0 and 57.3 in November, respectively. Prices paid have fallen two straight months but remains near the 58.9 peak from August and September. Yesterday, S&P Global final December services PMI came in a tick higher than the preliminary at 51.4. November factory orders will also be reported and are expected at 2.4% m/m vs. -3.6% in October.

The St. Louis Fed has chosen Alberto Musalem as its next president. He will start April 2 and release James Bullard, who left last year for academia. Musalem worked at Tudor from 2000-2014, then went to the NY Fed from 2014-2017, and most recently has been working at a Tudor-backed hedge fund. He is definitely an unusual choice for St. Louis Fed as his CV suggests he'd probably be better suited to head up the New York Fed, where presidents typically have markets experience. Musalem has a Ph.D. in economics from University of Pennsylvania so he checks that box. There’s no way to tell if he's hawkish or dovish until he speaks. Of note, the St. Louis Fed does not vote in 2024.

Canada also reports December jobs data. Consensus sees 15.0k jobs added vs. 24.9k in November, while the unemployment rate is seen rising a tick to 5.9% and hourly wages are expected to pick up to 5.4% y/y vs. 5.0% in November. Like the U.S., job growth has been cooling but net new jobs are still being created. December S&P Global manufacturing PMI will be reported Tuesday. Ivey PMI will also be reported. Bank of Canada easing expectations remain elevated. WIRP suggests nearly 10% odds of a cut January 24, rising to 25% March 6 and 80% April 10. A total of five cuts are priced in for 2024.

EUROPE/MIDDLE EAST/AFRICA

December eurozone CPI readings were mixed. Headline inflation came in as expected at 2.9% y/y vs. 2.4% in November, while core came in as expected at 3.4% y/y vs. 3.6% in November. Italy also reported CPI and its EU Harmonised inflation came in as expected at 0.5% y/y vs. 0.6% in November. Of note, the pickup in headline inflation largely reflects low base effects in the energy component as an energy subsidy in Germany rolled off. More importantly, core inflation fell to the lowest since March 2022. Lastly, November PPI came in at -8.8% y/y vs. -8.6% expected and -9.4% in October and supports the disinflationary narrative.

European Central Bank easing expectations remain elevated. We believe the eurozone disinflationary backdrop and weak economic growth outlook reinforce the case for the ECB to start cutting rates in Q2 and this is a clear headwind for euro. WIRP suggests 5% odds of a cut January 25, rising to nearly 45% March 7 and fully priced in April 11. A total of six cuts are priced in for 2024. Of note, ECB officials warned that inflation would rise temporarily and so markets are rightfully looking through this December spike.

Germany reported very weak November retail sales. Sales came in at -2.5% m/m vs. -0.5% expected and a revised 1.3% (was 1.1%) in October, while the y/y WDA rate came as expected at -2.4% vs. a revised 0.2% (was 0.1%) in October. Last week, Spain reported sales at 5.2% y/y WDA vs. 3.9% expected and a revised 5.3% (was 5.0%) in October. Of note, eurozone reports November retail sales next Monday (0.3% m/m expected) while Italy reports retail sales next Wednesday.

U.K Prime Minister Sunak confirmed that a general election is likely this year. Specifically, he said “My working assumption is we’ll have a general election in the second half of this year, and in the meantime, I’ve got lots that I want to get on with.” The vote must be held by January 2025 and expectations are that Sunak will wait for as long as possible in order to give his Tory party an opportunity to close the huge gap with Labour in the polls. Much will depend on how the economy evolves, to state the obvious.

ASIA

Japan reported soft final December services and composite PMIs. Services came in at 51.5 vs. 52.0 preliminary, which helped drag the composite PMI down to 50.0 vs. 50.4 preliminary. The economy continues to flirt with recession and that is one of the reasons why the Bank of Japan appears hesitant to hike rates anytime soon. WIRP suggests only 5% odds of liftoff January 23, rising to 20% March 19, 55% April 26, 75% June 14, and fully priced in July 31. Market pricing for the timing of liftoff continues to get pushed out. For instance, March liftoff was priced in at the start of October, then shifted to April at the start of November, and then shifted to June at the start of December.

China shadow bank Zhonghi has filed for bankruptcy. With a $36.4 bln hole in its balance sheet, there really was no alternative. The First Intermediate People’s Court in Beijing will take up the case and how its handled will be key, as we expect many other bankruptcies to emerge in the coming months. Its debt will of course have to be restructured, but its unclear how big the haircuts will be. Stay tuned.