Dollar Firm as Norway and Mexico Shake Things Up

February 10, 2023
  • Similar to Sweden yesterday, Norway provided another wake up call to the markets; Fed tightening expectations remain elevated; CPI revisions will be closely studied; February University of Michigan consumer sentiment may be a minor highlight; Canada highlight will be January jobs report; Mexico delivered a hawkish surprise with a 50 bp hike to 11.0% vs. 25 bp expected; Brazil policymakers are reportedly considering an early review of the inflation targets
  • Italy reported firm December IP; U.K. data dump began; Norway January CPI ran hot; Russia kept rates steady at 7.5%, as expected
  • Reports suggest Kazuo Ueda will be nominated to be BOJ Governor; RBA released its Statement on Monetary Policy; China reported January CPI and PPI

The dollar is getting some traction ahead of the weekend. DXY is up for the first time after three straight down days and trading near 103.427. The recent break above 103.793 sets up an eventual test of the January high near 105.631. The euro is trading just below $1.07 and is nearing the new cycle low near $1.0670 from Tuesday. The break below $1.0695 sets up an eventual test of the January 6 low near $1.0485. Sterling is trading near $1.21 after trading at a new cycle low near $1.1960 Tuesday. It remains on track to test that day’s low near $1.1840. USD/JPY is trading back near 131 after trading as low as 129.80 earlier today on unexpected news of the BOJ appointment (see below). After the dust settles, we believe the pair remains on track to test the Monday high near 132.90.


Similar to Sweden yesterday, Norway provided another wake up call to the markets. January CPI ran much hotter than expected and is likely to necessitate greater than expected tightening from the Norges Bank in the coming weeks (see below). Sound familiar? The Riksbank delivered a hawkish surprise this week for that exact same reason, as did the RBA and Banco de Mexico. RBNZ is also in the same boat. One might note that these are small economies with little impact overall. Yet we view them as canaries in a coal mine. Simply put, the battle to lower inflation is turning out to be much trickier than the very optimistic fairy tale that markets have woven. Global interest rates are going higher for longer, and any notions of H2 easing should be put to bed immediately. We do not think markets have fully priced in this higher rate global environment. When it does, risk assets should suffer.

Fed tightening expectations remain elevated. WIRP suggests a 25 bp hike March 22 is fully priced in, while another 25 bp hike May 3 is over 80% priced in and fully priced in for June 14. If we do get that second hike, which seems very likely, that would take the Fed Funds target range up to 5.0-5.25%, which is where the December Dot Plots put it by year-end. WIRP suggests nearly 30% odds of a last 25 bp hike July 26, which would move the target range above the Dot Plots to 5.25-5.5%. Yet markets are still pricing in Fed easing in H2. Let that sink in. We still have a ways to go to get to peak Fed Funds rate, and yet folks are still looking for H2 rate cuts in what would be an extremely quick turnaround. Waller and Harker speak today and are likely to sound hawkish.

CPI revisions will be closely studied. From the BLS website: “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.” Of note, January CPI data will be released next Tuesday. To makes things even tricker, the BLS announced last month that “Beginning with the January 2023 index, scheduled for publication on February 14, 2023, BLS plans to update the spending weights in the calculation of the CPI every year instead of every 2 years. Spending weights indicate what share of total expenditures each item represents. This change will improve the relevance of CPI spending weights by using the most recent consumer spending information. By improving the relevance of spending weights, BLS can improve the accuracy of the CPI.” The BLS went from revising these weights every ten years to every two years back in 2002 and so the move to annual revisions is another step in the process.

February University of Michigan consumer sentiment may be a minor highlight. Headline is expected to rise a tick to 65.0, with current conditions seen up a tick to 68.5 and expectations seen up four ticks to 63.1. Given recent labor market readings, we see upside risks to the sentiment readings. Of note, 1-year inflation expectations are seen up a tick to 4.0% while 5- to 10-year expectations are seen steady at 2.9%. Strong sentiment would underscore strength in consumption, with January retail sales data next week expected to show a big bounce.

Weekly jobless claims remain low. Initial claims came in at 196k vs. 190 expected and 183k last week, while the 4-week moving average fell for the ninth straight week to 189k, the lowest since late April. Continuing claims came in at 1.688 mln vs. 1.66 mln expected and a revised 1.65 (was 1.655) mln last week.

Canada highlight will be January jobs report. Consensus sees 15.0k jobs added vs. a revised 69.2k (was 104.0k) in December, with the unemployment rate seen rising a tick to 5.1%. Bank of Canada tightening expectations have collapsed after it announced a pause at its January 25 meeting, with the swaps market pricing in very low odds of another hike from the current 4.5%. Like the Fed, the market is pricing in an easing cycle from the BOC in H2, which is highly unlikely.

Banco de Mexico delivered a hawkish surprise with a 50 bp hike to 11.0% vs. 25 bp expected. The bank “deemed that, given the dynamics of core inflation, on this occasion it is necessary to continue with the magnitude of the reference rate adjustment. Given the monetary policy stance already attained and depending on the evolution of incoming data, for its next policy meeting, the upward adjustment to the reference rate could be of lower magnitude.” The swaps market is now pricing in a peak policy rate between 11.75-12.0% vs. 11.0% at the start of this week. Next meeting is March 30 and a 25 bp hike seems likely given the forward guidance given yesterday.

Brazil policymakers are reportedly considering an early review of the inflation targets. The move is unsettling markets as it comes at a time when President Lula has been criticizing the bank for its tight monetary policy. The national monetary council COPOM typically sets the inflation targets in June, when it was expected to set a target for 2026 vs. 3.25% for 2023 and 3.0% for 2024 and 2025. There is a tolerance band of +/- 150 bp on either side. Reports suggest central bank President Roberto Campos Neto would be in favor of a higher target, but we are skeptical. This is simply not the time to change the target. Campos Neto is on COPOM, as are the Finance and Planning Ministers. The next meeting policy meeting is March 22 and rates are expected to remain steady at 13.75%. An easing cycle is being priced in by mid-year but this seems very unlikely given all this recent intrigue. If nothing else, the central bank must show that its independence remains intact. Until the picture becomes clearer, we expect BRL to underperform.


Italy reported firm December IP. It came at 1.6% m/m vs. 0.2% expected and a revised -0.1% (was -0.3%) in November. As a result, the y/y rate improved to 0.1% vs. -1.7% expected and a revised -3.4% (was -3.7%) in November. This was the first positive y/y reading since August. Eurozone IP will be reported next Wednesday and is expected at -0.7% m/m vs. 1.0% in November. ECB expectations are edging higher. WIRP suggests a 50 bp hike March 16 is nearly priced in. Looking further ahead, a 25 bp hike May 4 is priced in along with 25% odds of a larger 50 bp move, followed by a 25 bp hike June 15 along with nearly 40% odds of a last 25 bp hike in Q3. These expectations are likely to drift lower if continued disinflation gives the doves the upper hand. We have already seen the cracks reappear last week. Schnabel and de Cos speak today and Visco speaks Saturday.

The U.K. data dump began. Q4 GDP came in as expected at flat q/q vs. a revised -0.2% (was -0.3%) in Q3,while the y/y rate came in as expected at 0.4% vs. 1.9% in Q3. Private consumption came in at 0.1% q/q vs. -0.1% expected and a revised -0.4% (was -1.1%) in Q3, government spending came in at 0.8% q/q vs. 0.4% expected and 0.5% in Q3, and GFCF came in at 1.5% q/q vs. 0.7% expected and a revised 0.3% (was 1.1%) in Q3. Net exports were a drag was exports fell more than expected and import rose more than expected. While the U.K. narrowly avoided two straight quarters of contraction, it’s hardly any reason to celebrate as the economic outlook remains poor as 2023 gets under way. WIRP suggests odds of a 25 bp hike March 23 are around 85%. After that, the odds of a final 25 bp hike top out near 90% in Q3so the expected terminal rate is now back to 4.5%, where it started last week but still down from 6.25% after the disastrous mini-budget back in September.

December GDP, IP, services, index, construction output, and trade were also reported. GDP came in at -0.5% m/m vs. -0.3% expected and 0.1% in November, IP came in at 0.3% m/m vs. -0.2% expected and a revised 0.1% (was -0.2%) in November services index came in at -0.8% m/m vs. -0.3% expected and 0.2% in November, and construction came in flat m/m vs. -0.2% expected and a revised -0.5% (was flat) in November. The trade deficit surged to -GBP7.15 bln vs. -GBP2.8 bln expected and a revised -GBP2.3 bln (was -GBP1.8 bln) in November. This was clearly behind the big drop in net exports for the Q4 GDP data.

Norway January CPI ran hot. Headline came I at 7.0% y/y vs. 6.5% expected and 5.9% in December, while underlying came in at 6.4% y/y vs. 6.0% expected and 5.8% in December. Headline accelerated for the first time since October to just below that month’s peak near 7.5%, while underlying is at a new cycle high. The data support our view that inflation has not been so easily vanquished in many countries. Norges Bank next meets March 23 and a 25 bp hike to 3.0% is expected with growing risks of a 50 bp move. At the last meeting January 19, the bank kept rates steady at 2.75% and noted that “The policy rate will need to be increased somewhat further” and Governor Bache later said rates “will most likely be raised in March.” The expected rate path from December saw the policy rate peaking near 3.0%, with gradual easing expected in H2 2024. Updated macro forecasts and expected rate path will come at the March meeting. We expect a hawkish shift in the rate path to reflect swaps market pricing, which now sees a peak policy rate near 3.25% vs. 2.75-3.0% at the start of this week. This could adjust even higher to 3.5% if inflation continues to run hot.

Russia central bank kept rates steady at 7.5%, as expected. However, the forward guidance tilted hawkish as the bank noted “If pro-inflation risks intensify, the Bank of Russia will consider the necessity of a key rate increase at its upcoming meetings.” At the December meeting , Governor Nabiullina gave a hawkish hint in noting that “Due to a growing shortage of personnel, companies’ labor costs are increasing. This is evident among firm operating in industry, transport, logistics and construction. If wages grow at a rate higher than labor productivity, this may lead to an additional increase in prices through business costs.” Later today, Russia reports January CPI. Headline inflation is expected at 11.63% y/y vs. 11.94% in December. If so, it would continue the deceleration seen since the 17.83% peak in April but would remain far above the 4% target.


Reports suggest Prime Minister Kishida will nominate Kazuo Ueda to be the new Bank of Japan Governor. Deputy Governor Amamiya was the frontrunner but reportedly refused the post. Ueda is currently a professor at Kyoritsu Women's University and was a BOJ board member (1998-2005) under Governors Masaru Hayami and Toshihiko Fukui. Ueda was never mentioned as a frontrunner for the post and the fact that Amamiya’s nomination was leaked and subsequently refused suggests the government did a poor job planning and preparing the markets. Press reports suggest Ueda will be more hawkish than Amamiya but really, Ueda’s track record is ancient history and we have absolutely no idea how his thinking has evolved in the nearly 20 years since he was last at the BOJ. Reports suggest Shinichi Uchida and Ryozo Himino will be nominated as Deputy Governors. Uchida is seen as a close Kuroda ally and suggests no radical departure from current BOJ policy. Elsewhere, Japan reported January PPI at 9.5% y/y vs. 9.7% expected and a revised 10.5% (was 10.2%) in December.

Reserve Bank of Australia released its Statement on Monetary Policy. The bank revised its inflation forecasts upwards, noting “Inflation in Australia is too high and is broadly based. Given the current tightness in the labor market there are upside risks to wages growth. Price and wage-setting behavior could become more sensitive to strong demand and high inflation.” No wonder the bank just hiked rates 25 bp to 3.35% and signaled more to come. WIRP suggests nearly 75% odds of a 25 bp hike at the next meeting March 7, while the swaps market is pricing in a peak policy rate near 4.35%, up from 4.10% at the start of this week and 3.90% at the start of last week. Given that inflation risks are still rising despite the 300 bp of tightening seen so far, we believe there are upside risks to the expected terminal rate.

China reported January CPI and PPI. CPI came in as expected at 2.1% y/y vs. 1.8% in December, while PPI came in at -0.8% y/y vs. -0.5% expected and -0.7% in December. At this point, policymakers are purely focused on boosting growth but the muted inflation readings give the PBOC cover to cut rates again. Further stimulus measures are likely this year as we remain skeptical that reopening will boost growth as much as markets expect.

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