• U.S. yields have stabilized at the long end despite the heavy supply; FOMC minutes were hawkish; ADP came in lower than expected; weekly jobless claims suggest the labor market remains strong; Mexico and Colombia report December CPI; Peru is expected to cut rates 25 bp to 4.75%
  
• U.K. assets remain under severe pressure; U.K. December DMP inflation expectations rose; U.K. BRC reported soft December shop prices; eurozone reported soft November retail sales
  
• Japan December cash earnings ran a little hot; Australia reported soft retail sales and firm trade data for November; PBOC took steps to curtail CNH weakness; China reported December soft CPI and PPI data; Taiwan reported solid December trade data

The dollar rally continues. DXY is trading higher for the third straight day near 109.166 as hawkish FOMC minutes reinforce the case for U.S. rates staying higher for longer (see below). DXY is on track to test and eventually surpass the cycle high near 109.533 from last Thursday. Sterling is the worst performer today and traded at a new low for this move near $1.2240. it is on track to test the October 2023 low near $1.2035 as fiscal concerns continue to hit U.K. assets (see below). Elsewhere, the euro is trading lower near $1.03 after weak retail sales data (see below), while USD/JPY is trading lower near 157.85. More tariff noise is likely in the coming days and weeks but we continue to look through that and focus on the underlying fundamental backdrop, which remains unchanged. Simply put, the strong U.S. fundamental story of strong growth, elevated inflation, and a more hawkish Fed continues to favor higher U.S. yields and a stronger dollar.

AMERICAS

U.S. yields have stabilized at the long end despite the heavy supply. The 10-year yield is trading near 4.67% after trading yesterday at the highest level since April 2024 near 4.73%, while the 30-year yield is trading near 4.90% after trading yesterday at the highest level since November 2023 near 4.97%. The heavy auction week concluded as $22 bln of 30-year bonds were sold yesterday at a yield of 4.913% vs. 4.535% previously. However, demand was strong as the bid to cover ratio rose to 2.52 vs. 2.39 previously and indirect bidders took 66.6% vs. 66.5% previously. This follows lukewarm demand for $39 bln of 10-year notes and solid demand for $58 bln of 3-year notes earlier this week.

FOMC minutes are worth discussing. Of note, “Many participants suggested that a variety of factors underlined the need for a careful approach to monetary policy decisions over coming quarters.” In addition, “Some participants stated that there was merit in keeping the target range for the federal funds rate unchanged.” Even though there was only one official dissent (Hammack), the Dot Plots showed that four Fed policymakers thought it appropriate to keep rates steady last month. So far, so good. The real surprises came when the minutes noted that “recent higher-than-expected readings on inflation, and the effects of potential changes in trade and immigration policy, suggested that the process [of meeting the 2% target] could take longer than previously anticipated.” Lastly, “Almost all participants judged that upside risks to the inflation outlook had increased.” Fed policymakers are clearly not in a hurry to cut rates again.

Fed officials will remain cautious. Harker, Collins, Barkin, Schmid, and Bowman all speak today. Yesterday, Governor Waller was uncharacteristically dovish as he noted that “As always, the extent of further easing will depend on what the data tell us about progress toward 2% inflation, but my bottom-line message is that I believe more cuts will be appropriate.” He added that “The pace of those cuts will depend on how much progress we make on inflation, while keeping the labor market from weakening.” The next and only cut is currently priced in for June but could be pushed out to July again if the data remain strong.

ADP reported its private sector jobs estimate. It came in at 122k vs. 140k expected and 146k in November. However, we all know that ADP is a poor predictor of NFP. Bloomberg consensus for NFP stands at 165k vs. 227k in November, while its whisper number stands at 185k. Unemployment is expected to remain steady at 4.2%, while average hourly earnings are expected to remain steady at 4.0% y/y.

Weekly jobless claims suggest the labor market remains strong. Initial claims fell to 201k vs. 215k expected and 211k the previous week. This was the lowest since mid-February 2024 and dragged the 4-week moving average down to 213k, the lowest since late April 2024. December Challenger job cuts will be reported today.

Growth remains solid. The Atlanta Fed GDPNow model is tracking Q4 growth at 2.7% SAAR and will be updated today after the data. Elsewhere, the New York Fed's Nowcast model is tracking Q4 growth at 1.9% SAAR and Q1 growth at 2.2% SAAR and will be updated tomorrow.

Financial conditions remain loose. The Chicago Fed’s measure has loosened ten straight weeks through last Friday and are the loosest since the first week of November 2021. This will help support growth ahead of an expected slug of fiscal stimulus later this year.

Mexico reports December CPI data. Headline is expected at 4.22% y/y vs. 4.55% in November, while core is expected at 3.64% y/y vs. 3.58% in November. If so, headline would be the lowest since February 2021 and nearing the 2-4% target range. Banco de Mexico also publishes its minutes today. At the December 19 meeting, the bank cut rates 25 bp to 10.0% by a unanimous decision. However, it noted “The Board expects that the inflationary environment will allow further reference rate reductions. In view of the progress on disinflation, larger downward adjustments could be considered in some meetings, albeit maintaining a restrictive stance.” Despite the dovish guidance, the swaps market is pricing in only 125 bp of easing over the next 12 months that would see the policy rate bottom near 8.75%.

Colombia reports December CPI data. Headline is expected at 5.16% y/y vs. 5.20% in November, while core is expected at 5.63% y/y vs. 5.88% in November. If so, headline would be the lowest since October 2021 but still above the 2-4% target range. At the last meeting December 20, the bank delivered a hawkish surprise and cut rates 25 bp to 9.5% vs. 50 bp expected. The vote was 5-2, with one dissent in favor of a 50 bp move and another one in favor of a 75 bp move. Governor Villar said the weak peso and hawkish Fed guidance were behind the “prudent” cut. The swaps market is pricing in 100 bp of total easing over the next 12 months that would see the policy rate bottom near 8.5%.

Peru central bank is expected to cut rates 25 bp to 4.75%. However, the market is split as a third of the analysts polled by Bloomberg see steady rates. At the last meeting December 12, the central bank kept rates steady at 5.0% and noted that “The board is especially attentive to new information about inflation and its determinants, including core inflation, inflation expectations and economic activity to consider, if necessary, additional modifications in the monetary policy stance.” Since then, headline inflation has eased, core has picked up, and the sol has weakened. It’s a close call but we lean towards a hold today while expecting the cautious easing cycle to resume later in 2025.

EUROPE/MIDDLE EAST/AFRICA

U.K. assets remain under severe pressure. The current sell-off in GBP and gilts reflects a deterioration in the U.K. fiscal prospects, driven largely by heightened risk the UK could be entering a period of stagflation. GBP/USD broke below the April 2024 low near $1.2300 and is on track to test the October 2023 low near $1.2035, while U.K. 10-year yields traded as high as 4.92%, the highest since July 2008 and on track to test the June 2008 high near 5.27%. The latest rise in U.K. yields virtually wipes out Chancellor Reeves’ spending buffer of GBP9.9 bln. As such, the government may have to announce tax hikes and/or spending cuts when it publishes its Spring economic and fiscal forecast on March 26, further dampening economic activity and raising stagflation risks.

U.K. December DMP inflation expectations rose. 1-year expectations rose two ticks to a nine-month high of 3.0%, while 3-year expectations rose two ticks to a 13-month high of 2.9%. These readings will likely keep the Bank of England on a very cautious easing path, which is reflected by 50 bp of total easing priced in over the next 12 months. However, the BOE’s limited scope to ease policy can worsen the already fragile UK growth outlook and lead to a further deterioration in the UK’s fiscal prospects. Bottom line: until we have some positive UK economic growth surprise, the sell-off in GBP and gilts may have more legs. Breeden speaks Thursday.

U.K. BRC reported soft December shop prices. Prices fell -1.0% y/y vs. -0.4% expected and -0.6% in November. This was the weakest reading since July 2021 and bodes well for official CPI data due out January 15. The economy is clearly slowing and so the sooner inflation comes down, the better. The Bank of England has been very cautious about easing but it is clearly taking a toll on the economy.

Eurozone reported soft November retail sales data. Sales came in at 0.1% m/m vs. 0.3% expected and a revised -0.3% (was -0.5%) in October. As a result, the y/y fell to 1.2% vs. 1.7% expected and a revised 2.1% (was 1.9%) in October. Italy reports November retail sales and France reports November consumer spending tomorrow. The slowing trend in eurozone consumption is unmistakable and argues for a greater policy response from eurozone policymakers. Market pricing for only 100 bp of further ECB easing in this cycle seems too low.

ASIA

Japan December cash earnings data ran a little hot. Nominal earnings came in at 3.0% y/y vs. 2.7% expected and 2.2% in October, while real earnings came in at -0.3% y/y vs. -0.6% expected and -0.4% in October. Scheduled full-time pay came in as expected at 2.8% vs. 2.9% in October. Despite the slight upside misses, none of these readings scream out for imminent BOJ tightening. Of note, the BOJ wrote in its quarterly survey of branch managers that “Overall, many chiefs reported that the awareness of the need for sustained wage increases is permeating through a wide range of industries and businesses of various sizes.” Still, the market sees only 45% odds of a hike at the January 24 meeting, rising to 75% for March 19 and nearly priced in for May 1.

Australia reported soft November retail sales data. Sales came in at 0.8% m/m vs. 1.0% expected and a revised 0.5% (was 0.6%) in October. The y/y rate fell to 3.0% vs. a revised 3.5% (was 3.4%) in October, and the weaker readings were all the more disappointing as sales should have been boosted more by Black Friday discounting. Household spending will be reported Friday and is expected at 0.6% m/m vs. 0.8% in October, but there are downside risks after the retail sales data. Markets continue to price in roughly 75% odds of a 25 bp cut in February.

Elsewhere, Australia reported firm trade data. Exports rose 4.8% m/m vs. a revised 3.5% (was 3.6%) in October, while imports rose 1.7% m/m vs. a revised 0.0% (was 0.1%) in October. In y/y terms, exports improved to -5.0% and imports improved to 6.2%. However, with China continuing to struggle, we do not expect this bump up in exports to be sustained.

The PBOC took steps to curtail CNH weakness. The PBOC will auction a record CNY60 bln ($8.2 bln) of six-month bills in Hong Kong on January 15. By selling these bills, the PBOC reduces the supply of yuan in the offshore market, making it more expensive to short the currency. Nevertheless, China’s record yield differential with the U.S. will maintain upward pressure on the USD/CNH. Elsewhere, PBOC continues to fix USD/CNY below 7.20 even as the pair continues to bump up against its 2% daily trading limit from the fix.

China reported soft December CPI and PPI data. CPI fell a tick as expected to 0.1% y/y while PPI rose a tick more than expected to -2.3% y/y vs. -2.5% in November. Core CPI rose a tick to 0.4% y/y, but deflation risks clearly remain in play and will require a much more significant policy response than what we’ve seen already.

Taiwan reported solid December trade data. Exports rose 9.2% y/y vs. 6.0% expected and 9.7% in November, while imports rose 30.4% y/y vs. 15.5% expected and 19.8% in November. Here too, we do not expect a sustained improvement in the export numbers due to mainland China’s struggles.