Dollar Firm on Strong Data and Tariff Noise

January 08, 2025

Win Thin

Strong data has pushed out Fed easing expectations; FOMC minutes will be closely watched; U.S. yields continue to climb at the long end due to the combination of strong data and heavy supply; ADP reports its private sector jobs estimate; Chile reports December CPI data
Germany reported weak November data; U.K. BRC reports December shop prices later today; Sweden December CPI data cooled
Australia November CPI data were mixed; PBOC continues its efforts to curtail yuan weakness

The dollar remains firm ahead of ADP. DXY is trading higher for the second straight day near 109.371 as strong U.S. data yesterday pushed out Fed easing expectations (see below). The dollar is also gaining on reports of some more tariff noise (see below). DXY is on track to test and eventually surpass the cycle high near 109.533 from last Thursday. The euro is trading lower near $1.0295 after weak German data (see below), while sterling traded at a new low for this move $1.2325 and is about to test the April 2024 low near $1.23. USD/JPY traded at a new cycle high near 158.55 today before coming off a bit to 158.35 currently. We continue to look through the tariff noise. However comprehensive the eventual tariff plan ends up being, we believe dollar dominance will continue in 2025 due to the ongoing economic and monetary policy divergence themes. Simply put, the strong U.S. fundamental story of strong growth, elevated inflation, and a more hawkish Fed continues to favor higher UST yields and a higher dollar, regardless of tariffs.

AMERICAS

The dollar is gaining on reports that Trump may declare a national economic emergency to justify large-scale tariffs. According to CNN, “The declaration would allow Trump to construct a new tariff program by using the International Economic Emergency Powers Act, known as “IEEPA,” which unilaterally authorizes a president to manage imports during a national emergency.” What we wrote earlier this week on all this tariff noise still stands: This is likely a trial balloon and the story is still developing so stay tuned. That said, U.S. economic outperformance should continue to drive the dollar higher regardless of the tariffs.

Strong data has pushed out Fed easing expectations. The next Fed cut has been pushed out to July vs. June before yesterday’s data. A lot can still happen between now and the spring but it's hard to argue with rates staying higher for longer. Furthermore, that cut is seen as the last in this cycle. Governor Waller speaks today. Yesterday, both Barkin and Bostic were cautious and noted that rates may have to remain elevated for longer in order to bring inflation down to the 2% target. We concur.

FOMC minutes will be closely watched. At that meeting, the Fed cut rates 25 bp but pivoted to a more hawkish stance. While there was only one official dissent (Hammack) in favor of steady rates, the Dot Plots showed that four policymakers in all had a 2024 Dot of 4.625% that represented steady rates in December. Chair Powell was suitably hawkish at his press conference. He acknowledged that the decision was a closer call. Most importantly, Powell stressed that the Fed is in a new phase of rate adjustments where the Fed needs to see progress on inflation.

U.S. yields continue to climb at the long end due to the combination of strong data and heavy supply. The 10-year yield is trading at the highest level since April 2024 near 4.70%, while the 30-year yield is trading at the highest level since November 2023 near 4.93%. $22 bln of 30-year bonds will be sold today. It appears that demand for longer dated paper may not be so strong despite the higher yields. Yesterday, $39 bln of 10-year notes were sold at a yield of 4.680% vs. 4.235% at the previous auction. Bid to cover ratio was 2.53 vs. 2.70 previously, while indirect bidders took 61.4% vs. 70.0% previously. This comes after $58 bln of 3-year notes were sold Monday at a yield of 4.332% vs. 4.117% at the previous auction. Bid to cover ratio was 2.62 vs. 2.58 previously, while indirect bidders took 61.0% vs. 64.2% previously.

ADP reports its private sector jobs estimate. It is expected at 139k vs. 146k in November and comes ahead of the December jobs report Friday. Bloomberg consensus for NFP stands at 163k 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 will be reported today due to tomorrow’s National Day of Mourning for former President Jimmy Carter.

November JOLTS data suggest the labor market remains relatively robust. Job openings rose to 8.098 mln vs. 7.740 mln expected and a revised 7.839 mln (was 7.744 mln) in October. This was the highest number of opening since May. The openings rate rose to 4.8 vs. 4.6% expected and a revised 4.7% (was 4.6%) in October. This was the highest since June and moves further above the 4.5 level that typically presages a sharp rise in the unemployment rate. Elsewhere, the quits rate fell two ticks to 1.9% while the layoffs rate was steady at 1.1%.

December ISM services PMI was strong. Headline came in at 54.1 vs. 53.5 expected and 52.1 in November, reversing much of the November drop. The details were also strong. Activity came in at 58.2 vs. 53.7 in November and was the strongest since September, while employment fell a tick to 51.4. Prices paid jumped to 64.4 vs. 57.5 expected and 58.2 in November and was the highest since February 2023. This was much greater than the rise in manufacturing prices paid to 52.5 vs. 51.8 expected and 50.3 in November. Both readings point to accelerating price pressures.

Growth remains solid. The Atlanta Fed GDPNow model is tracking Q4 growth at 2.7% SAAR and will be updated tomorrow 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 Friday.

Chile reports December CPI data. Headline is expected at 4.7% y/y vs. 4.2% in November. If so, it would reverse the November drop and move further above the 2-4% target range. At the last meeting December 17, the central bank cut rates 25 bp to 5.0% and signaled a new phase as Governor Costa noted that inflation will be around 5% in early 2025, a level that she called “uncomfortable” even as she stressed that “From here on, it shouldn’t be surprising that we enter a stage in which there are pauses.” The swaps market is not pricing in any further easing for this cycle.

EUROPE/MIDDLE EAST/AFRICA

Germany reported weak November data. Factory orders plunged -5.4% m/m vs. -0.2% expected and -1.5% in October. As a result, the y/y rate fell to -1.7% vs. 3.0% expected and 5.7% in October. Elsewhere, retail sales fell -0.6% m/m vs. 0.5% expected and a revised -0.3% (was -1.5%) in October. As a result, the y/y rate fell to 2.3% vs. 2.5% expected and a revised 5.1% (was 3.6%) in October. German IP and trade data will be reported tomorrow. IP is expected at 0.5% m/m vs. -1.0% in October, exports are expected at 2.0% m/m vs. -2.8% in October, and imports are expected at 0.7% m/m vs. -0.1% in October. Germany remains the sick man of Europe and we believe markets are underestimating the ECB’s capacity to ease in the face of economic weakness.

U.K. BRC reports December shop prices later today. Prices are expected at -0.4% y/y vs. -0.6% in November. If so, the reading would bode 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 taking a toll on the economy.

Sweden December CPI data cooled. Headline came in two ticks lower than expected at 0.8% y/y vs. 1.0% expected and 1.6% in November, CPIF came in two ticks lower than expected at 1.5% y/y vs. 1.8% in November, and CPIF ex-energy came in a tick lower than expected at 2.1% y/y vs. 2.4% in November. CPIF decelerated for the first time since September and moves further below the 2% target. The market is now fully pricing in a 25 bp cut at the January 29 meeting along with nearly 50% odds of a larger 50 bp move. Looking ahead, the market sees the policy rate bottoming near 2.0% over the next 12 months.

ASIA

Australia November CPI data were mixed. Headline picked up a tick more than expected to 2.3% y/y vs. 2.1% in October, while trimmed mean fell to 3.2% y/y vs. 3.5% in October. This was the first acceleration in headline since May but remains near the bottom of the 2-3% target range, while trimmed mean matched the cycle low from September. Odds of a move in February have risen to around 75% vs. 50% before the December decision.

The PBOC continues its efforts to curtail yuan weakness. The PBOC set its daily reference rate at 7.1887, much stronger than the analysts’ estimate of 7.3415. The 1,528 pips gap between the fixing and estimates is the widest since April. Moreover, onshore CNY is now bumping up against the 2% daily trading limit relative to the fix. China will eventually have to capitulate and allow greater yuan weakness as record yield differentials with the US will maintain downward pressure on the yuan.

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