Dollar Flat as Market Awaits Fresh Drivers

January 08, 2024

Win Thin

The jobs data offered a little bit of everything; looking through the noise, we see underlying strength in the economy; New York Fed reports December inflation expectations
Eurozone reported soft November retail sales; Germany reported soft November factory orders; Switzerland reported December CPI
China is starting off 2024 on its back foot

The dollar is trading flat as markets await fresh drivers. DXY is trading flat for the second straight day near 102.393. Break above 102.87 is needed to set up a test of the December high near 104.263. The euro is trading flat near $1.0945 while sterling is trading slightly lower near $1.2710. USD/JPY is trading lower today near 144.45 after trading Friday at the highest level since mid-December near 145.40. Japan is on holiday today and will reopen tomorrow. NOK is the worst performing major on lower oil prices, though the other growth-sensitive currencies are also underperforming. Despite the mixed jobs data Friday (see below), we believe markets will come to realize that the U.S. economy remains robust in Q4 and likely to remain so in 2024, which certainly wouldn’t require 5-6 rate cuts from the Fed this year. 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 this week’s inflation data will provide some added impetus.

AMERICAS

The jobs data offered a little bit of everything. For instance, the stronger than expected headline reading of 216k for NFP was offset by -71k in revisions for the previous two months. Elsewhere, the household survey showed -683k jobs in December vs. +586k in November but the unemployment rate was steady because of a -676k drop in the labor force. Average hourly earnings picked up a tick to 4.1% y/y, while average weakly hours fell a tick to 34.3. As a result, Fed easing expectations ended up little changed on Friday.

Looking through the noise, we see underlying strength in the economy. The Atlanta Fed’s GDPNow model has Q4 growth at 2.5% SAAR vs. 2.0% previously and will be updated tomorrow after the data. Elsewhere, the New York Fed’s Nowcast model has Q4 growth at 2.5% SAAR and Q1 growth at 2.7% SAAR and will be updated Friday. Bottom line: the US economy is still growing above trend in Q4 and quite possible Q1. Of note, the early Q4 reads were based largely on strike-depressed October data. As November and December data continue to bounce back as we’ve seen already, the Q4 growth estimates have risen accordingly. In turn, this momentum is likely to carry over into Q1.

The New York Fed reports December inflation expectations. Of note, 1-year expectations have been falling steadily, while 3- and 5-year expectations have been flatlining a bit in recent months. All three remain well above the Fed’s 2% target, which will be concerning to policymakers. November consumer credit will also be reported and is expected at $9.0 bln vs. $5.134 bln in October.

Fed easing expectations have started to adjust. WIRP suggests 5% odds of a cut January 31 and rise to 66% March 20 after being nearly priced in at the start of last week. Five rate cuts are priced in vs. six at the start of last week, though there are still nearly 50% odds of a sixth cut. Bostic speaks today. His claim last month that his 2024 Dots from the December 12-13 FOMC showed only two cuts now puts him at the hawkish end of the Fed spectrum, which is not his usual position. Of note, four others also saw two cuts in 2024, while one saw one cut and two saw no cuts.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported soft November retail sales. Sales came in as expected at -0.3% m/m vs. a revised 0.4% (was 0.1%) in October, while the y/y rate WDA came in at -1.1% vs. a revised -0.8% (was -1.2%) in October. Italy reports retail sales Wednesday and France reports consumer spending Friday.

Germany reported soft November factory orders. Orders came in at 0.3% m/m vs. 1.1% expected and a revised -3.8% (was -3.7%) in October. As a result, the y/y rate came in at -4.4% vs. -3.4% expected and -7.3% in October. In turn, this suggests little scope for improvement in IP in the coming months. Germany also reported firm November trade data. Exports jumped 3.7% m/m vs. 0.5% expected and a revised -0.4% (was -0.2%) in October, while imports rose 1.9% m/m vs. 0.4% expected and a revised -1.1% (was -1.2%) in October. The y/y rates both improved from October to -4.9% and -12.2%, respectively. Current account data will be reported Thursday.

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 50% March 7 and fully priced in April 11. A total of six cuts are priced in for 2024.

Switzerland reported December CPI. Headline came in a tick higher than expected at 1.7% y/y vs. 1.4% in November, while core came in a tick higher than expected at 1.5% y/y. At the last meeting December 14, the Swiss National Bank kept rates steady at 1.75% and President Jordan said “Monetary conditions are currently appropriate. Our conditional inflation forecast is now within the price stability range over the entire forecast horizon for the first time in some time.” Language on possible rate hikes was dropped from the statement. Jordan stressed that a rate cut was not discussed but added that officials will have to shift their stance if franc strength makes monetary conditions too restrictive. Jordan also stressed that FX intervention can be in both directions and that the SNB is no longer focusing just on selling foreign currency. The SNB was the first major central bank to reach its 2% inflation target, and this boosts the allure of CHF as a store of value despite relatively low Swiss rates. WIRP suggests 45% odds of a cut March 21 and becomes fully priced in June 20. Two cuts are priced in for 2024.

ASIA

China is starting off 2024 on its back foot. The CSI 300 stock index remains under pressure and traded today at the lowest level since February 2019 near 3283. It is on track to rest the January 2019 low near 2936. Other indices such as the Shanghai Composite and MSCI China have held up slightly better but also remain under pressure. Since China dropped most COVID restrictions in early December 2022, MSCI China has greatly underperformed within both MSCI EM and MSCI Asia after an initial burst of optimism. We expect this underperformance to continue in 2024.

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