Dollar Flat in Quiet Trading

December 22, 2022

Win Thin

Consumer confidence has recovered sharply; the release of the November Chicago Fed NAI was suspended; we get another revision to Q3 GDP; weekly jobless claims will be in focus; Chile central bank minutes will be released
ECB tightening expectations are starting to ebb; U.K. reported Q3 current account and final GDP data; Turkey kept rates steady at 9.0%, as expected
Reports suggest Japan will submit a record budget for FY23; Indonesia hiked rates 25 bp to 5.5%, as expected

The dollar is little changed in featureless trading. DXY is trading flat near 104.16 and is little changed after the BOJ shocker. Indeed, the yen remains stuck near 132 after trading as low as 130.60 Tuesday. Break below the August low near 130.40 is needed to set up a test of the May low near 126.35. Likewise, the euro is stuck near $1.06, while sterling is lagging again and trading at the lowest since November 30 near $1.2050. We continue to believe that the fundamental outlook still favors the dollar. We remain negative on the euro and sterling but our 2023 forecasts for USD/JPY will have to be marked lower as the timetable for BOJ liftoff has been moved forward and suggests the yen will remain relatively firm.

AMERICAS

Consumer confidence has recovered sharply. Yesterday, the Conference Board reported confidence at 108.3 vs. 101.0 expected and a revised 101.4 (was 100.2) The headline was the highest headline since April as both present situation and expectations jumped to 147.2 and 82.4, respectively. It suggests consumption will continue to hold up relatively well. In turn, this calls into question market pricing for only 50 bp more tightening from the Fed to a peak of 5.0%.

The release of the November Chicago Fed National Activity Index scheduled for today was suspended. The Chicago Fed said on its website that “We are unable to access many of the data series used to construct the CFNAI. As a result, we will suspend the monthly release of the CFNAI until the new year.” Of note, the December reading is scheduled to be reported January 26 and we would assume that November will be reported at the same time. It’s too bad about the suspension because markets need a good read on the current state of the economy and this series has taken on greater significance now that the 3-month to 10-year curve has inverted. Of note, the NAI came in at -0.05 in October, while the 3-month moving average came in at 0.09. A zero reading means the economy is growing at around trend. Recall that when that 3-month average moves below -0.7, that signals imminent recession and we are still well above that threshold.

We get another revision to Q3 GDP. Consensus sees steady growth of 2.9% SAAR. Of course, this is old news. Looking ahead, the Atlanta Fed’s GDPNow model is currently tracking 2.7% SAAR growth in Q4, down from the previous estimate of 2.8% SAAR. The next model update will be tomorrow. December Kansas City Fed manufacturing survey (-7 expected) and November leading index (-0.5% m/m expected) will also be reported today.

Weekly jobless claims will be in focus. That is because initial claims will be for the BLS survey week containing the 12th of the month, and are expected a 222k vs. 211k the previous week. Continuing claims are reported with a 1-week lag and so next week’s number will be for the BLS survey week. This week, they are expected at 1.678 mln vs. 1.671 mln the previous week. Current consensus for NFP stands at 208k vs. 263k in November, with the unemployment rate seen steady at 3.7% and average hourly earnings falling a tick to 5.0% y/y. While job growth is clearly slowing, it’s not by enough to materially impact unemployment and so we continue to believe that the Fed will have to do more than the market is expecting.

Chile central bank minutes will be released. At that December 6 meeting, the bank left rates steady at 11.25%, as expected, and stressed that “Inflation remains very high and its convergence to the 3% target is still subject to risks. The Board will maintain the monetary policy rate at 11.25% until the state of the macroeconomy indicates that this process has been consolidated.” The swaps market is pricing in the start of an easing cycle in Q1, which seems too soon.

EUROPE/MIDDLE EAST/AFRICA

ECB tightening expectations are starting to ebb. After Madame Lagarde’s masterful hawkish performance, the swaps market began pricing in a peak policy rate between 3.75-4.0% earlier this week vs. 3.0% at the start of last week. This pricing has since fallen back to between 3.25-3.5%. Elsewhere, WIRP suggests a 50 bp hike February 2 is priced in, while another 50 bp hike is 75% priced in March 16, followed by a 25 bp hike May 4. One final 25 bp hike in Q3 is about 75% priced in that would take the deposit rate to 3.5%. We felt strongly that the markets were overplaying ECB hawkishness and welcome this repricing, as it was very doubtful the bank would basically double the deposit rate even as the economy tipped into recession. Now, if only the market would get the message about overplaying Fed dovishness…….

The U.K. reported Q3 current account and final GDP data. The q/q growth rate was marked down a tick to -0.3%, while the y/y was revised to 1.9% vs. 2.4% preliminary. Private consumption, government spending, and investment were all marked down significantly, but this was partially offset by stronger net exports. This offset is unlikely to be sustained while domestic activity will continue to weaken under the weight of fiscal and monetary tightening. Bloomberg consensus sees GDP contracting -0.4% q/q in Q4, Q1, and Q2, improving to -0.2% q/q in Q3 and finally returning to 0.1% q/q growth in Q4 2023. We see downside risks. Bank of England tightening expectations remain subdued. WIRP suggests a 50 bp hike February 2 is about 80% priced in, with no odds of a larger 75 bp hike. The swaps market is pricing in a peak policy rate near 4.75%. Elsewhere, the current account deficit came in at -GBP19.4 bln vs. -GBP20.1 bln expected and a revised -GBP35.1 bln (was -GBP33.8 bln) in Q2.

Turkey central bank kept rates steady at 9.0%, as expected. The bank noted that “Considering the increasing risks regarding global demand, the committee evaluated that the current policy rate is adequate.” At the last policy meeting November 24, the bank cut rates 150 bp and noted that “the current policy rate is adequate and decided to end the rate-cut cycle that started in August” whilst adding that additional measures “supporting the effective transmission” of monetary policy would be implemented. This suggests that monetary policy has entered a new phase and that some macroprudential easing will be seen in 2023 ahead of June elections. That said, the country continues to careen towards a full-blown economic crisis due to an unsustainable policy mix. The best that President Erdogan can hope for is that it will come after the elections.

ASIA

Reports suggest Japan will submit a record budget for FY23. The initial budget proposal for FY23 will be around JPY114.4 trln ($867 bln), up from JPY107.6 trln for FY22. The biggest spending item will be JPY36.9 trln for social security costs, followed by JPY25.3 trln for debt servicing and JPY16.4 trln in transfers to regional and local governments. Another major items is JPY6.8 trln for defense spending, up from JPY5.4 trln in FY22. This spending will be funded in part by JPY69.4 trln in tax revenue, up from JPY65.2 trln in FY22. The government also expects JPY35.6 trln of funding to come from bond issuance, down slightly from JPY36.9 trln in FY22. Obviously, the big unknown is debt servicing costs, which could shoot much higher when Yield Curve Control is abandoned and interest rates rise. The official announcement of the budget figures is expected tomorrow after approval by the cabinet.

Bank Indonesia hiked rates 25 bp to 5.5%, as expected. In downshifting to 25 bp after three straight 50 bp moves, Governor Warjiyo noted “BI will not raise interest rates excessively. BI will continue to assess its next interest rate moves, but our hints have been clear: inflation and inflation expectations are declining.” We note that while headline inflation appears to have peaked but core continues to accelerate and so the tightening cycle is likely to continue into 2023, albeit at a slower pace. The bank also introduced a new tool that is meant to encourage exporters repatriate their earnings onshore in order to boost dollar supply and support the rupiah.

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