• The two-day FOMC meeting begins today; data highlight will be November retail sales; Canada highlight will be November CPI; Canada Finance Minister Freeland resigned from the cabinet; Brazil central bank publishes its minutes; Chile is expected to cut rates 25 bp to 5.0%
  
• Some ECB officials remain cautious; Germany reported some key surveys; U.K. wages ran hot; Hungary is expected to keep rates steady
• Westpac Australia consumer confidence fell; New Zealand raised its budget deficit projections across the forecast horizon; China’s leaders have reportedly agreed on a 2025 GDP growth target of 5%

The dollar is firm as U.S. economic outperformance continues. DXY is trading higher near 107 ahead of retail sales data. USD/JPY is trading lower near 153.85 ahead of the BOJ meeting this week. Sterling is trading higher near $1.2700 after U.K. wages accelerated (see below), while the euro is trading lower near $1.0495 in the wake of the soft German surveys (see below). We look for the dollar rally to continue on the economic divergence story (see below). While the U.S. election results have turbo-charged this dollar move, faithful readers will recall that we have been resolute in our belief that the strong U.S. fundamental story continues to favor higher UST yields and a higher dollar. Last week’s rate cuts by the BOC, SNB, and ECB are likely to carry over into this week with rate cuts from many more central banks. With the Fed likely to signal a pause after its expected cut, we believe that monetary policy divergences will continue to favor the dollar.

AMERICAS

The divergence story favoring the dollar remains in play. The preliminary December PMIs confirm this. Eurozone and Japan composite PMIs improved slightly, while Australia fell back below 50 and the U.K. was flat just above 50. China reported weak November data, suggesting its composite will continue to flirt with 50. At the other end of the spectrum, the S&P Global composite PMI for the U.S. surged to 56.6 (see below). The data continue to show that U.S. economic exceptionalism is continuing and this global backdrop should lead to further gains for the dollar.

The two-day FOMC meeting begins today. The swaps market has fully priced in a cut, but 8 of the 103 analysts polled by Bloomberg look for steady rates. Based on the data alone, we don't think the Fed should cut rates this week. Will they validate market expectations or deliver a hawkish surprise? Most likely a cut, but we think Powell will have to signal a hard stop to placate the hawks on the FOMC. We also look for a hawkish shift in the Dot Plots to underscore this.

Data highlight will be November retail sales. Headline is expected at 0.6% m/m vs. 0.4% in October, ex-autos are expected at 0.4% m/m vs. 0.1% in October, and the so-called control group used for GDP calculations is expected at 0.4% m/m vs. -0.1% in October. Overall, consumer spending is supported by positive real wage growth, healthy labor market and strong household balance sheet. November business inventories and IP will also be reported today.

S&P Global preliminary December PMIs point to ongoing strength in the economy. Manufacturing came in at 48.3 vs. 49.5 expected and 49.7 in November, while services came in at 58.5 vs. 55.8 expected and 56.1 in November. As a result, the composite PMI jumped to 56.6 vs. 55.1 expected and 54.9 in November and was the highest since March 2022. We expect the U.S. economic outperformance to continue well into next year, as fiscal stimulus is in the pipeline.

December regional Fed surveys started rolling out. Empire manufacturing survey kicked things off yesterday and came in at 0.2 vs. 10.0 expected and 31.2 in November. Clearly, the November spike was an outlier. New York Fed services survey will be reported today. Philly (2.9 expected) and Kansas City Fed manufacturing surveys will be reported Thursday. Kansas City services survey will be reported Friday.

Growth remains robust. We get a final revision to Q3 GDP Thursday. Overall growth is expected to remain steady at 2.8% SAAR, while personal consumption is expected to pick up two ticks to 3.7% SAAR. However, this is old news as the markets look ahead to Q4 and Q1. The Atlanta Fed GDPNow model has Q4 growth at 3.3% 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 2.3% SAAR and will be updated Friday.

Key housing data will be reported this week. December NAHB housing market index kicks things off today and is expected to rise a point to 47. November building permits and housing starts will be reported tomorrow. Existing home sales will be reported Thursday and are expected at 3.0% m/m vs. 3.4% in October. As background, residential investment subtracted -0.1 ppt and -0.2 ppt from Q2 and Q3 GDP growth, respectively, and is likely to remain a drag on Q4 growth as well.

Canada highlight will be November CPI data. Headline is expected to remain steady at 2.0% y/y, core median is expected to fall a tick to 2.4% y/y, and core trim is expected to remain steady at 2.6% y/y. If so, headline would remain at or below the 2% target for the fourth straight month. At last week’s meeting, the bank delivered a follow-up 50 bp cut to 3.25% but toned down its forward by noting that “Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time.” In our view, the BOC has room to keep easing as inflation is close to 2%, inflationary pressures are no longer broad-based, and the growth outlook is soggy.

Canada Finance Minister Freeland resigned from the cabinet. Her exit was due to differences with Prime Minister Trudeau over fiscal policy, which was also the reason behind the exit of Freeland’s predecessor Bill Morneau back in 2020. Trudeau named Public Safety Minister Dominic LeBlanc as Freeland’s replacement after initial reports that his first choice was former BOC and BOE Governor Mark Carney. Of note, the next general election has to take place on or before October 20 2025. The likelihood is that it will be sooner rather than later as Trudeau’s minority Liberal government is increasingly fragile. Conservative leader Pierre Poilievre poll lead has widened to as much as 25 points.

Brazil central bank publishes its minutes. Last week, the bank unexpectedly hiked rates 100 bp to 12.25% and stated that “In light of a more adverse scenario for inflation convergence, the Committee anticipates further adjustments of the same magnitude in the next two meetings, if the scenario evolves as expected.” The bank warned that “the perception of agents about the recent fiscal announcement has significantly impacted asset prices and expectations, especially the risk premium, inflation expectations and the exchange rate.” Since the decision, the central bank has had to intervene several times to support the real and yet USD/BRL traded at a new all-time high yesterday. The swaps market is now pricing in a terminal policy rate of 16.5% vs. 15.75% before the decision. The bank publishes its quarterly inflation report Thursday.

Chile central bank is expected to cut rates 25 bp to 5.0%. At the last meeting October 17, the bank cut rates 25 bp to 5.25% and said, “The key rate will see further reductions to meet its neutral level” whilst adding that this will occur at a pace that will consider the evolution of the macroeconomic scenario and its implications for inflation’s trajectory.” The swaps market is pricing in a terminal rate of 4.75% over the next 12 months.

EUROPE/MIDDLE EAST/AFRICA

Some ECB officials remain cautious. General Council member Rehn said “The direction of our monetary policy is now clear. The speed and scale of the rate cuts will be determined in each meeting on the basis of incoming data and comprehensive analysis.” Yesterday, ECB Executive Board member Schnabel argued for a gradual and data-dependent easing cycle as the policy stance today may already be in neutral territory. Schnabel pointed out that ECB staff estimate a nominal neutral rate of around 1.5% to 3.0%. However, she cautioned that changes in the demand for and supply of global savings suggest that equilibrium rates may be closer to the upper-end of that range. The swaps market is now pricing in 150 bp of easing over the next 12 months that would see the policy rate bottom near 1.50% vs. 1.75% prior to last week’s 25 bp cut.

Germany reported some key surveys. December IFO business climate came in at 84.7 vs. 85.5 expected and a revised 85.6 (was 85.7) in November. Current assessment rose to 85.1 vs. 84.0 expected and 84.3 in November, but this was more than offset by the plunge in expectations to 84.4 vs. 87.5 expected and a revised 87.0 (was 87.2) in November. IFO President Fuest noted that “This weakness in the German economy is becoming chronic. It’s been stagnating for a long time,” adding that “the next government needs to prioritize economic growth.”

Elsewhere, the ZEW survey was mixed. Current situation came in at -93.1 vs. -92.6 expected and -91.4 in November while ZEW expectations came in at 15.7 vs. 6.9 expected and 7.4 in November. ZEW President Wambach was more upbeat, noting that “With snap elections ahead in Germany and the resulting expectations of an economic policy encouraging private investment as well as the prospect of further interest rate cuts, the economic outlook is improving.” January GfK consumer confidence will be reported Thursday and is expected at -22.8 vs. -23.3 in December.

U.K. wages ran hot. Average weekly earnings for the three months ended in October picked up to 5.2% y/y vs. 4.6% expected and a revised 4.4% (was 4.3%) previously, while earnings ex-bonus picked up to 5.2% y/y vs. 5.0% expected and a revised 4.9% (was 4.8%) previously. The unemployment rate remained steady as expected at 4.3%. The policy-relevant private sector earnings ex-bonuses picked up to 5.4% y/y vs. 4.9% in September and is tracking above the Bank of England’s Q4 projection of 5.1% y/y. Faster wage growth risks fueling services inflation and raises the bar for the BOE to deliver additional rate cuts. The bank is widely expected to keep the policy rate unchanged at 4.75% Thursday. Bottom line: monetary policy trend between the ECB and BOE still favors a lower EUR/GBP.

National Bank of Hungary is expected to keep rates steady. At the last meeting November 19, the bank kept rates steady at 6.5%. Only one MPC member recommended a rate cut, suggesting the bar for the bank to resume easing is high. Indeed, Deputy Governor Virag said the bank was prepared to keep rates steady for a “sustained period.” The swaps market is pricing in 25 bp of easing over the next 12 months but if the forint remains weak, we believe the bank will remain on hold.

ASIA

Westpac Australia consumer confidence fell. Headline fell to 92.8 in December vs. 94.6 in November. It was the first drop since September but confidence remains elevated. Westpac economist noted “a loss of confidence around the outlook, particularly for the economy. That likely reflects several factors including: a disappointing September quarter national accounts update; ongoing uncertainty around inflation and the potential for interest rate easing; and a more unsettled global backdrop.” The first RBA cut is fully priced in for April, but odds of a February cut have risen to nearly 60%.

New Zealand’s government raised its budget deficit projections across the forecast horizon. The latest projections have the budget remaining in deficit through 2028 vs. previous expectations of a surplus that year. Finance Minister Willis noted that “The revisions reinforce the importance of the measures the government has taken to restore discipline to public spending and drive greater economic growth. The Crown’s financial position has deteriorated over the past six years, but the economy has reached a turning point.” The wider deficits imply more debt issuance (NZD20 bln over the next four years) and less room for the RBNZ to keep easing aggressively. NZD is near the cycle lows and New Zealand 10-year bond yields ticked higher.

China’s leaders have reportedly agreed on a 2025 GDP growth target of 5%, same as 2024. One must take both years with a grain of salt. While data are likely to show China growing close to 5% this year, it feels more like 2-3%. Global commodity prices remain under pressure, while domestic activity clearly remains weak. Officials have also agreed on a 2025 budget deficit equal to -4% of GDP vs. -3% in 2024. The additional one percentage point of GDP in spending amounts to about CNY1.3 trln and this won’t be enough to trigger a sustained recovery in Chinese economic activity. For reference, China’s 2008 fiscal bazooka that prevented a recession totaled CNY4 trln (12.5% of GDP in 2008).