• Top Fed officials remain cautious; we had a flurry of minor data yesterday that all add up to a story of continued strength in the U.S. economy; NY Fed’s Nowcast model will be updated today; weekly jobless claims suggest the labor market remains firm
  
• The account of the January ECB meeting was hawkish; ECB speakers were also hawkish; January ECB inflation expectations and German IFO business climate survey for February were little changed; U.K. GfK consumer confidence weakened February
  
• New Zealand reported weak Q4 real retail sales; China’s property market remains in a slump

The dollar is little changed ahead of the weekend. DXY is basically trading flat for the third straight day just below 104. The euro is trading flat near $1.0830, while sterling is trading higher near $1.2685. USD/JPY is trading higher near 150.65. When all is said and done, recent developments support our view that the Fed is unlikely to cut rates anytime soon and the markets are finally coming around to our view. The data continue to come in mostly firmer while Fed officials remain very cautious about easing too soon (see below). We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should see further gains after this current period of consolidation.

AMERICAS

Top Fed officials remain cautious. Vice Chair Jefferson acknowledged that it would likely become appropriate to cut rates later this year but stressed that “Excessive easing can lead to a stalling or reversal in progress in restoring price stability.” Governor Waller emphasized that “there is no rush to begin cutting interest rates.” According to Waller, “with most data indicating solid economic fundamentals, the risk of waiting a little longer to ease policy is lower than the risk of acting too soon and possibly halting or reversing the progress we've made on inflation.” Governor Cook said, “At some point, as we gain greater confidence that disinflation is ongoing and sustainable, that changing outlook will warrant a change in the policy rate.” Fed officials have been remarkably consistent since the January FOMC meeting, and we expect this to continue into the March meeting.

We had a flurry of minor data yesterday that all add up to a story of continued strength in the U.S. economy. As a result, the odds of a March cut have fallen to basically zero, while the odds of a May cut have fallen below 25%. More importantly, the June cut that was fully priced in at the start of this week has seen those odds fall to below 80%. It's all going to depend on how the data continue to come in but if we had to pick a side, we think the risks of a cut are tilted towards coming later than June, not sooner. Elsewhere, the Chicago Fed's measure of financial conditions loosened for the 17th straight week last week and are the loosest since January 2022. This should keep the economy humming along in Q1.

The New York Fed’s Nowcast model will be updated today. It is currently tracking Q1 growth at 2.8% SAAR and will begin releasing its Q2 estimates in early March. Of note, the Atlanta Fed’s GDPNow model is tracking Q1 growth at 2.9% SAAR and will be updated next Tuesday after the data.

Weekly jobless claims suggest the labor market remains firm. Initial claims were for the BLS survey week containing the 12th of the month and came in at 201k vs. 216k expected and a revised 213k (was 212k) previously. This was the lowest since mid-January. Continuing claims are reported with a one-week lag and so next week’s reading will be for the BLS survey week. These came in at 1.862 mln vs. 1.884 mln expected and a revised 1.889 mln (was 1.895 mln) previously. Bloomberg consensus for February NFP stands at 150k vs. 353k in January, while its whisper number stands at 219k.

EUROPE/MIDDLE EAST/AFRICA

The account of the January ECB meeting was hawkish. The bank felt that “The risk of cutting policy rates too early was still seen as outweighing that of cutting rates too late. Having to reverse course, in the event that economic activity picked up more strongly than expected, wage growth accelerated or renewed inflationary pressures emerged, could entail high reputational costs.” It added that “All in all, members signaled that continuity, caution and patience were still needed, since the disinflationary process remained fragile and letting up too early could undo some of the progress made.” Lastly, “Given the very tight labor market, it was prudent for the Governing Council to exercise caution on wage prospects and to await evidence that wage growth was actually moderating as projected for 2024. It was argued that the Governing Council would need to see some hard data confirming that wages had turned the corner.”

ECB speakers were also hawkish. Holzmann noted that “typically the Fed always in the last few years has always gone first by about half a year so I would assume, ceteris paribus, as things are, that we would also follow with delay. I don’t see circumstances which bring us to cut before.” Elsewhere, Nagel said “Even though it may be very tempting, it is too early to cut interest rates. This is because the price outlook is not yet clear enough.” Of note, Holzmann and Nagel are the leading hawks at the ECB. The market sees less than 5% odds of a cut March 7, rising to 30% April 11 and fully priced in June 6.

January ECB inflation expectations were reported. 1-year expectations rose a tick to 3.3% while 3-year expectations were steady at 2.5%. Of note, 1-year expectations have come down markedly in Q4 before reversing slightly in January, while 3-year expectations remain well-anchored around 2.5%. ECB policymakers will most likely want to see further progress before cutting rates. Interestingly, consumer expectations for nominal income growth remained unchanged at 1.2%, perhaps dampening the effects on future wage growth and inflation.

German IFO business climate survey for February was little change. Headline came in steady as expected at 85.5 vs. 85.2 in January. Expectations rose a tick more than expected to 84.1 vs. 83.5 in January, while current assessment rose a tick more than expected to 86.9 and was steady from a revised 86.9 (was 87.0) in January. The readings are indicative of an unimpressive eurozone growth outlook, as Germany remains the weak link.

U.K. GfK consumer confidence weakened February. Headline fell two points to -21 vs. an expected improvement to -18. Still, consumer confidence is higher than a year ago and points to a favorable U.K. consumer spending outlook. The improved economic outlook has weighed on BOE easing expectations, as the market sees basically no chance of a cut March 21, rising to 15% May 9 and 45% June 20. A cut isn’t fully priced in until August 1.

ASIA

New Zealand reported weak Q4 real retail sales. Retail sales volume declined by -1.9% q/q vs. -0.2% expected and a revised -0.8% (was flat) in Q3. This was the eighth straight quarter of contraction and given how weak this latest reading was, it seems likely that GDP will also contract q/q in Q4 when it is reported next month. If so, it would be the second straight quarter of contraction and in four of the past five.  Market sees nearly 30% odds of a RBNZ hike next week, which seem too higher given the weak data.

China’s property market remains in a slump. January new and existing home prices dropped -0.37% m/m and -0.68% m/m, respectively. In y/y terms, the declines in home prices accelerated to -1.2% and -4.4%, respectively. Despite the relatively minor support measures taken so far, we believe home prices still have a long way to fall given the excess supply that’s built up in that sector. Meanwhile, Moody’s withdrew credit ratings on eleven Chinese companies, including several property companies, which underscore growing default risks.