• FOMC minutes will be closely watched; December ISM manufacturing PMI will be the data highlight; November JOLTS data and December vehicle sales will also be reported
  
• Germany reported December unemployment; ECB easing expectations remain elevated; Turkey reported mixed December CPI data
  
• Tokyo Electron announced big increases to its starting salaries; reports suggest Australia is looking to provide further relief to households struggling from high inflation

The dollar is getting more traction ahead of the FOMC minutes. DXY is trading higher for the fourth straight day near 102.444 after making a new cycle low near 100.617 on December 28. It's worth noting that this move lower in the foreign currencies is being led by sterling. Cable is already testing the 62% retracement objective of the December rise near $1.2625 and break below sets up a test of the December 13 low near $1.25. Elsewhere, the euro is nearing a test of the 62% retracement objective of the December rise near $1.0855 and break below sets up a test of the December 8 low near $1.0725. With the exception of SEK, the growth-sensitive majors are holding up relatively better. Japan remains on holiday with markets reopening tomorrow. USD/JPY is trading at the highest level since December 27 near 142.85 and a break above 143.15 sets up a test of the December 19 high near 145. Last month’s dovish Fed decision was a game changer for the dollar, but we believe markets are coming to realize that the U.S. economy remains robust in Q4 and likely to remain so in 2024, which certainly wouldn’t require six rate cuts from the Fed this year. That said, a sustained dollar recovery will really come down to the U.S. data. Over the past few weeks, the readings have all come in quite firm and so we continue to believe that the current market easing expectations are dead wrong. Until these expectations shift, however, the dollar is likely to remain vulnerable.

AMERICAS

The dollar is clawing back some of its recent losses, but it has a long road ahead. Looking at just the December drop, DXY has retraced nearly half and the next key retracement objective comes in near 102.87 (62%). We think this week’s move higher in the dollar is mostly due to overstretched positioning with a bit of risk off sentiment thrown in (Red Sea tensions). If and when the Fed repricing takes hold due to continued U.S. economic strength, that should give the dollar another leg higher, but we're not quite there yet.

FOMC minutes will be closely watched. At the December 12-13 meeting, the Fed delivered a dovish hold. The statement was fairly boilerplate; it was really Chair Powell’s press conference that heralded the Fed pivot and opened the floodgates to the “buy everything” rally. There were no dissents, but the minutes will be scoured for any pushback from the hawks. Markets are starting off the year reassessing the ultra-dovish Fed pricing, but much more needs to be done. WIRP suggests 10% odds of a cut January 31, rising to 80% March 20 vs. fully priced in last week. Six cuts are priced in for 2024 but there are no longer any odds of a seventh. Barkin speaks today and Friday.

The U.S. economy remains robust. The Atlanta Fed’s GDPNow model now has Q4 growth at 2.0% SAAR and will be updated today after the data. Elsewhere, the New York Fed’s Nowcast model now has Q4 growth at 2.4% SAAR and Q1 growth at 2.2% SAAR and will be updated Friday. Bottom line: the US economy is still growing at or above trend in Q4. In turn, this momentum seems likely to carry over into Q1 as financial conditions are the loosest since January 2021.

December ISM manufacturing PMI will be the data highlight. Headline is expected at 47.1 vs. 46.7 in November. Keep an eye on employment and prices paid, which are expected at 46.5 and 49.5 vs. 45.8 and 49.9 in November, respectively. Yesterday, S&P Global final December manufacturing PMI came in at 47.9 vs. 48.2 preliminary. ISM services PMI will be reported Friday. Headline is expected at 52.5 vs. 52.7 in November but keep an eye on employment and prices paid, which stood at 50.7 and 58.3 in November, respectively. Prices paid in both sectors have been rising in recent months even as supply chain issues resolve, suggesting it is more demand led. Last week, Chicago PMI came in much weaker than expected at 46.9 vs. 55.8 in November.

We get some other labor market readings ahead of the jobs report Friday. November JOLTS data will be reported today. Job openings are expected at 8.821 mln vs. 8.733 mln in October but keep an eye on hires and layoffs to get a fuller picture of the hiring situation. Hires have been edging lower in recent months, while layoffs have been edging higher. That said, the labor market remains fairly robust, with Bloomberg consensus for NFP currently at 170k vs. 199k in November. December Challenger job cuts and weekly jobless claims will be reported tomorrow.

December vehicle sales will be reported. Sales are expected at an annual rate of 15.50 mln vs. 15.32 mln in November. Consumption accelerated in November and with jobs still being created, we expect that strength to carry over into December and beyond. December retail sales data will be reported January 17.

EUROPE/MIDDLE EAST/AFRICA

Germany reported December unemployment. Unemployment claims came in at 5.0k vs. 20.0k expected and a revised 21.0k (was 20.0k) in November. The unemployment rate came in as expected at 5.9% vs. a revised 5.8% (was 5.9%) in November. This is a new high for this cycle and the highest since March 2021. However, the labor agency noted that “Long vacancy periods reflect the difficulties many firms face in finding suitable and skilled workers in a timely manner, despite increasing unemployment and underemployment.” It added that “If we look back at 2023, we can see that the weak economy has left its mark on the labor market. However, considering the extent of the stress and uncertainty, the labor market is still holding up well.”

European Central Bank easing expectations remain elevated. WIRP suggests nearly 10% odds of a cut January 25, rising to 60% March 7 and fully priced in April 11. A total of six cuts are fully priced in for 2024, with 50% odds of a seventh. ECB officials have been pushing back at this dovish pricing but to no avail. Of note, December eurozone CPI readings will continue rolling out as Germany and France report tomorrow. Germany’s EU Harmonised inflation is expected at 3.9% y/y vs. 2.3% in November, while France’s EU Harmonised inflation is expected at 4.1% y/y vs. 3.9% in November. Italy and eurozone report Friday.

Turkey reported mixed December CPI data. Headline came in at 64.77% y/y vs. 64.95% expected and 61.98% in November, while core came in at 70.64% y/y vs. 69.50% expected and 69.89% in November. At the last meeting December 21, the bank hiked rates 250 bp to 42.50% and said, "Assessing that monetary tightness is significantly close to the level required to establish the disinflation course, the committee reduced the pace of monetary tightening." It added that it would complete tightening “as soon as possible” but pledged continued tightness “as long as needed.” With inflation expected to continue accelerating well into 2024, it’s clear that significant tightening is still needed. Next policy meeting is January 25 and the bank needs to deliver a larger hike. The swaps market is pricing in 300 bp of tightening over the next three months followed by the start of an easing cycle over the subsequent three months. This would not be enough to lower inflation and stabilize the lira, in our view.

ASIA

Tokyo Electron announced big increases to its starting salaries. New hires will be paid an average of 40% more, with college graduates earning JPY304,8000 and post-graduates earning JPY320,000. The increase in starting salaries is the first in seven year and bodes well for workers in the upcoming spring wage negotiations. The company said the number of new hires for this spring will be around 400, up 50 from last year, and it plans to boost that to 500 over the next few years. This is worth keeping an eye on as the Bank of Japan has made the outcome of the spring wage negotiations a key part of its decision on liftoff. Up until now, wages have risen very little and liftoff expectations have been pushed out into June or July.

Reports suggest Australia is looking to provide further relief to households struggling from high inflation. Prime Minister Albanese said that “Our priority will be to provide cost of living relief whilst taking pressure off inflation. I have asked treasury and finance to come up with further propositions that we’ll consider in the lead-up to the May budget.” However, he stressed that “If you just distribute additional cash to people you potentially make inflation worse. And therefore don’t help to solve the problem.” No further details were given but we can expect some trial balloons as the May budget approaches. Inflation has been coming down but has been stuck near 5% in recent months. Of note, WIRP suggests the first rate cut is priced for June 18.