• The Fed delivered the expected hold; dovishness was seen in the updated Dot Plots; Chair Powell’s press conference then piled on the dovishness; financial conditions continue to loosen; retail sales data today will be very important; Mexico is expected to keep rates steady at 11.25%
  
• The ECB and BOE meetings end shortly with widely expected holds; unlike the Fed, we expect some pushback against rate cut bets; SNB kept rates steady at 1.75%, as expected; Norges Bank delivered a hawkish surprise and hiked rates 25 bp to 4.5%; Sweden reported soft November CPI
  
• Japan reported October core machine orders; BOJ liftoff expectations have eased a bit ahead of its December 18-19 meeting; Australia reported strong November jobs data; New Zealand reported weak Q3 GDP data; Philippines and Taiwan kept rates steady, as expected

The dollar continues to sink in the wake of the dovish FOMC decision. DXY is trading lower for the third straight day near 102.398. Clean break below 102.546 sets up a test of the July low near 99.578. The euro is trading higher near $1.0925 ahead of the ECB decision (see below) and a break above $1.0960 sets up a test of the July high near $1.1275. Sterling is trading higher near $1.2665 ahead of the BOE decision (see below) and a break above $1.2720 sets up a test of the July high near $1.3140. USD/JPY is trading lower near 141.35 and clean break below 142.85 sets up a test of the July low near 137.25. Yesterday’s Fed decision was a game changer as the bank completely validated market easing expectations. Those easing expectations have spread to virtually every other major central. The big question now is whether these others push back. The ECB and BOE will have their opportunity later today. If they do not push back, the dollar may get some limited traction. Of note, NOK is outperforming after the Norges Bank unexpectedly hiked rates 25 bp (see below).

AMERICAS

The Fed delivered the expected hold. It noted that “Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.” This was a fairly balanced statement.

Dovishness was seen in the updated macro forecasts and Dot Plots. The 2024 Dot came in at 4.625% vs. 5.125%, which implies three cuts from the lower 2023 Dot of 5.375%. The unemployment forecasts were basically unchanged from 2024-2026, as were the growth forecasts. Yet somehow, PCE falls slightly quicker in 2024 and 2025.

Chair Powell’s press conference then piled on the dovishness. He said he believed the policy rate is at or near the peak for this cycle. Powell then said the Fed doesn’t want to take further hikes off the table and yet that’s exactly what he did. He later said no one is declaring victory but that is exactly what just he did. Lastly and most importantly, Powell admitted that the Fed discussed the timing of rate cuts at this meeting. Powell said the day before the blackout that it was premature to speculate on when policy may ease. What changed over the subsequent 12 days? If anything, the data have come in on the firm side.

Fed easing expectations have intensified. WIRP now sees nearly 20% odds of a cut January 31 and becomes fully priced in March 20 vs. May 1 before the decision. Six cuts are fully priced in by the end of 2024 vs. 4-5 before the decision. While we disagree with this market pricing, the Fed fully validated it and so it will take an even longer string of stronger data to shift the narrative.

This was another communication mistake from the Fed. Ahead of the blackout period, every Fed official was pushing back against the easing narrative. Since then, market easing expectations had picked up and the first chance the Fed got to push back, and they blew it. Data have come in firmer over the last couple weeks, not softer, while financial conditions have loosened, not tightened. This was a total 180 by the Fed and while we continue to believe the Fed is apolitical, it will undoubtedly come under fire for shifting rather abruptly to set up aggressive rate cuts in an election year.

Financial conditions continue to loosen. Chicago Fed's weekly measure came out yesterday and conditions loosened last week for the 8th straight week and are the loosest since the first week of February 2022, over a month before the Fed started hiking rates. So far this week, yields have fallen, equities have risen, and the dollar has weakened and so if these moves are sustained, financial conditions are likely to get even looser. Chair Powell said that it was important that financial conditions align with the Fed’s goals, adding that there can be back and forth in those conditions. However, we stress that there's been no back and forth, only continued loosening. The Fed had every opportunity to push back against loose financial conditions and did not, which means policymakers are happy with the looseness.

Retail sales data today will be very important. Headline is expected at -0.1% m/m vs. -0.1% in October, while ex-autos is expected at -0.1% m/m vs. 0.1% in October. The so-called control group used for calculating GDP is expected at 0.2% m/m vs. 0.2% in October. Consumption continues to hold up relatively well despite softening in some consumer confidence measures. We continue to believe that as long as jobs are being created, consumption should remain fairly robust.

The U.S. economy itself remains relatively robust. The Atlanta Fed’s GDPNow model is now tracking Q4 growth at 1.2% SAAR vs. 1.3% previously. Next update will be today after the data. Weekly jobless claims, November import/export prices, and October business inventories will be reported. This stands in contrast to the NY Fed Nowcast model that is still tracking 2.3% SAAR, which will be updated tomorrow. Readings early in the quarter are typically volatile as more and more data are incorporated into the models. Lastly, we’d note that the current early reads are based largely on strike-depressed October data. If November data continue to bounce back as we expect, the Q4 estimates should rise accordingly.

Banco de Mexico is expected to keep rates steady at 11.25%. Governor Rodriguez recently hinted that a rate cut in early 2024 was possible but other policymakers remained more cautious. Looking ahead, the next meetings are February 8 and March 21. Much will depend on how quickly inflation falls in January and February. The swaps market is pricing in 25 bp of easing over the next three months, followed by another 50 bp over the subsequent three months.

Peru central bank is expected to cut rates 25 bp to 6.75%. It has cut rates 25 bp at every meeting since it started easing in September as inflation is falling quickly back to the 1-3% target range. Bloomberg consensus sees the policy rate at 6% by the end of Q1, 5.25% by the end of Q2, and 4.75% by the end of Q3.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank meeting ends shortly with a widely expected hold. Despite efforts to push back against the market, easing expectations have picked up. WIRP suggests 5% odds of a cut today, rising to 15% January 25 and nearly 90% for March 7. A second cut is nearly priced in April 11 and six cuts by the end of next year are now priced in vs. five at the start of this week. The bank will discuss adjusting both its PEPP reinvestments and its Minimum Reserve Requirements. ECB hawks have been pushing for changes to both of these sooner rather than later. While the bank may give some hints of these discussions, we do not think a decision on either will be made until 2024.

Updated macro forecasts will be released. Inflation forecasts are likely to be revised down in light of the recent data. However, the ECB cannot cut the forecasts by too much without running the risk of validating market easing expectations. Growth forecasts should also be cut marginally in light of the recent data.

Despite Powell’s dovish performance yesterday, President Lagarde will most likely use her press conference to try to push back against the dovish narrative. However, we note that her October conference was quite downbeat, and the growth outlook has gotten worse since then. It will be a tricky balancing act but in the end, we think the hawks at the ECB hold enough sway to prevent Lagarde from going full Powell on the markets.

The Bank of England meeting ends shortly with a widely expected hold. Here too, we believe the bank is likely to push back against market easing expectations. WIRP suggests no odds of a cut today, rising modestly to 5% February 1, 45% March 21, and fully priced in May 9 vs. June 20 at the start of this week. Four cuts are priced in by the end of 2024 vs. three at the start of this week. Here too, we expect Governor Bailey to take a fairly hawkish tone at the press conference.

The Swiss National Bank kept rates steady at 1.75%, as expected. 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. Of note, the market only sees easing ahead. WIRP suggests nearly 90% odds of a cut March 21 vs. 70% at the start of this week, while odds of a second cut June 20 stand near 75%.

Norges Bank delivered a hawkish surprise and hiked rates 25 bp to 4.5%. Most were looking for steady rates. Governor Bache said “The economy is cooling down, but inflation is still too high. An increase in the policy rate now reduces the risk of inflation remaining high for a long period of time. The policy rate will likely be kept at 4.5% for some time.” Updated macro forecasts and expected rate path were released. Growth and inflation forecasts were revised down rather significantly, while the expected rate path was little changed. Indeed, the bank signaled higher for longer by raising its 2024 rate forecast to 4.5%, implying no rate cuts until 2025. However, the market doesn’t believe it. WIRP suggests no odds of a cut January 25 but becomes nearly priced in March 21.

Sweden reported soft November CPI. Headline came in at 5.8% y/y vs. 6.0% expected and 6.5% in October, CPIF came in at 3.6% y/y vs. 3.9% expected and 4.2% in October, and CPIF ex-energy came in at 5.4% y/y vs. 5.9% expected and 6.1% in October. CPIF was the lowest since November 2021 but still well above the 2% target. Next policy meeting is February 1, and no change is expected. However, the swaps market is pricing in some odds of a rate cut over the next three months, followed by 50 bp of easing over the subsequent three months.

ASIA

Japan reported October core machine orders. Orders came in at -2.2% y/y vs. -5.6% expected and -2.2% in September. Earlier this week, November machine tool orders came in at -13.6% y/y vs. -20.6% in October.

The Bank of Japan liftoff expectations have eased a bit ahead of its December 18-19 meeting. WIRP now suggests no odds of a move then vs. 35% last week, as the soft data provide a bit of a reality check for the markets. Weak wage growth, lower than expected November Tokyo CPI data, and downward revisions to Q3 GDP data all argue for caution in removing accommodation too soon. Expected Bank of Japan liftoff has shifted back to June vs. April at the start of this week.

Australia reported strong November jobs data. 61.5k jobs were created vs. 11.5k expected and a revised 42.7k (was 55.0k) in October. The mix was favorable, with 57.0k full-time jobs and 4.5k part-time jobs created. The unemployment rate rose two ticks to 3.9%, as the participation rate rose two tocks to 67.2%. Despite the strong jobs data, market pricing for an RBA easing cycle has intensified. WIRP suggests 20% odds of a cut February 6, rising to 50% March 19, 80% May 7, and fully priced in June 18 vs. November 5 at start of this week.

New Zealand reported weak Q3 GDP data. GDP contracted -0.3% q/q vs. 0.2% expected and a revised 0.5% (was 0.9%) in Q2, while the y/y rate came in at -0.6% vs. 0.5% expected and a revised 1.5% (was 1.8%) in Q2. Given recent softness in the data, market pricing for an RBNZ easing cycle has intensified. WIRP suggests 5% odds of a cut February 26, rising to 40% April 10 and fully priced in May 22 vs. August 14 at the start of this week.

Philippine central bank kept rates steady at 6.5%, as expected. Governor Remolona said, “The Monetary Board continues to see the need to keep monetary policy settings sufficiently tight to allow inflation expectations to settle more firmly within the target range.” The bank lowered its 2024 inflation forecast slightly to 4.2% vs. 4.4% previously and said it will monitor the effect of its previous 450 bp of tightening on the economy. Despite the hawkish tone, the swaps market is still pricing in 75 bp of easing over the next three months followed by another 50 bp over the subsequent three months.

Taiwan central bank kept rates steady at 1.875%, as expected. The bank said that the current policy rate will encourage the stable development of the economy but warned that it is monitoring the downside risks to growth from China’s slowing economy. Lastly, Governor Yang said that the central bank will not necessarily follow the Fed in lowering rates. However, the market is now pricing some odds of a rate cut over the next six months vs. steady rates over the next three years seen at the start of this week.