• We are rethinking our U.S. recession call; November PCE data will be the data highlight; personal income and spending will be reported at the same time; weekly jobless claims data suggest a firm labor market; Canada reports October GDP data
  
• BOE’s Haskel acknowledged an improving inflation outlook; U.K. reported firm November retail sales data; final U.K. Q3 GDP and current account data were also reported
  
• Japan reported soft November national CPI data; minutes of the October 30-31 BOJ meeting were released

The dollar remains under pressure ahead of PCE data. DXY is trading at the lowest since July 31 near 101.586 after breaking below support at the 102 area. The July 27 low near 100.551 is drawing near and a break below sets up a test of the July 14 cycle low near 99.578. The euro is trading at a new high for this move near $1.1030 and is on track to test the July cycle high near $1.1275. Sterling is outperforming after stronger than expected retail sales data (see below) and is trading near $1.2740. Clean break above $1.2720 sets up a test of the July cycle high near $1.3140. USD/JPY is trading lower near 142 and is on track to test last week’s cycle low near 141. After that are the July low near 138 and 137.25. Last week’s dovish Fed decision was a game changer for the dollar even as Fed officials are still attempting damage control. A sustained dollar recovery will really come down to the U.S. data. Over the past two weeks, the readings have all come in quite firm and so we continue to believe that the current market easing expectations are wrong. Until these expectations shift, however, the dollar is likely to remain under pressure.

AMERICAS

We are rethinking our U.S. recession call. Before the December FOMC, we still thought a recession would start next year in Q2 or Q3 but now we’re not so sure. Without cutting rates, the Fed has let the market do the easing for them. The Chicago Fed financial conditions are the loosest since January 2022 while the New York Fed's FCI-G is likely to show that policy turned accommodative in December. Job growth has slowed but is still positive, while the economy continues to grow above trend. We strongly disagree with the Fed's pivot for all these reasons and yet here we are. And while a recession may be avoided in 2024, it will likely come at a cost of higher inflation that may have to be addressed in 2025. The parallels with the 1970s are undeniable.

The U.S. economy remains robust. We got another revision to Q3 GDP data and growth was revised to 4.9% SAAR vs. 5.2% previously due largely to downward revisions to consumption and inventories. Final sales picked up a tick to 3.6% SAAR. However, this is old news as markets focus on the current quarter and beyond. The Atlanta Fed’s GDPNow model is now tracking Q4 growth at 2.7% SAAR vs. 2.6% previously and will be updated today after the data. This is above the New York Fed’s Nowcast model, which is tracking 2.1% SAAR and will also be updated today. The early Q4 reads were based largely on strike-depressed October data. If November data continue to bounce back as we’ve seen already, the Q4 growth estimates should rise accordingly.

Fed easing expectations have intensified. WIRP suggests 15% odds of a cut January 31 and nearly priced in March 20 vs. May 1 at the start of this week. Six cuts are fully priced in by end-2024 vs. four at the start of last week, with 33% odds of a seventh. While we still strongly disagree with this market pricing, it will now take a much longer string of stronger data to shift the narrative than what was needed before the Fed’s dovish performance last week.

November PCE data will be the data highlight. Headline is expected to fall two ticks to 2.8% y/y while core PCE is expected to fall two ticks to 3.3% y/y. If so, headline would be the lowest since March 2021 but still above the 2% target. Of note, the Cleveland Fed’s Nowcast model estimates headline at 2.9% and core at 3.4%. Looking ahead, the model estimates December headline at 3.0% and core at 3.3%.

Personal income and spending will be reported at the same time. Income is expected at 0.4% m/m vs. 0.2% in October and spending is expected at 0.3% m/m vs. 0.2% in October. Real personal spending is expected at 0.3% m/m vs. 0.2% in October. Retail sales picked up in November and we expect to see the same for personal spending, which includes services. Consumer confidence is picking up. Final December University of Michigan consumer sentiment will be reported today, and the preliminary headline was 69.4.

Weekly jobless claims data suggest a firm labor market. Initial claims were for the BLS survey week and came in at 205k vs. 215k expected and a revised 203k (was 202k) last week. The 4-week MA fell to 212k, the lowest since late October. Bloomberg consensus for December NFP stands at 168k vs. 199k in November, while its whisper number stands at 170k. Continuing claims are reported with a one-week lag and so next week’s number will be for the BLS survey week. This week, they came in at 1.865 mln vs. 1.880 mln expected and a revised 1.866 mln (was 1.876 mln) last week.

Housing sector data will remain in focus. New home sales are expected at 1.6% m/m vs. -5.6% in October. Earlier this week, existing home sales came in at 0.8% m/m vs. -0.3% expected and -4.1% in October. Durable goods orders will also be reported and are expected at 2.3% m/m vs. -5.4% in October.

Canada reports October GDP data. It is expected at 0.2% m/m vs. 0.1% in October, while the y/y rate is expected 1.0% vs. 0.6% in October. Yesterday, October retail sales data were mixed. Headline came in a tick lower than expected at 0.7% m/m vs. a revised 0.5% (was 0.6%) in September, while ex-autos came in a tick higher than expected at 0.6% m/m vs. a revised 0.1% (was 0.2%) in September. WIRP suggests 10% odds of a rate cut January 24, rising to 55% March 6 and fully priced in April 10 vs. June 5 at the start of last week. Nearly six cuts are priced in by the end of 2024 vs. five at the start of this week and four at the start of last week.

EUROPE/MIDDLE EAST/AFRICA

Bank of England’s Haskel acknowledged an improving inflation outlook. This is noteworthy as he has dissented in favor of a 25 bp rate hike at the past three policy meetings. Commenting specifically on the November CPI data reported this week, Haskel noted that that the drop in services inflation seemed more “broadly based” than previous months but added that “I wouldn’t want to make policy based on one month data.” Easing expectations remain elevated. WIRP suggests 5% odds of a cut February 1, rising to 40% March 21 and fully priced in May 9 vs. June 20 at the start of this week. Five cuts are fully priced in by the end of 2024 vs. four at the start of this week and three at the start of last week. There are also over 50% odds of a sixth cut.

U.K. reported firm November retail sales data. Headline came in at 1.3% m/m vs. 0.4% expected and a revised 0.0% (was -0.3%) in October, while sales ex-auto fuel came in at 1.3% m/m vs. 0.3% expected and a revised 0.2% (was -0.1%) in October. The y/y rates improved to 0.1% and 0.3%, respectively, and were the first positive readings since March 2022. Consumption has remained surprisingly robust, but headwinds are building. Indeed, U.K. retailers are pointing to subdued holiday spending so far this month.

Final U.K. Q3 GDP and current account data were also reported. Growth came in at -0.1% q/q vs. 0.0% preliminary and actual in Q2, while the y/y rate came in at 0.3% vs. 0.6% preliminary and 0.3% actual in Q2. Private consumption was revised down a tick to -0.5% q/q, government spending was revised up more than a full percentage point to 0.8% q/q, and GFCF was revised up a few ticks to -1.6% q/q. Net exports subtracted from growth as exports were revised down more than a full percentage point to -0.6%. Weakness has carried over into Q4 and there is a risk that GDP contracts again, though current Bloomberg consensus sees flat q/q in both Q4 and Q1. Lastly, the current account deficit came in at -GBP17.2 bln vs. -GBP13.1 bln expected and a revised -GBP24.0 bln (was -GBP25.3 bln) in Q2.

ASIA

Japan reported soft November national CPI data. Headline came in at 2.8% y/y vs. 3.3% in October, core (ex-fresh food) came in at 2.5% y/y vs. 2.9% in October, and core ex-energy came in at 3.8% y/y vs. 4.0% in October. All three were at consensus. Core inflation is the lowest since July 2022 and nearing the 2% target. BOJ liftoff expectations have fallen back. WIRP suggests 25% odds of a hike January 23, rising to 60% March 19 and 75% April 26 before being fully priced in June 14 vs. April 26 at the start of last week.

Minutes of the October 30-31 BOJ meeting were released. At that meeting, there was minor tweak to Yield Curve Control as the bank said the 1% ceiling was now a reference point rather than a rigid target. Members of the board felt that the likelihood of hitting the inflation target has been rising gradually, but uncertainties remain high. As a result, members believed that the BOJ needs to patiently continue with monetary easing and Yield Curve Control. One member felt that the odds of achieving the inflation target have risen further than before and that it’s necessary for the BOJ to gradually lower the degree of monetary easing. One member felt that Increasing policy flexibility would help ensure a smooth exit in the future. Lastly, one member said that tweaking YCC at that time could be perceived as tightening.