Dollar Soft After Weak Data Cement 25 bp Hike by the Fed

January 19, 2023
  • December PPI and retail sales data are worth discussing; the Fed released its Beige Book report; we think recent data cement a 25 bp hike February 1; Fed officials have split into two distinct groups; regional Fed manufacturing surveys for January continue rolling out; weekly jobless claims will be of interest; the U.S. debt ceiling remains an underappreciated risk
  • ECB publishes the account of its December 15 meeting; ECB officials remain hawkish; U.K. January GfK consumer confidence will be reported; Norges Bank kept rates steady at 2.75%; Turkey kept rates steady at 9.0%, as expected
  • Japan reported December trade data; Australia reported weak December jobs data; New Zealand Prime Minister Jacinda Ardern announced she is stepping down; Malaysia unexpectedly kept rates on hold at 2.75%; Indonesia hiked rates 25 bp to 5.75%, as expected

The dollar remains soft as recent data cement a 25 bp hike February 1. DXY is down for the second straight day and trading near 102.245 after making a new cycle low yesterday near 101.528. It is on track to test the May low near 101.297. The euro is trading higher near $1.0820 after making a new cycle high near $1.0885 yesterday. It remains on track to test the last April high near $1.0935. Sterling is trading flat near $1.2350 after making a new cycle high near $1.2435 and remains on track to test the December high near $1.2445. Break above that would set up a test of the May high near $1.2665. USD/JPY is trading lower near 128.64 after trading yesterday at the highest since January 12 near 131.60 after the BOJ decision. The pair remains on track to test the new cycle low from Monday near 127.25. While we believe that the current dollar weakness is overdone, we continue to respect the price action. Until a more hawkish Fed narrative emerges, the dollar is likely to remain under pressure.


December PPI data were better than expected. Headline came in at 6.2% y/y vs. 6.8% expected and a revised 7.3% (was 7.4%) in November, while core came in a tick lower than expected at 5.5% y/y vs. 6.2% in November. The data suggest CPI will continue to ease in the coming months and markets should continue to price in a less hawkish Fed ahead. While inflation pressures continue to ease, we note that core PCE remains well above the Fed’s 2% target and more work clearly needs to be done to get it lower.

December retail sales came in very weak. Headline came in at -1.1% m/m vs. -0.9% expected and a revised -1.0% (was -0.6%) in November, while sales ex-autos came in at -1.1% y/y vs. -0.5% expected and a revised -0.6% (was -0.2%) in November. The so-called control group used for GDP calculations came in at -0.7% m/m vs. -0.3% expected and -0.2% in November. As these two months contain holiday spending, the weak readings are disappointing. Given low base effects, however, the y/y rate for the control group picked up to 6.7% vs. 5.5% in November and was the highest since September. Of note, the Atlanta Fed’s GDPNow model is now tracking Q4 growth at 3.5% SAAR, down from 4.1% previously but still quite robust. The next model update comes later today after the data.

The Fed released its Beige Book report. On Overall Economic Activity: Overall economic activity was relatively unchanged since the previous report. On balance, contacts generally expected little growth in the months ahead. Most bankers reported that residential mortgage demand remained weak, and some said higher borrowing costs had begun to dampen commercial lending. On Labor Markets: Employment continued to grow at a modest to moderate pace for most Districts. While some Districts noted that labor availability had increased, firms continued to report difficulty in filling open positions. With persistently tight labor markets, wage pressures remained elevated across Districts, though five Reserve Banks reported that these pressures had eased somewhat. On Prices: Selling prices increased at a modest or moderate pace in most Districts, though many said that the pace of increases had slowed from that of recent reporting periods. Many retailers noted increased difficulty in passing through cost increases, suggesting greater price sensitivity on the part of consumers. On balance, contacts across Districts said they expected future price growth to moderate further in the year ahead. As we expected, the Beige Book painted a mixed picture of the economy that justified another downshift in rate hikes along with a willingness to continue tightening if data warrant.

We think recent data cement a 25 bp hike February 1. WIRP suggests only 10% odds of a larger 50 bp move. Another 25 bp hike March 22 is almost priced in, while one last 25 bp hike in Q2 is only 15% priced in. Furthermore, the swaps market continues to price in an easing cycle by year-end and we just don’t see that happening.

Fed officials have split into two distinct groups. From the hawkish camp, Bullard said he expects inflation to recede this year but not as fast as market see. He said Fed policy is almost restrictive but not quite there yet, adding that his 2023 rate projection last month was for 5.25-5.50%. Bullard stressed that rates need to remain above 5% in order to push inflation down and wants Fed policy to err on the tighter side as insurance. Elsewhere, Mester said “We’re not at 5% yet, we’re not above 5%, which I think is going to be needed given where my projections are for the economy. I just think we need to keep going, and we’ll discuss at the meeting how much to do.” From the less hawkish camp, Logan said “A slower pace is just a way to ensure we make the best possible decisions.” Harker was in the middle ground, noting that 25 bp hikes are appropriate but adding that “I think we get north of 5 - again we can argue whether it’s 5.25% or 5.5% - but we sit there for a while.”

We get the sense that for now, the hawks are outnumbered by those that are more cautious and willing to pause rate hikes sooner rather than later. Recent data support a slower pace of tightening but we don't think the readings support a pause yet, not with inflation still well above target and the labor market remaining very tight. Still, until we get some signs that the market is being overly optimistic on inflation and the Fed, it will be hard for the hawks to regain control of the narrative. Collins, Brainard, and Williams speak today.

Regional Fed manufacturing surveys for January continue rolling out. Philly Fed is expected at -11.0 vs. -13.8 in December. However, there are clearly downside risks after the Empire survey came in at a whopping -32.9 vs. -8.7 expected and -11.2 in December, the lowest since May 2020. December IP was reported yesterday and came in at -0.7% m/m vs. -0.1% expected and a revised -0.6% (was -0.2%) in November. Within IP, manufacturing production came in at -1.3% m/m vs. -0.2% expected and a revised -1.1% (was -0.6%) in November. There can be no doubt that the manufacturing sector is also slowing along with the housing sector.

Weekly jobless claims will be of interest. That is because initial claims will be for the BLS survey week containing the 12th of the month and are expected at 214k vs. 205k the previous week. Continuing claims are reported with a one-week lag and so next week’s reading will be for the BLS survey week. If claims data remain low, we can expect another solid NFP reading for January that will follow 223k in December. Consensus currently stands at 190k. Until the labor market weakens, it’s hard to see how wages will fall enough for the Fed to feel comfortable pivoting. December building permits (1.0% m/m expected) and housing starts (-4.8% m/m expected) will also be reported.

The U.S. debt ceiling remains an underappreciated risk. Last week, Treasury Secretary Yellen projected that the ceiling will be hit today. She said Treasury will resort to “extraordinary measures” to avoid default and buy some time until Congress either raises the $31.4 trln ceiling or suspends it again. Yellen warned that it's “critical that Congress act in a timely manner. Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability. In the past, even threats that the U.S. government might fail to meet its obligations have caused real harms, including the only credit rating downgrade in the history of our nation in 2011.” This is a potential risk off event that has not gotten much attention even as both parties dig in. We will put out a longer piece on the debt ceiling this week.


The ECB publishes the account of its December 15 meeting. At that meeting, the bank hiked rates 50 bp to 2.5% and said that it expected to hike rates further but will decide meeting by meeting. In her press conference, Madame Lagarde said it was obvious to expect more 50 bp hikes “for a period of time.” She stressed that market rate bets wouldn’t lead to inflation converging with the 2% target and that the ECB needs to do more than what the market expects. Lastly, Lagarde said that anyone who thinks the ECB is pivoting is wrong, as the bank wants rates at a sufficiently restrictive level to achieve its inflation target. Reports suggested that more than a third of the ECB policymakers favored a 75 bp hike then but settled for a smaller 50 bp move in return for more hawkish messaging on future hikes as well as a firm commitment to promptly start Quantitative Tightening.

ECB officials remain hawkish. Lagarde said “We shall stay the course until such time we have moved into restrictive territory for long enough so that we can return inflation to 2% in a timely manner.” Elsewhere, Knot stressed that “Our president has already announced that most of the ground that we have to cover we will cover at a constant pace of multiple 50 bp hikes.” Recent ECB comments are clearly pushback against reports last week that the bank may slow to a 25 bp hike at the March meeting. ECB tightening expectations remain subdued. WIRP suggests a 50 bp hike February 2 is almost fully priced in, followed by around 65% odds of another 50 bp hike March 16. Then, 25 bp hikes are priced in for May 4 and June 15 that would see the deposit rate peak near 3.25% vs. 3.5% last week and 3.75% at the start of the year. Odds of one last 25 bp hike in Q3 are around 45% vs. 30% at the start of this week. If inflation continues to slow, we think the expected peak rate is likely to move down perhaps even to 3.0%, which is where it stood back in mid-December.

U.K. January GfK consumer confidence will be reported. It is expected at -40 vs. -42 in December. If so, it would be the fourth straight month of improvement from the -49 low in September. December retail sales will be reported tomorrow. Headline is expected at 0.5% m/m vs. -0.4% in November while sales ex-auto fuel are expected at 0.4% m/m vs. -0.3% in November. BOE tightening expectations remain steady. WIRP suggest nearly 85% odds of a 50 bp hike February 2, while a 25 bp hike March 23 is now priced in rather than 50 bp previously. After that, a 25 bp hike in either May or June is priced in that would see the bank rate peak near 4.5% vs. 4.75% last week.

Norges Bank kept rates steady at 2.75%. Markets were almost evenly split between no hike and a 25 bp hike. The bank noted that “The policy rate will need to be increased somewhat further” but added that the policy rate “has been raised considerably over a short period of time, and monetary policy has started to have a tightening effect on the economy. This may suggest a more gradual approach to policy rate setting.” Governor Bache later said rates “will most likely be raised in March.” The expected rate path from December saw the policy rate peaking near 3.0%, with gradual easing expected in H2 2024. Updated macro forecasts and expected rate path will come at the March 23 meeting. Of note, the swaps market is now pricing in a peak policy rate near 2.75% vs. 3.0% at the start of this week and 3.25% right after the December meeting.

Turkey central bank kept rates steady at 9.0%, as expected. After cutting rates 500 bp over the course of H2 2022, the bank kept rates steady at the last meeting December 22 and noted that “Considering the increasing risks regarding global demand, the committee evaluated that the current policy rate is adequate.” The bank will deliver its quarterly monetary policy report next Thursday that will contain updated inflation forecasts. We believe monetary policy has entered a new phase and that further easing will come ahead of May 14 elections in the form of macroprudential measures. As a result, the country will continue to careen towards a full-blown economic crisis due to an unsustainable policy mix. The best that President Erdogan can hope for is that it will come after the elections.


Japan reported December trade data. Exports came in at 11.5% y/y vs. 10.6% expected and 20.0% in November, while imports came in at 20.6% y/y vs. 22.6% expected and 30.3% in November. The adjusted trade balance came in at -JPY1.7 trln and has been in deficit since June 2021, due largely to surging energy imports. The OECD forecasts Japan’s current account surplus to narrow to 1.1% of GDP in 2023 from an estimated 1.8% in 2022 and 3.9% in 2021. Narrowing external accounts would be a headwind for the yen.

Australia reported weak December jobs data. A loss of -14.6k jobs was posted vs. an expected gain of 25.0k and a revised 58.3k (was 64.0k) in November. The mix was favorable, as 17.6k full-time jobs created were offset by -32.2k part-time jobs lost. Still, the unemployment rate came in a tick higher than expected at 3.5%. This makes the RBA’s job a bit tougher after November CPI saw headline inflation a tick higher than expected at 7.3% y/y vs. 6.9% in October and trimmed mean a tick higher than expected at 5.6% y/y vs. a revised 5.4% (was 5.3%) in October. At the last policy meeting December 6, the Reserve Bank of Australia hiked rates 25 bp to 3.10%. The next policy meeting is February 7 and WIRP suggests around 50% odds of a 25 bp hike, while the swaps market is pricing in a peak policy rate near 3.70%, down from 3.85% at the start of this week. Updated macro forecasts will come at next month’s meeting.

New Zealand Prime Minister Jacinda Ardern announced she is stepping down. At the same time, she set the general election for October 14. The Labour caucus will vote on a new leader January 22 who will need two thirds support. If no one wins, the vote will go to the wider party membership and will conclude no later than February 7 Deputy Prime Minister and Finance Minister Grant Robertson said he will not seek leadership. Despite Labour winning an outright majority in 2020 to give her a second term, a recent opinion poll shows Labour trailing the opposition National Party by a margin of 33% to 38%, with National ally ACT picking up 11%.

Bank Negara delivered a dovish surprise and kept rates on hold at 2.75% vs. an expected 25 bp hike. The bank noted that “Any changes to the OPR depend on how strong the economy and prices grow,” adding that the pause will allow the bank to assess the impact of past tightening “given the lag effects of monetary policy on the economy.” The bank said headline inflation peaked in Q3 and is expected to ease further this year and so this may mark the end of the tightening cycle. With policymakers now more focused on growth, Prime Minister Anwar is expected to deliver fiscal stimulus in the spending plan expected next month. December CPI will be reported Friday and is expected to fall a tick to 3.9% y/y. While the bank does not have an explicit inflation target, easing price pressures would allow the bank to keep rates steady going forward. Keep an eye on core inflation as its continued acceleration could scuttle Bank Negara’s plan to stop hiking.

Bank Indonesia hiked rates 25 bp to 5.75%, as expected. Governor Warjiyo noted that “Global economic growth this year will be slower than expected, due to the recession risk in the US and Europe, and China’s challenging exit from Covid Zero.” The bank also said it would no longer buy longer-dated bonds but continue selling short-dated ones in order to maintain attractive yields for investors. We note that while headline inflation appears to have peaked, core continues to accelerate and so the tightening cycle is likely to continue at the next meeting February 15. That said, the bank’s focus on downside growth risks suggest the end of that cycle is drawing near.

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