Dollar Soft Ahead of CPI Data

February 14, 2023
  • January CPI data will be the highlight; Fed tightening expectations remain high; Fed Vice Chair Lael Brainard will reportedly leave to become Director of the National Economic Council
  • U.K. labor market data came in solid; Turkish policymakers are taking measures to support local markets
  • BOJ nominations were formally submitted to Parliament; Japan Q4 GDP data came in soft; HKMA intervened for the first time since November

The dollar is soft ahead of the CPI today. DXY is down for the second straight day and trading just below 103. The euro is trading higher near $1.0755, while sterling is trading back above $1.22. USD/JPY is trading lower near 132.20 after it traded at the highest since February 6 yesterday near 132.75. The dollar’s recent bounce has run out of steam and so this week’s data will determine whether dollar gains can resume near-term.


January CPI data will be the highlight. Headline is expected at 6.2% y/y vs. 6.5% in December, while core is expected at 5.5% y/y vs. 5.7% in December. The m/m readings have taken on more importance after the annual revisions boosted those readings in H2 (see below), with headline expected at 0.5% and core expected at 0.4%. Of note, the annual PPI revisions will be reported today. From the BLS website: “Each year with the release of PPI data for January, seasonal adjustment factors and relative importance figures are recalculated to reflect price movements from the just-completed calendar year.” January PPI will be reported Thursday. Headline is expected at 5.4% y/y vs. 6.2% in December, while core is expected at 4.9% y/y vs. 5.5% in December.

CPI revisions are worth discussing. While the adjustments to the seasonal factors announced last Friday did not affect the y/y rates, the m/m rates showed greater momentum in the second half of 2022. To wit, the m/m changes in headline and core for November were both revised up a tick to 0.2% and 0.3%, respectively. For December, headline was revised up two ticks to 0.1% and core was revised up a tick to 0.4%. This suggests that recent optimism regarding falling inflation pressures may be overdone. We’ll know more later today. January real average hourly earnings will also be reported.

To makes things even trickier, the BLS announced more changes last month. Specifically, “Beginning with the January 2023 index, scheduled for publication on February 14, 2023, BLS plans to update the spending weights in the calculation of the CPI every year instead of every 2 years. Spending weights indicate what share of total expenditures each item represents. This change will improve the relevance of CPI spending weights by using the most recent consumer spending information. By improving the relevance of spending weights, BLS can improve the accuracy of the CPI.” The BLS went from revising these weights every ten years to every two years back in 2002 and so the move to annual revisions is another step in the process.

Fed tightening expectations remain high. WIRP suggests 25 bp hikes March 22 and May 3 are priced in, while the odds of a third hike in June or July top out near 45%. Strangely enough, an easing cycle is still expected to begin in Q4 but we believe that will be corrected in the next stage of Fed repricing. Barkin, Logan, Harker, and Williams all speak today and are likely to maintain a hawkish tone.

Fed Vice Chair Lael Brainard will reportedly leave to become Director of the National Economic Council. Brainard would replace outgoing NEC Director Brian Deese, who announced his departure earlier this month. This has not been official confirmed yet but Brainard’s name was floated early and so the reports are not a big surprise. President Biden will name a replacement for Brainard. Of note, she is regarded as one of the most dovish on the FOMC and so her replacement will be very important in framing the Fed policy debate going forward. In related news, Jared Bernstein will reportedly be named Chair of the Council of Economic Advisers, replacing the outgoing Cecilia Rouse.


U.K. labor market data came in solid. Average weekly earnings for the three months ended December slowed to 5.9% y/y vs. 6.2% expected from a revised 6.5% (was 6.4%) in November. However, earnings ex-bonus picked up to 6.7% y/y vs. 6.5% expected and a revised 6.5% (was 6.4%) in November. The unemployment rate remained steady at 3.7%, as expected. One could argue that the data support further monetary tightening but we note that the headline reading appears to have peaked in November. WIRP suggests a 25 bp hike March 23 is nearly priced in. After that, a final 25 bp hike is nearly priced in for Q2, with low odds of a third hike and so the expected terminal rate is now back to 4.5% after starting off last week near 4.25%.

Turkish policymakers are taking measures to support local markets. The sovereign wealth fund will reportedly support equities with a newly created mechanism. The so-called price stability fund will raise capital from state banks and use the money to buy stocks at times of volatility. Elsewhere, policymakers are reportedly channeling billions of liras from pension funds and state banks into the stock market and are planning to introduce tax waivers for stock buybacks. The reports come a day ahead of the planned resumption of trading on the stock exchange tomorrow. Yet what’s missing are any policy changes that would encourage foreign investment. Through early February, Bloomberg data show -$4 bln of foreign outflows from the equity markets over the past 12 months.


Bank of Japan nominations were formally submitted to Parliament. Markets are still digesting the surprise pick of former BOJ board member Kazuo Ueda after current Deputy Governor Amamiya reportedly refused the post. Hearings will begin February 24. If approved, Ueda would become Governor April 9. Current BOJ Executive Director in charge of monetary policy Shinichi Uchida and former head of the watchdog Financial Services Agency Ryozo Himino were also nominated for the two Deputy Governor posts, as earlier reports suggested. Together, the three will likely usher in a new era of tighter policy.

Yet expected BOJ liftoff is not imminent. Next BOJ policy meeting March 9-10 will be the last one under Governor Kuroda and while no change is expected, we simply cannot rule out one last surprise. WIRP suggests nearly 50% odds of liftoff April 28, however, rising to nearly 70% June 16 and then fully priced in July 28. That said, the actual tightening path is seen as very mild as the market is pricing in 25 bp of tightening over the next 12 months followed by only 25 bp more over the subsequent 24 months. That is why we expect the drop in USD/JPY after liftoff to be fairly limited.

Japan Q4 GDP data came in soft. Growth came in at 0.2% q/q vs. 0.5% expected and a revised -0.3% (was -0.2%) in Q3, while the SAAR came in at 0.6% vs. 2.0% expected and a revised -1.0% (was -0.8%) in Q3. Private consumption came in as expected at 0.5% q/q vs. a revised flat (was 0.1%) in Q3 while business spending came in at -0.5% q/q vs. -0.3% expected and 1.5% in Q3. Inventories subtracted -0.5% from growth while net exports added 0.3%. In light of the modest expected bounce in Q4, we expect policymakers to remain concerned about the durability of the recovery.

The HKMA intervened for the first time since November. HKD has been weakening as local interest rates have fallen due to abundant liquidity. This has made it cheaper to short HKD and so USD/HKD traded at the upper end of the trading band at 7.85. This led the HKMA to buy HKD4.2 bln ($538 mln), which in turn should decrease local liquidity and push HIBOR higher. Bottom line: we see no threat to the HKD peg.

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