• President Trump denied reports that he was considering a more modest tariff plan; U.S. yields continue to climb at the long end in the midst of a heavy auction week; Fed Vice Chair for Supervision Barr will step down from his post early; December ISM services PMI and November JOLTS data will be reported; Canada Prime Minister Trudeau has resigned as leader of his Liberal Party
  
• Eurozone December CPI readings did not surprise; ECB November inflation expectations rose; U.K. BRC reported strong December like-for-like sales; Switzerland reported soft December CPI data; Israel delivered a dovish hold
  
• Yen weakness led to some jawboning; U.S.-China spreads are at record highs; Philippines December CPI ran hot

The dollar remains under pressure despite Trump denials of a more modest tariff plan. The dollar has continued to weaken after reports yesterday of more limited tariffs. DXY is trading lower for the third straight day near 108.085 after trading at a new cycle high near 109.533 last Thursday. The euro is trading higher near $1.0405, helped by elevated eurozone inflation and inflation expectations (see below), while sterling is trading higher near $1.2540. USD/JPY traded at a new cycle high near 158.40 today before coming off to 157.70 currently after some official jawboning (see below), while CHF is underperforming after soft December CPI readings. However comprehensive the eventual tariff plan ends up being, we believe dollar dominance will continue in 2025 due to the ongoing economic and monetary policy divergence themes. Simply put, the strong U.S. fundamental story of strong growth, elevated inflation, and a more hawkish Fed continues to favor higher UST yields and a higher dollar, regardless of tariffs.

AMERICAS

President Trump denied reports that he was considering a more modest tariff plan. Regarding the Washington Post story that his administration could only target essential imports from every country, Trump said that it “incorrectly states that my tariff policy will be pared back. That is wrong.” The dollar sold off significantly when the story broke and then subsequently rallied on his denial. Therein lies the stark reminder of how volatile markets can get with conflicting policy pronouncements under a Trump presidency. The one trade for 2025 that we’re sure of is to be long volatility because we are going to get a lot more of it.

U.S. yields continue to climb at the long end in the midst of a heavy auction week. The 10-year yield is trading at the highest level since May 2024 near 4.64%, while the 30-year yield is trading at the highest level since November 2023 near 4.87%. $58 bln of 3-year notes were sold yesterday at a yield of 4.332% vs. 4.117% at the previous auction. Bid to cover ratio was 2.62 vs. 2.58 previously, while indirect bidders took 61.0% vs. 64.2% previously. The long end will be a greater test of demand, with $39 bln of 10-year notes to be sold today. Bid to cover ratio was 2.70 at the previous auction, while indirect bidders took 70.0%. $22 bln of 30-year bonds will be sold tomorrow. For now, higher yields are keeping demand for U.S. assets strong.

Fed Vice Chair for Supervision Michael Barr will step down from his post early. His term as Vice Chair runs until July 2026 but he plans to step down February 28, or even earlier if his successor were to be confirmed. However, Barr said he will stay on the Board of Governors until his term there ends January 31 2032. Barr said that “The risk of a dispute over the position could be a distraction from our mission.” He was referring to reports of a potential plan by the Trump administration to remove him from his Vice Chair Post. Fed officials have said in the past that there was no legal precedent for such action, and so we think that resigning to avoid a legal battle is the wrong message from Barr.

That said, we don't see any immediate policy implications. Our understanding is that the Vice Chair for Supervision will have to be chosen from the existing board members. The same goes if Powell were to step down as Chair. The Fed is structured so that barring any resignations from the Board, a President can only appoint two candidates. For Trump, the two to replace will be Kugler (term ends January 31 2026) and Powell (term ends January 31 2028). Regional Fed Presidents are chosen by their respective bank boards. Barkin speaks today.

December ISM services PMI will be the data highlight. Headline is expected at 53.5 vs. 52.1 in November. Keep an eye on prices paid, which is expected at 57.5 vs. 58.2 in November. Yesterday, S&P Global final December services PMI fell to 56.8 vs. 58.5 preliminary, while its composite fell to 55.4 vs. 56.6. Both readings are still stellar but today's ISM services will be more important.

November JOLTS data will also be reported today. Job openings are expected at 7.740 mln vs. 7.744 mln in October. The openings rate is expected to remain steady at 4.6 after rising from the cycle low of 4.4 in August. If so, it would remain above the 4.5 level that typically presages a sharp rise in the unemployment rate. Ahead of the jobs report Friday, other labor market data will also be reported. ADP reports its private sector estimate tomorrow and is expected at 140k vs. 146k in November. December Challenger job cuts and weekly jobless claims will be reported Thursday.

Growth remains solid. The Atlanta Fed GDPNow model is tracking Q4 growth at 2.4% SAAR and will be updated today after the data. Elsewhere, the New York Fed's Nowcast model is tracking Q4 growth at 1.9% SAAR and Q1 growth at 2.2% SAAR and will be updated Friday.

Canada Prime Minister Trudeau has resigned as leader of his Liberal Party. He will remain Prime Minister until his replacement has been chosen. The party has not yet unveiled the rules or expected timing of the contest. Former Bank of Canada and Bank of England Mark Carney said that he is considering entering the contest for the Liberal leadership post. Former Finance Minister Chrystia Freeland has also been mentioned as a potential contender. Whoever it is, current polls suggest the Liberals will suffer heavy losses in the general election. Stay tuned.

Canada data highlight will be December Ivey PMI. There are downside risks after S&P Global services and composite PMIs fell sharply yesterday. Services fell three full points to 48.2 while the composite fell two and a half points to 49.0. Last week, its manufacturing PMI rose two ticks to 52.2. It seems that the Bank of Canada was correct to shift to a less dovish stance at the December 11 meeting. The swaps market is pricing in only 75 bp of further easing over the next 12 months.

EUROPE/MIDDLE EAST/AFRICA

Eurozone December CPI readings did not surprise. Headline accelerated two ticks to 2.4% y/y while core remained steady at 2.7% y/y, both as expected. There were upside risks after both Spain and Germany inflation came in higher than expected. Instead, those two were offset as France’s EU Harmonised inflation came in a tick lower than expected at 1.8% y/y and Italy’s came in two ticks lower than expected at 1.4% y/y. Headline was the highest since July, while services inflation picked up a tick to 4.0% y/y. Given the weak economic outlook, we think the disinflationary trend continues and will keep the ECB cutting. The swaps market is expecting only 100 bp of further easing but we think that is underestimating how bad the economic outlook really is.

ECB November inflation expectations rose. 1-year expectations picked up a tick to 2.6%, while 3-year expectations picked up three ticks to 2.4%. Expectations had been falling steadily but are now trending higher along with the actual inflation readings. Still, the overall disinflation process should continue and keep the ECB in easing mode. The market is pricing in only 100 bp of further easing in this cycle but we suspect it will have to cut more.

U.K. BRC reported strong December like-for-like sales. Sales rose 3.1% y/y vs. -0.2% expected and -3.4% in November. This bodes well for official retail sales data due out January 17. BRC shop prices will be reported tomorrow and are expected at -0.4% y/y vs. -0.6% in November. That should provide insight into the official CPI data due out January 15.

Switzerland reported soft December CPI data. Headline fell a tick to 0.6% y/y, while core fell two ticks to 0.7% y/y vs. 0.8% expected. Headline fell back to the cycle low from October and moves further below the 2% target. At the last meeting December 12, Swiss National Bank delivered a dovish surprise and cut rates 50 bp to 0.50%. However, the bank toned down its dovish guidance by noting it “will adjust its monetary policy if necessary.” Nevertheless, the bar for additional easing remains low and remains an ongoing drag for CHF. Despite the less dovish guidance from the SNB, the swaps market is still fully pricing in 50 bp of further easing over the next six months that would take the policy rate down to zero.

Bank of Israel left rates steady at 4.5%, as expected. However, it was a dovish hold due to the updated rate path. It now sees the policy rate at 4.0-4.25% in Q4 2025. At the October 9 meeting, the bank saw the rate at 4.5% in 3Q 2025 and so it is teeing up the start of an easing cycle late this year. The bank also lowered its forecast for 2025 inflation to 2.6% in 2025 vs. 2.8% in October, and forecasts 2026 inflation of 2.3%. The swaps market is still pricing in steady rates over the next three months followed by 25 bp of easing over the subsequent three months.

ASIA

Yen weakness led to some jawboning. USD/JPY traded at the highest level since mid-July near 158.40 before coming off a bit on some official jawboning. The pair remains on track to test that month’s high near 161.95. Finance Minister Kato trotted out the usual catchphrases, saying he was “deeply concerned” about recent FX moves. He also warned that “We will take appropriate action if there are excessive movements in the currency market.” We expect jawboning to pick up even more as the pair approaches the 160 intervention danger zone.

U.S.-China spreads are at record highs. Both the 2-year and 10-year spreads are at all-time highs above 300 bp. Until the monetary policy divergences narrow, wide spreads will favor the dollar and will put ongoing downward pressure on the yuan. The PBOC continues to hold the line by keeping the daily fix for USD/CNY below 7.20 but at some point, it will have to capitulate to a much weaker yuan.

Philippines December CPI ran hot. Headline came in at 2.9% y/y 2.6% expected and 2.5% in November. This was the third straight month of acceleration to the highest since August but still well within the 2-4% target range. At the last meeting December 19, central bank cut rates 25 bp to 5.75%, as expected. It noted that “The balance of risks to the inflation outlook continues to lean to the upside due largely to potential upward adjustments in transport fares and electricity rates.” Governor Remolona said that “In our discussion today, there was a sense that maybe 100 bp over 2025 would be too much, but zero would also be too little. We have to see what the data says.” The swaps market would seem to agree and is still pricing in 75 bp of total easing over the next 12 months.