• Fed easing expectations have intensified and financial conditions continue to loosen; weekly jobless claims will be closely watched; regional Fed surveys for December will continue to roll out; Canada reports October retail sales; Mexico reports mid-December CPI
  
• U.K. November public sector net borrowing was reported; U.K. CBI reported a soft December distributive trades survey; Turkey hiked rates 250 bp to 42.50%, as expected; Czech Republic is expected to cut rates 25 bp to 6.75%
  
• Reports suggest Japan will propose another expansionary budget for FY24; reports suggest the U.S. is considering raising tariffs on imports of electric vehicles from China; Indonesia kept rates steady at 6.0%, as expected

The dollar is under pressure again. DXY is trading lower near 102.083 and is testing support at 102. The euro is trading higher near $1.0980 and testing resistance at $1.10 while sterling is trading higher near $1.2670. USD/JPY is trading lower near 142.75. 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 very wrong. Until these expectations shift, however, the dollar is likely to remain under pressure.

AMERICAS

Fed easing expectations have intensified. WIRP suggests 10% odds of a cut January 31 and rising to 85% March 20. Two cuts are nearly priced in May 1. Six cuts are fully priced in by end-2024 vs. four at the start of last week. 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. Damage control by Fed officials since the FOMC meeting has done nothing to deter the market.

Financial conditions continue to loosen. The Chicago Fed’s measure loosened for the 9th straight week last week. They are now the loosest since the week ending January 21, 2022, nearly two months before the Fed started hiking rates. With equities higher, yields lower, and spreads narrower so far this week, we'll likely get a 10th straight week of looser financial conditions.

Weekly jobless claims will be closely watched. That’s because initial claims will be for the BLS survey week containing the 12th of the month. These are expected at 215k vs. 202k last week. 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 are expected at 1.880 mln vs. 1.876 mln last week. Bloomberg consensus for December NFP stands at 158k vs. 199k in November, while its whisper number stands at 169k.

Conference Board consumer confidence rose sharply in December. Headline rose 110.7 vs. 104.5 expected and a revised 101 in November. This was the highest since July as both current situation and expectations rose around 10 points from November. Lower gas prices and mortgage rates are clearly behind this improvement and supports our view that consumption will continue to hold up well as we move into 2024.

Regional Fed surveys for December will continue to roll out. Philly and Kansas City Fed manufacturing surveys are expected at -3.0 and -4, respectively. November leading index will also be reported and is expected at -0.5% vs. -0.8% in October.

We get another revision to Q3 GDP. Growth is seen steady at 5.2% 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. 1.2% previously. Next update will be tomorrow. This is now above the NY Fed Nowcast model, which is tracking 2.2% SAAR and will be updated tomorrow as well. The early 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.

Canada reports October retail sales. Headline is expected at 0.8% m/m vs. 0.6% in September, while ex-autos is expected at 0.5% m/m vs. 0.2% in September. WIRP suggests 15% 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. Five cuts are priced in by the end of 2024 vs. four at the start of last week.

Mexico reports mid-December CPI. Headline is expected at 4.36% y/y vs. 4.33% previously, while core is expected at 5.22% y/y vs. 5.30% previously. At last week’s meeting, Banco de Mexico kept rates steady at 11.25% and maintained the language that it would hold rates “for some time.” This suggests low odds of a cut February 8 but if inflation continues to fall, a cut March 21 is possible. Swaps market is pricing in 25 bp of easing over the next three months followed by another 25 bp over the subsequent three months.

EUROPE/MIDDLE EAST/AFRICA

U.K. November public sector net borrowing was reported. PSNB ex-banking groups came in at GBP14.3 bln vs. GBP13.0 bln expected and a revised GBP16.0 bln (was GBP14.9 bln) in October. The total for the first eight months of this fiscal year rose to GBP116.4 bln, up 27% from the same period a year ago. ONS said that welfare costs rose 12% from a year ago while public sector staff costs also rose by 12% from a year ago, adding that “In recent months we have seen large increases in benefit payments largely because of inflation-linked benefits uprating and cost-of-living payments.” If this trend continues, Chancellor Hunt will have difficulty justifying expected tax cuts in his spring budget. However, falling inflation and expected BOE rate cuts could give him more leeway to do so ahead of expected fall elections. Stay tuned.

Bank of England easing expectations remain elevated despite the hawkish hold. WIRP suggest 5% odds of a cut February 1, rising to 45% March 21 and fully priced in May 9 vs. June 20 at the start of this week. Five cuts are priced in by the end of 2024 vs. four at the start of this week and three at the start of last week.

U.K. CBI reported a soft December distributive trades survey. Retailing reported sales came in at -32 vs. -14 expected and -11 in November, while total reported sales came in at -15 vs. -9 in November. November retail sales data will be reported tomorrow. Headline is expected at 0.4% m/m vs. -0.3% in October, while ex-auto fuel is expected at 0.3% m/m vs. -0.1% in October. Consumption has remained relatively robust, but headwinds are building. Indeed, the CBI survey suggests that the expected November bounce in retail sales is likely to be reversed in December.

Turkey central bank hiked rates 250 bp to 42.50%, as expected. The bank said, "Assessing that monetary tightness is significantly close to the level required to establish the disinflation course, the committee reduced the pace of monetary tightening." It said that it would complete tightening “as soon as possible” but pledged continued tightness “as long as needed.” The swaps market is pricing in 575 bp of tightening over the next three months that would see the policy rate peak at 48.25%, followed by the start of an easing cycle over the subsequent three months.

Czech National Bank is expected to cut rates 25 bp to 6.75%. Of the 23 analysts polled by Bloomberg, 6 look for steady rates and 17 look for a 25 bp cut. At the last meeting November 2, the bank delivered a hawkish surprise and kept rates steady at 7.0% vs. an expected 25 bp cut. Vice Governor Zamrazilova said policymakers are having a “serious debate” about the timing of a rate cut, adding that risks from cutting too soon are bigger than those of a delay in cutting. The swaps market is pricing in 125 bp of total easing over the next three months followed by another 75 bp over the subsequent three months.

ASIA

Reports suggest Japan will propose another expansionary budget for FY24. The initial budget for FY24 beginning in April will reportedly be JPY112 trln ($784 bln), down only slightly from the record JPY114.4 trln for the current FY23. The proposal will be submitted to the cabinet for approval tomorrow. This was the first decline in twelve years, but just barely. Of note, debt servicing costs are forecast to rise 6.7% to JPY27 trln vs. JPY25.3 trln in FY23 and is based on the assumption of higher interest rates. The Finance Ministry will reported raise its assumption for the accumulated interest rate used for calculating debt servicing costs to 1.9% for the FY24 budget vs. 1.5% assumed in August and 1.1% that’s assumed for the FY23 budget. In that regard, BOJ liftoff expectations have eased. WIRP suggests 30% odds of a hike January 23, rising to 60% March 19, 75% April 26, and fully priced in June 14 vs. April 26 at the start of last week.

Reports suggest the U.S. is considering raising tariffs on imports of electric vehicles from China. Chinese electric vehicles are currently subject to a 25% tariff by the U.S. The Biden administration has basically left in place Trump-era tariffs on $300 bln of imports from China. However, reports suggest U.S. officials are hoping to complete a review of these tariffs in early 2024. Stay tuned.

Bank Indonesia kept rates steady at 6.0%, as expected. With regards to rate cuts, Governor Warjiyo was cautious and said, “We may only start to ascertain the risks of exchange rate stability and other risks in the second half of 2024.” He added that the scope for BI easing might open up if the rupiah strengthens more quickly and inflation slows “but we will not rush.” Warjiyo said the bank sees 50 bp Fed rate cuts starting in H2 2024, which he acknowledged is less dovish than what the market sees. Bloomberg consensus sees steady rates through H1 followed by 25 bp cuts in both Q3 and Q4.