• With U.S. data remaining firm, Fed easing expectations are starting to adjust; December retail sales data ran hot; Fed Beige Book report suggests little urgency to ease; weekly jobless claims will be closely watched; housing data will remain in focus
  
• ECB publishes the account of its December 13-14 meeting; BOE released its quarterly bank liabilities and credit conditions surveys; SNB is pushing back against franc strength
  
• Japan reported soft November core machine orders; Japan financial institutions are raising salaries significantly; Australia reported soft December jobs data

The dollar is trading lower as markets await fresh drivers. DXY is trading lower for the first time since last Thursday near 103.275 after trading yesterday at the highest since December 13 near 103.692. The 200- day moving average near 103.456 is providing some resistance but we believe DXY is on track to test the December 8 high near 104.263. The euro is trading flat near $1.0890 after testing its 200-day moving average near $1.0845 yesterday, while sterling is trading modestly higher near $1.2690. USD/JPY is trading lower today near 147.85 after it traded at the highest level since November 30 yesterday near 148.50. Break above 147.45 sets up a test of the November 13 high near 152. The Swiss franc is underperforming after SNB jawboning (see below). All indications are that the U.S. economy remains robust in Q4 and likely to remain so in early 2024. Over the past few weeks, the data have mostly come in on the firm side and so we continue to believe that the current market easing expectations still need to adjust significantly. These expectations have started to shift but more needs to be seen. Yesterday’s U.S. retail sales data (see below) helped the adjustment process.

AMERICAS

With U.S. data remaining firm, Fed easing expectations are starting to adjust. WIRP suggests nearly 65% odds of a cut March 20 vs. 85% at the start of this week. Furthermore, the swaps market is now pricing in 150 bp of Fed easing this year vs. nearly 175 bp at the start of this week. Besides the strong U.S. growth story, we note that inflation readings in December have come in largely higher than expected for most major economies, supporting our view that inflation is likely to remain sticky.

December retail sales data ran hot. Headline came in at 0.6% m/m vs. 0.4% expected and 0.3% in November, ex-autos came in at 0.4% m/m vs. 0.2% expected and actual in November, and the so-called control group used for GDP calculations came in at 0.8% m/m vs. 0.2% expected and a revised 0.5% (was 0.4%) in November. In y/y terms, headline rose 5.6% vs. 4.0% in November, ex-autos rose 4.5% vs. 3.4% in November, and the control group rose 5.6% vs. 4.7%, the highest since February. Consumption remains strong and likely to carry over into 2024.

The U.S. economy remains robust. The Atlanta Fed’s GDPNow model is now tracking Q4 growth at 2.4% SAAR vs. 2.2% previously. Next update comes today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q4 growth at 2.4% SAAR and Q1 growth at 2.5% SAAR. Next update comes tomorrow. Bottom line: the U.S. economy continues to grow above trend.

Fed Beige Book report for the January 30-31 FOMC meeting was released. On overall economic activity: A majority of the twelve Federal Reserve Districts reported little or no change in economic activity since the prior Beige Book period. Overall, most Districts indicated that expectations of their firms for future growth were positive, had improved, or both. On labor markets: Seven Districts described little or no net change in overall employment levels, while the pace of job growth was described as modest to moderate in four Districts. Firms from many Districts expected wage pressures to ease and wage growth to fall further over the next year. On prices: Six Districts noted that their contacts had reported slight or modest price increases, and two noted moderate increases. Three Districts noted that their firms were expecting price increases to ease further over the next year, while four Districts’ firms anticipated little change. Bottom line: the Fed is in no rush to cut rates. Bostic speaks twice today.

Regional Fed surveys for January will continue rolling out. Philly Fed manufacturing survey is expected at -6.7 vs. -12.8 in December. So far this week, Empire manufacturing survey came in at -43.7 vs. -14.5 in December and the New York Fed services survey came in at -9.7 vs. -14.6 in December.

Weekly jobless claims will be closely watched. That’s because the initial claims reading will be for the BLS survey week containing the 12th of the month. They are expected at 205k vs. 202k last week, the lowest since mid-October. There is no Bloomberg consensus yet for January NFP, but its whisper number stands at 160k vs. 216k in December. Continuing claims are reported with a 1-week lag and are expected at 1.843 mln vs. 1.834 mln last week, the lowest since late October. Bottom line: the labor market remains firm, which in turn suggests consumption will remain robust.

Housing data will reman in focus. December building permits and housing starts are expected at 0.6% m/m and -8.7% m/m, respectively. Existing home sales will be reported tomorrow and are expected at 0.3% m/m vs. 0.8% in November. Yesterday, January NAHB housing index came in at 44 vs. 39 expected and 37 in December and was the highest since September.

EUROPE/MIDDLE EAST/AFRICA

ECB publishes the account of its December 13-14 meeting. At that meeting, the bank kept rates steady but announced QT tapering would begin in H2. President Lagarde pushed back against the dovish narrative and said the ECB should “absolutely not lower our guard” and noted that it needs to see more data. Lastly, Lagarde stressed that the ECB did not discuss rate cuts at all. That stance has clearly shifted, as ECB policymakers are openly talking about rate cut timing now and Lagarde is penciling the first one this summer. Money markets have heeded the call and trimmed bets on ECB easing. The OIS curve implies 80% probability of a 25 bp cut April 11 vs. fully priced in last week. However, 150 bp of total easing is still seen this year. Lagarde speaks today at Davos.

Bank of England released its quarterly bank liabilities and credit conditions surveys. Banks saw weaker demand for secured lending in Q4 but expect a recovery in Q1. This is likely due to the recent drop in mortgage rates. However, default rates on mortgages and unsecured lending (mostly credit cards) rose in Q4 and are expected to continue rising in Q1. There may be some relief in sight as the markets prepare for BOE rate cuts. The first cut is priced in for June 20, with a little less than 125 bp of total easing seen this year.

Swiss National Bank is pushing back against franc strength. President Jordan said the inflation outlook has shifted as “The big difference is now that the Swiss franc became stronger, especially in the last week of last year. This already had some impact - the inflation outlook was slower.” He added that “In the last couple of weeks of last year, we saw real appreciation. That makes the situation for some of our firms more difficult.” At the last policy meeting December 14, Jordan stressed that a rate cut was not discussed but added that officials will have to shift their stance if franc strength makes monetary conditions too restrictive. WIRP suggests 50% odds of a cut March 21 and becomes fully priced in June 20, with 75 bp of total easing seen this year.

ASIA

Japan reported soft November core machine orders. Orders came in at -4.9% m/m vs. -0.8% expected and -0.7% in October, while the y/y rate came in at -5.0% vs. 0.1% expected and -2.2% in October. This was the weakest y/y reading since August. Earlier this week, December machine tool orders came in at -9.9% y/y vs. -13.6% in November. Recent softness in the data has pushed out BOJ liftoff expectations to July 31 and this has weighed on the yen.

Japan financial institutions plan to raise salaries significantly. Reports suggest Dai-ichi Life may hike its starting salary for university graduates in to JPY321,000 per month vs. JPY276,000 currently. This would be a 16% increase to the highest for a Japanese financial institution and would also be the first increase in four years. Others are also raising their starting salaries, with Nomura Securities planning an increase to JPY265,000 vs. JPY245,000 currently and Mitsubishi UFJ Financial Group planning an increase to JPY255,000, the first increase in 13 years. While the financial sector is just a slice of the overall economy, wage increases here could set the tone for broader economy-wide increases as competition for talent heats up. Stay tuned.

Australia reported soft December jobs data. There were -65.1k jobs lost vs. an expected gain of 15.0k and a revised 72.6k (was 61.5k) in November. The mix was bad, as -106.6k full-time jobs lost were only partially offset by 41.4k part-time jobs created. This was the biggest one month fall in full-time jobs since May 2020. The unemployment rate remained steady at 3.9% due to a decline in the participation rate to 66.8% vs. a revised 67.3% (was 67.2%) in November. RBA cash rate futures have trimmed the probability for 50 bp of policy rate cuts this year. This could continue as we believe money markets are underpricing the risk of a more dovish RBA. Australia inflation is on the right track and the outlook for household spending is unimpressive.