• There are no Fed speakers this week due to the media blackout; growth remains solid; New York Fed reports November inflation expectations; Mexico reports November CPI
  
• Sentix investor confidence in the eurozone continues to fall; there are no ECB speakers this week ahead of the decision Thursday; BOE officials remain cautious ahead of the December 19 meeting
  
• Japan reported revised Q3 GDP data; we do not think the BOJ will hike this month; October current account data will hold some interest; China policymakers are flagging more stimulus even as deflationary risks persist

The dollar is soft as a new week begins. DXY is trading modestly lower near 105.889 ahead of key US inflation data that may provide fresh clues to Fed policy. USD/JPY trading lower near 150.50 on falling odds of a December BOJ hike (see below). Elsewhere, the euro is trading flat near $1.0570 and sterling is trading slightly higher near $1.2765. EM FX is mixed despite hints of stimulus from China (see below). We look for the dollar rally to continue after this period of consolidation. While the U.S. election results have turbo-charged this dollar move, faithful readers will recall that we have been resolute in our belief that the strong U.S. fundamental story continues to favor higher UST yields and a higher dollar. Last week’s jobs report as well as other key data still to come over the next week or so should confirm our thesis. Market pricing for the Fed has already adjusted, which has given the dollar a huge lift.

AMERICAS

There are no Fed speakers this week due to the media blackout. As such, there can be no further pushback to markets viewing a December cut as a done deal. The Fed still has to digest CPI, PPI, and retail sales before the December 18 FOMC decision. It’s clear from Fed comments last week that officials (ex-Goolsbee) are worried about sticky inflation and therefore preparing the markets for a pause. The market is pricing in 85% odds of a cut this month. If the Fed does indeed cut, we are very confident that it will be a hawkish cut that sets up a pause in January and perhaps beyond (depending on the data).

Growth remains solid. The Atlanta Fed GDPNow model now has Q4 growth at 3.3% SAAR, up a tick from the start of this week despite the soft ISM services PMI. Next update will come today after the data. Elsewhere, the New York Fed's Nowcast model is tracking Q4 growth at 1.9% SAAR while its initial estimate for Q1 growth came in at 2.4% SAAR. Both will be updated Friday.

New York Fed reports November inflation expectations. Expectations across the spectrum have flat-lined well above the 2% target and should keep the Fed in a cautious mood.

Mexico reports November CPI data. Headline is expected at 4.60% y/y vs. 4.76% in October, while core is expected at 3.60% y/y vs. 3.80% in October. If so, headline would basically reverse the October spike but still remain above the 2-4% target range, while core would be the lowest since April 2020. At the last meeting November 14, Banco de Mexico cut rates 25 bp to 10.25% and signaled more easing to come. Next meeting is December 10 and another 25 bp cut to 10.0% seems likely. Looking ahead, the swaps market is pricing in 150-175 bp of total easing over the next 12 months.

EUROPE/MIDDLE EAST/AFRICA

Sentix investor confidence in the eurozone continues to fall. Headline came in at -17.5 in December vs. -12.3 expected and -12.8 in November. This was the lowest since November 2023. Contrast this with its measure for the U.S., which rose to 21.6 vs. 15.9 in November.

There are no European Central Bank speakers this week ahead of the decision Thursday. Attention will be on President Lagarde’s press conference and the update macroeconomic projections. Judging from the recent soft batch of economic data, the ECB will likely tweak lower its inflation and real GDP growth forecasts. This could lead to a downward adjustment to ECB easing expectations, which would weigh on the euro. The market is currently pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom near 1.75%, but we think it could go even lower.

Bank of England officials remain cautious ahead of the December 19 meeting. MPC member Ramsden speaks today. BOE inflation expectations survey will be reported Friday. 1- and 3-year expectations have been trending lower but 5-year expectations have been creeping higher. This should keep the BOE on its cautious easing path. The next cut isn’t fully priced in until March.

ASIA

Japan reported revised Q3 GDP data. Real GDP grew 0.3% q/q as expected vs. 0.2% preliminary. Looking at the components, private demand contributed 0.4 ppt to growth vs. 0.5 ppt preliminary, fixed investment subtracted -0.1 ppt and was unchanged from the preliminary, public demand contributed 0.0 ppt vs. 0.1 preliminary, net exports subtracted -0.2 ppt vs. -0.4 ppt preliminary, and inventories contributed 0.2 ppt vs. 0.1 ppt preliminary. Private consumption remained the biggest growth tailwind, while net exports remained the biggest drag.

Despite the GDP revisions, we do not think the Bank of Japan will hike this month. Odds of a December hike have been volatile of late. After rising as high as 65% earlier this month, the odds have plunged to around 25% after a Jiji News Service report last week that argued there's a possibility that policy may be kept steady in December. We agree. Japan’s disinflationary trend is intact, and the growth outlook is unimpressive. October earnings data reported last week were mixed and did not call out for more tightening.

October current account data will hold some interest. The adjusted surplus came in at JPY2.409 trln vs. JPY2.255 trln expected and JPY1.272 trln in September. However, the investment flows will be of more interest. The October data showed that Japan investors became net sellers of U.S. bonds (-JPY1.676 trln) after three straight months of net buying. Japan investors stayed net sellers (-JPY223.4 bln) of Australian bonds for the second straight month and also stayed net sellers of Canadian bonds (-JPY116.2 mln) for the second straight month. Investors turned net sellers of Italian bonds (-JPY408.1 bln) after two straight months of net buying. Overall, Japan investors turned total net sellers of foreign bonds (-JPY4.238 trln) after two straight months of net buying. While it's the biggest month of total net selling since June 2022, it’s still too early to say that Japan investors have stopped chasing higher yields abroad.

China policymakers are flagging more stimulus. Ahead of the annual closed door Central Economic Work Conference to be held Wednesday and Thursday, the Politburo vowed “more proactive” fiscal policy and a “moderately loose” monetary stance next year. At that conclave, the GDP growth target and stimulus plans for 2025 are set. This was the first major shift in monetary stance since 2011. The Politburo also pledged to boost consumption “forcefully”, expand domestic demand in all aspects and “firmly prevent” systemic risks. Color us skeptical.

China still faces deflationary risks. November CPI came in at 0.2% y/y vs. 0.4% expected and 0.3% in October, while PPI came in -2.5% y/y vs. -2.8% expected and -2.9% in October. Overall, China’s economy is still struggling to escape a deflationary spiral. November new loan and money supply data will be reported sometime this week. New loans are expected at CNY995 bln vs. CNY500 bln in October, while aggregate financing is expected at CNY2.565 trln vs. CNY1.396 trln in October. The expected pickup reflects the likely impact of the People’s Bank of China’s pump-priming measures since late-September.