• Two out of three ain’t bad; Fed easing expectations have intensified; retail sales data came in firm; the labor market and overall economy remain relatively robust; surveys for December will start rolling out; October TIC data will also be reported
  
• ECB and BOE delivered widely expected holds; Lagarde and Bailey used their press conferences to push back against the dovish narrative; eurozone preliminary December PMIs were soft; U.K. preliminary December PMIs were firm
  
• Japan and Australia preliminary December PMIs were firm; China reported mixed November data

The dollar has steadied ahead of the weekend. DXY is trading modestly higher near 102.046 after three straight down days. Clean break below 102.546 sets up a test of the July low near 99.578. The euro is trading lower near $1.0960 despite the hawkish hold from the ECB, as weak PMI readings take a toll (see below). Sterling is trading higher near $1.2760 after the hawkish hold from the BOE as well as firm PMI readings (see below). Break above $1.2720 sets up a test of the July high near $1.3140. USD/JPY remains heavy and is trading lower near 141.75. Clean break below 142.85 sets up a test of the July low near 137.25. This week’s dovish Fed decision was a game changer as the bank completely validated market easing expectations. Despite pushback from the ECB and BOE yesterday, those easing expectations continue to spread to virtually every other major central. If this continues, the dollar may get some limited traction, but it will really come down to the U.S. data. This week, the readings have all come in quite firm and so we continue to believe that the market easing expectations are wrong. Until these expectations shift, however, the dollar is likely to remain under pressure.

AMERICAS

Two out of three ain’t bad. After getting the Fed call totally wrong, the ECB and BOE both delivered hawkish holds as we had expected (see below). Both of these central banks pushed back against the dovish narrative and staked out key differences with the Fed. So, we are left wondering why the Fed turned so dovish when the economy is growing at or above trend for what is likely to be the sixth straight quarter. How does inflation continue falling when the economy is robust, hiring continues, and financial conditions get looser? It really will come down to the data, but recent readings suggest the Fed is very unlikely to ease policy as much as markets expect right now.

Fed easing expectations have intensified. WIRP suggests over 10% odds of a cut January 31 and rising to 90% March 20. Vs. May 1 at the start of this week. Six (!) cuts are fully priced in by end-2024 vs. four at the start of this week. While we disagree with this market pricing, it will take a much longer string of stronger data to shift the narrative than what was needed before the Fed’s dovish performance this week. Williams speaks today and has become one of the leading doves on the FOMC this year.

Retail sales data came in firm. Headline came in at 0.3% m/m vs. -0.1% expected and a revised -0.2% (as -0.1%) in October, while ex-autos came in at 0.2% m/m vs. -0.1% expected and a revised 0.0% (was 0.1% in October). The so-called control group used for calculating GDP came in at 0.4% m/m vs. 0.2% expected and a revised 0.0% (was 0.2%) in October. Furthermore, the y/y rates accelerated sharply. Total retail sales rose 4.1% vs. 2.2% in October, ex-autos rose 3.6% vs. 2.0% in October, and the control group rose 4.9% vs. 3.2% in October. Of note, the 4.9% y/y reading for the control group was the strongest since February. Consumption continues to hold up relatively well despite softening in some consumer confidence measures. We continue to believe that as long as jobs are being created, consumption should remain robust.

Indeed, the labor market remains firm. Initial jobless claims came in at 202k vs. 220k expected and a revised 221k (was 220k) last week. That's the lowest for initial claims since the October BLS survey week containing the 12th of the month. Of note, next week's initial claims will be for the BLS survey week for this month. If this downward momentum in claims persists, we should get another solid jobs report for December. In turn, that should continue to help support consumption. Elsewhere, continuing claims rose to 1.876 mln vs. 1.879 expected and a revised 1.856 mln (was 1.861 mln) last week. There's no Bloomberg consensus yet for December NFP but its whisper number stands at 170k. Yes, jobs growth has slowed but not by a whole lot. Another number near 200k (November was 199k) will surely test the dovish Fed narrative.

The U.S. economy itself remains relatively robust. The Atlanta Fed’s GDPNow model is now tracking Q4 growth at 2.6% SAAR vs. 1.2% previously. Next update will be next Tuesday. This is now above the NY Fed Nowcast model that is tracking 2.3% SAAR. This model will be updated today and likely to see an upward revision too. Readings early in the quarter are typically volatile as more and more data are incorporated into the models. Lastly, we’d note that the current early reads are based largely on strike-depressed October data. If November data continue to bounce back as we expect, the Q4 growth estimates should rise accordingly.

Surveys for December will start rolling out. S&P Global PMIs will be reported today. Manufacturing is expected at 49.5 vs. 49.4 in October, services is expected at 50.7 vs. 50.8 in October, and the composite is expected at 50.5 vs. 50.7 in October. Empire manufacturing survey kicks things off for the regional Fed surveys today and is expected at 2.1 vs. 9.1 in November. November IP will also be reported and is expected at 0.3% m/m vs. -0.6% in October.

October TIC data will also be reported. China has been steadily shedding its UST holdings. However, recent MOF data suggest Japan is starting to scoop up USTs again. This may change when the BOJ finally hikes rates but for now, Japan investors are still chasing higher yields abroad.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank delivered the widely expected hold. The bank noted that inflation has dropped in recent months but is likely to pick up temporarily in the near-term. It said that current rates must be maintained for a sufficiently long time. Lastly, the ECB said it would fully reinvest maturing PEPP bonds in H1 2024 but then reduce the portfolio by EUR7.5 bln per month on average in H2 2024. Updated macro forecasts were released. Inflation and growth forecasts were revised as we expected.

President Lagarde used her press conference to push back against the dovish narrative. She said the ECB should “absolutely not lower our guard” and noted that it needs to see more data. Lagarde said wage data the bank has not isn’t declining and it doesn’t yet have evidence of a sustainable slowdown. Lastly and most importantly, Lagarde stressed that the ECB did not discuss rate cuts at all.

This was a hawkish hold with an early start to QT but easing expectations remain elevated. WIRP suggests 10% odds of a cut January 25, rising to 55% for March 7 and fully priced in for April 11. Six cuts by the end of next year are now priced in vs. five as the start of this week. Officials continue to push back against easing expectations. Holzmann said “The probability that we are at the terminal rate has increased, but there still is a rest probability.” Villeroy said “Barring shocks or surprises, rate hikes are over - but that doesn’t mean a quick rate cut. We are not guided by a calendar, we are guided by data.” Muller said, “There is no reason to consider either an additional increase in interest rates or a reduction in interest rates in the near future.”

Eurozone preliminary December PMIs were soft. Headline manufacturing came in at 44.2 vs. 44.6 expected and 44.2 in October, services came in at 48.1 vs. 49.0 expected and 48.7 in October, and the composite came in at 47.0 vs. 48.0 expected and 47.6 in October. Given the improvements seen in most of the major economy PMIs so far today, weakness in the eurozone is noteworthy. Looking at the country breakdown, the German composite came in 46.7 vs. 48.2 expected and 47.8 in October and the French composite came in at 43.7 vs. 45.0 expected and 44.6 in October. Italy and Spain will be reported with the final November PMIs in early January.

The Bank of England delivered the widely expected hold. The vote was 6-3 for the second straight meeting, with the three dissents (Greene, Mann, and Haskel again) still in favor of a 25 bp hike. This clearly shows that there was no dovish pivot whatsoever at the BOE. Governor Bailey was hawkish, stressing that it was too early to speculate on rate cuts soon. He hoped that the bank was at the top of the rate cycle but couldn’t definitively say that rates have peaked. Bailey highlighted differences between the U.S. and U.K. positions. He added that markets have to form a view and that the BOE is more cautious. Bailey delivered a direct rebuke to the Fed's dovish pivot.

Yet BOE easing expectations remain elevated. WIRP no odds of a cut February 1, rising to 25% March 21 and nearly priced in May 9 vs. June 20 at the start of this week. Four cuts are priced in by the end of 2024 vs. three at the start of this week.

U.K. preliminary December PMIs were firm. Manufacturing came in at 46.4 vs. 47.5 expected and 47.2 in October, services came in at 52.7 vs. 51.0 expected and 50.9 in October, and the composite came in at 51.7 vs. 51.0 expected and 50.7 in October. This was the second straight month above 50 for the composite PMI and the highest since June.

ASIA

Japan preliminary December PMIs were firm. Manufacturing came in at 47.7 vs. 48.3 in November, services came in at 52.0 vs. 50.8 in November, and the composite came in at 50.4 vs. 49.6 in November. The November composite reading was the first reading below 50 since December 2022 and so the recovery back above 50 is welcome. Of note, manufacturing was the lowest since February and matched the pandemic low from September 2020.

Australia preliminary December PMIs were also firm. Manufacturing came in at 47.8 vs. 47.7 in November, services came in at 47.6 vs. 46.0 in November, and the composite came in at 47.4 vs. 46.2 in November. With China continuing to struggle, we do not expect much of a recovery in Australia’s economy near-term.

China reported mixed November data. IP came in at 6.6% y/y vs. 5.7% expected and 4.6% in October, while retail sales came in at 10.1% y/y vs. 12.5% expected and 7.6% in October. Both of these readings were flattered by low base effects caused by lockdowns last year. FAI came in a tick lower than expected at 2.9% YTD, while property investment came in a tick higher than expected at -9.5% YTD.

PBOC kept key 1-year MLF rate steady at 2.5%, as expected. However, it injected a record CNY1.45 trln of 1-yar liquidity vs. CNY975 bln expected. Policymakers also relaxed some minor homebuying limits in Beijing and Shanghai, continuing the modest efforts so far to help support the property sector.