- Fed Governor Waller went full dove ahead of the media blackout at midnight tonight; Treasury Secretary nominee Bessent said all the right things in his confirmation hearing; December retail sales data were mixed; November TIC data will be reported
- ECB account of the December 11-12 meeting confirmed more easing was in the pipeline; U.K. reported weak December retail sales; BOE will likely have to step up the pace of easing; Poland delivered a dovish hold yesterday
- China reported firm real sector data; China’s population shrank for the third straight year
The dollar Is holding steady ahead of the weekend. DXY is trading flat near 109.009 after three straight down days. The yen is underperforming, with USD/JPY trading higher near 155.65 after testing the 155 level earlier. Sterling is also underperforming after weak retail sales data (see below) and is trading lower near $1.2210, while the euro is trading flat near $1.305. Treasury Secretary nominee Scott Bessent said all the right things at his confirmation hearing yesterday (see below). More tariff noise is likely in the coming days and weeks but we continue to look through that and focus on the underlying fundamental backdrop, which remains unchanged. Simply put, the strong U.S. fundamental story of strong growth, elevated inflation, and a more hawkish Fed continues to favor higher U.S. yields and a stronger dollar.
AMERICAS
Fed Governor Waller went full dove ahead of the media blackout at midnight tonight. Yesterday, Waller said “The inflation data we got yesterday was very good. If we continue getting numbers like this, it’s reasonable to think rate cuts could happen in the first half of the year,” adding that he wouldn’t rule out a cut in March. He said that if inflations move lower, there may be more cuts than the market is pricing in, adding that 3-4 cuts this year were possible if the data cooperates. However, Waller admitted that "I may be a little more optimistic about inflation coming down than the rest of my colleagues." Besides Goolsbee, we don't think many on the FOMC share Waller's sanguine view on inflation.
Treasury Secretary nominee Bessent said all the right things in his confirmation hearing yesterday. Bessent pledged to protect the role of the dollar as the world’s reserve currency and spoke out in favor of Fed independence. He downplayed the pass-through of tariffs to consumers, noting studies that showed currency appreciation would act as on offset. This is a debatable point. On the need to extend the 2017 tax cuts, Bessent predicted ”economic calamity” if the cuts were allowed to expire. We disagree but the point is moot as it seems quite likely that the 2017 cuts will be extended and even expanded.
December retail sales data were mixed. Headline came in two ticks lower than expected at 0.4% m/m vs. a revised 0.8% (was 0.7%) in November and ex-autos came in a tick lower than expected at 0.4% m/m vs. 0.2% in November. More importantly, the so-called control group used for GDP calculations came in three ticks higher than expected at 0.7% m/m vs. 0.4% in November. In y/y terms, headline slowed two ticks to 3.9%, ex-autos slowed five ticks to 2.9%, and the control group slowed four ticks to 4.1%. Overall, consumer spending is supported by positive real wage growth, a healthy labor market, and strong household balance sheets.
Growth remains robust. The New York Fed's Nowcast model is tracking Q4 growth at 2.4% SAAR vs. 1.9% last week and Q1 growth at 2.7% SAAR vs. 2.2% last week and will be updated today. Elsewhere, the Atlanta Fed GDPNow model is tracking Q4 growth at 3.0% SAAR and will also be updated today after the data. December building permits, housing starts, and IP will all be reported.
November TIC data will be reported. We expect the U.S. to remain a magnet for foreign investment inflows. The U.S. Treasury auctions last week showed that the market was capable of absorbing heavy issuance at elevated yields, with indirect bidders (a proxy for foreign demand) taking a high share.
EUROPE/MIDDLE EAST/AFRICA
European Central Bank account of the December 11-12 meeting confirmed more easing was in the pipeline. The account noted that “if the baseline projection for inflation was confirmed over the next few months and quarters, a gradual dialing back of policy restrictiveness was seen as appropriate.” Still, the ECB is not about to crank up the pace of easing as the account pointed out that “some members noted that a case could be made for a 50 bp rate cut at the current meeting and would have favored more consideration being given to the possibility of such a larger cut.” However, “it was remarked that a 50 bp cut could be perceived as the ECB having a more negative view of the state of the economy than was actually the case.” Bottom line: the eurozone’s soggy growth outlook leaves plenty of room for the ECB to cut rates. The swaps market is pricing in 100 bp of total easing over next 12 months that would see the policy rate bottom around 2.00%.
U.K. reported weak December retail sales. Total retail sales volume fell -0.3% m/m vs. 0.4% expected and a revised 0.1% (was 0.2%) in November. Black Friday deals were captured in the December data but failed to encourage spending, which was dragged down by soft food and non-store sales. Ex-auto fuel fared even worse at -0.6% m/m vs. 0.3% expected and a revised 0.1% (was 0.3%) in November. Of note, the y/y comparisons were boosted by low base effects due to the different timing of Black Friday. The recent U.K. debt market sell-off threatens to further curtail consumption spending as more mortgage holders reduce spending in anticipation of paying higher mortgage rates. According to the Bank of England, around 800,000 fixed-rate mortgages currently with an interest rate of 3% or below are expected to be refinanced per year, on average, until the end of 2027.
The Bank of England will likely have to step up the pace of easing. The market has nearly priced in a 25 bp cut in February and almost 75 bp of total easing over the next 12 months (up from 50 bp earlier this week). Governor Bailey delivers a speech today titled “A Central Banker’s view of global challenges and expectations for the Bretton Woods Institutions’ response.” A text of the speech will be released ahead of time.
National Bank of Poland delivered a dovish hold yesterday. As was widely expected, the bank left rates at 5.75% and reiterated that “the current level of the NBP interest rates is conducive to meeting the NBP inflation target in the medium term.” However, the bank scrapped previous reference that “in the coming quarters inflation will remain markedly above the NBP inflation target,” paving the way for a rate cut over the next few months. The swaps market is pricing in 25 bp of easing over the next three months followed by another 25 bp of easing over the subsequent three months. Governor Glapinski will have an opportunity today to share his policy outlook and address the division within the MPC during his press conference after he unexpectedly pushed out his outlook for rate cuts to 2026 from mid-2025.
ASIA
China reported firm real sector data. Q4 GDP rose a tick lower than expected at 1.6% q/q vs. a revised 1.3% (was 0.9%) in Q3, while the y/y rate came in at 5.4% vs. 5.0% and 4.6% in Q3. On an annual basis, GDP growth just hit the government’s target of 5.0% for this year. Elsewhere, IP came in at 6.2% y/y vs. 5.4% expected and actual in November, while sales came in a tick higher than expected at 3.7% y/y vs. 3.0% in November. Fixed asset investment ex-rural slowed a tick to 3.2% YTD, while property investment slowed two ticks to -10.6% YTD. We remain skeptical that the stimulus measures announced so far will have much lasting impact on the economy. To escape the debt-deflation loop, Chinese policymakers need to ramp up fiscal measures to boost consumption.
China’s population shrank for the third straight year. Total population fell 1.39 mln to 1.408 bln in 2024 and is expected to fall again in 2025. Simply put, the demographics are yet another huge headwind for policymakers.
