• The strong jobs report Friday brings the dovish Fed narrative into question; UST supply could also help push yields higher; the U.S. economy remains relatively robust
  
• Easing expectations remain elevated ahead of the ECB and BOE meetings
  
• Reports suggest the BOJ sees little need to hike rates at its December 18-19 meeting; Japan MOF reported its Q4 BSI survey; Japan November machine tool orders remained soft

The dollar has steadied as an eventful week begins. DXY has held on to Friday’s gains and is trading flat near 104.018. The yen is once again the big mover with USD/JPY trading higher near 146.20 on reports that the BOJ sees little need to hike rates next week (see below). The euro is trading flat near $1.0770 ahead of the Thursday ECB decision, while sterling is trading higher near $1.2580 ahead of the Thursday BOE decision. At this point, it will likely take a string of firm U.S. data to truly challenge the current dovish Fed narrative. Last Friday’s jobs data is a good start, while elevated CPI readings would likely add to the upward pressure on U.S. yields. We continue to stress that the U.S. economy continues to grow at or above trend even as the rest of the world slips into recession, while price pressures remain persistent enough that the Fed will not be able to cut rates as soon and by as much as the markets think. The dollar should see another leg higher when market expectations for the Fed finally shift, though that may be a 2024 story.

AMERICAS

The strong jobs report Friday brings the dovish Fed narrative into question. After sinking all week, U.S. yields finally recovered. The 10-year yield traded as low as 4.10% last week before closing near 4.23% and is now trading near 4.26%, while the 30-year yield traded as low as 4.21% last week before closing near 4.30% and is now trading near 4.34%. The 2-year yield traded as low as 4.54% this month before closing near 4.72% and is now trading near 4.75%. We look for a double whammy of elevated core CPI inflation and a hawkish hold from the Fed to help keep this move higher in yields going this week.

UST supply could also help push yields higher. The Treasury auctions $50 bln of 3-year notes and $37 bln of 10-year notes today, followed by $21 bln of 30-year bonds Tuesday. Indirect bidders took 64.6% of the previous 3-year auction while the bid/cover ratio was 2.67 for a yield of 4.701%. Elsewhere, indirect bidders took 69.7% of the previous 10-year auction while the bid/cover ratio was 2.45 for a yield of 4.519%. Investors may remain cautious bidding for USTs ahead of the inflation data and FOMC meeting.

The U.S. economy remains relatively robust. The Atlanta Fed’s GDPNow model is now tracking Q4 growth at 1.2% SAAR vs. 1.3% previously. Next update will be Thursday. This stands in contrast to the NY Fed Nowcast model that is still tracking 2.3% SAAR. This model will be updated Friday. 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 estimates should rise accordingly.

EUROPE/MIDDLE EAST/AFRICA

Easing expectations remain elevated ahead of the European Central Bank meeting. The decision Thursday will most likely be a widely expected hold. The bank is likely to continue pushing back against market easing expectations. WIRP suggests less than 5% odds of a cut this week, rising to 10% January 25, 65% for March 7 and fully priced in for April 11. Five cuts by the end of next year are fully priced in.

Easing expectations also remain elevated ahead of the Bank of England meeting. Here too, the decision Thursday will most likely be a widely expected hold. The bank is also likely to push back against market easing expectations. WIRP suggests no odds of a hike this week, rising modestly to top out near 5% February 1. After that, rate cuts are priced in. WIRP suggests 10% odds of a cut March 21, rising to nearly 45% May 9 and nearly 90% June 20. Three cuts are priced in by the end of 2024.

ASIA

Reports suggest the Bank of Japan sees little need to hike rates at its December 18-19 meeting. Sources say officials have yet to see enough evidence of wage growth that would support sustainable inflation at the 2% target. Those officials reportedly see very little cost to waiting for more information. WIRP now suggests less than 5% odds of a move this month vs. 35% last week, as soft data provided a bit of a reality check for the markets. Weak October wage growth, lower than expected November Tokyo CPI data, and downward revisions to Q3 GDP data all argue for caution in removing accommodation too soon. Still, expected Bank of Japan liftoff remains at April 26 vs. June 14 at the start of last week.

Japan Ministry of Finance reported its Q4 BSI survey. Large manufacturing outlook fell to 4.8 vs. 5.8 in Q3, while large all industry outlook rose to 5.7 vs. 5.4 in Q3. In terms of domestic economic conditions, large manufacturing fell to 5.0 vs. 10.8 in Q3, while large all industry fell to 7.4 vs. 13.3 in Q3, which confirms recent weakness in the data. The economy hit a soft patch in Q3, and it appears to be carrying over into Q4. The BSI readings had been improving over the course of this year, but further gains will be difficult. BOJ reports its Q4 Tankan survey tomorrow and the BSI survey points to downside risks.

Japan November machine tool orders remained soft. Total orders came in at -13.6% y/y vs. -20.6% in October. However, foreign orders came in at -6.0% y/y while domestic orders came in at 28.5% y/y. October core machine orders will be reported Thursday and are expected at -5.7% y/y vs. -2.2% in September.