• Fed Chair Powell delivered a hawkish message Friday; the dovish Fed narrative is likely to keep the dollar under pressure near-term; the U.S. economy remains robust
  
• Some ECB officials remain cautious; Switzerland November CPI cooled; Riksbank released minutes from its November 23 meeting; Turkey reported November CPI
  
• Fitch warned that BOJ losses on its JGB holdings from policy normalization could hurt the sovereign rating

The dollar has steadied as a key data week begins. DXY is trading slightly higher near 103.335 but so far has been unable to break decisively above the 200-day moving average near 103.579 today. The euro is trading flat near $1.0880 while sterling is trading lower near $1.2680. USD/JPY is trading lower near 146.50, the lowest since mid-September and on track to test the September 1 low near 144.45. Powell pushed back against the dovish Fed narrative Friday but to little avail (see below). At this point, it will likely take a string of firm U.S. data to truly challenge the current dovish Fed narrative. 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. That said, the dollar remains vulnerable until we see a shift in market expectations for the Fed and that may be a 2024 story.

AMERICA

Fed Chair Powell delivered a hawkish message Friday. While he said all the right things, we believe it is far too late for the Fed to undertake any sort of damage control now. Rather, it will be up to the data to do the talking for the Fed and this Friday’s jobs report will be key. The media embargo went into effect at midnight Friday and so there will be no Fed speakers until Powell’s pos-decision press conference December 13. WIRP suggests no change this month but after that it’s all about the cuts. There are 15% odds of a cut January 31, rising to nearly 70% March 20 and fully priced in for May 1 vs. June 12 at the start of last week. Five cuts are fully priced in by end-2024. Needless to say, this isn’t happening.

The dovish Fed narrative is likely to keep the dollar under pressure near-term. U.S. yields traded Friday at the lowest since September, which has added to very loose financial conditions. The Chicago Fed’s weekly measure through November 24 were the loosest since early February 2022. Last week, yields fell, equities rose, spreads narrowed, and the dollar weakened and so conditions likely loosened again through December 1, which will be reported Wednesday.

No wonder the U.S. economy remains robust. The New York Fed’s Nowcast model is now tracking Q4 growth at 2.3% SAAR. This stands in stark contrast to the Atlanta Fed’s GDPNow model, which is tracking Q4 growth at 1.2% SAAR vs. 1.8% previously. Next update will be Wednesday. 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 bounce back as we expect, the Q4 estimates should rise accordingly. Today, only October factory orders will be reported. Total orders are expected at -3.0% m/m vs. 2.8% in September.

EUROPE/MIDDLE EAST/AFRICA

Some European Central Bank officials remain cautious. Guindos warned that “Unit labor costs are increasing in Europe and that is one of the concerns regarding the future evolution of inflation. We can’t declare victory.” Over the weekend, Nagel warned that “A scenario of an escalation of geopolitical tensions could imply higher inflation,” the newspaper cited him as saying. “It would be way too early to declare victory over high inflation rates.” Yet ECB easing expectations have picked up. WIRP suggests 5% odds of a cut December 14, rising to 20% January 25, 75% priced in for March 7 and fully priced in for April 11 vs. June 6 at the start of last week. A fifth cut by the end of next year is pretty much priced in.

Switzerland November CPI cooled. Headline came in at 1.4% y/y vs. 1.7% expected and actual in October, while core fell a tock to 1.4% y/y. This is the lowest headline reading since October 2021 and the sixth straight month that it has been below the 2% target. At the last policy meeting September 21, the Swiss National Bank unexpectedly kept rates steady at 1.75% vs. an expected 25 bp hike. The bank said that "From today's perspective, it cannot be ruled out that a further tightening of monetary policy may become necessary to ensure price stability over the medium term.” President Jordan said the battle against inflation is not yet over and that the bank is closely monitoring second round effects but added that “we could afford to take a break from hikes.” The market only sees easing ahead. WIRP suggests nearly 30% odds of a cut December 14, rising to nearly 85% March 21 and fully priced in for June 20. A second cut is fully priced in for September 26.

Riksbank released minutes from its November 23 meeting. At that meeting, the bank delivered a dovish surprise and kept rates steady at 4.0% vs. an expected 25 bp hike. The minutes show some confidence that previous rate hikes were slowing the economy, as “The labor market is slowing down from a strong initial position. Forward-looking indicators, such as companies’ price plans, also point to inflation continuing to fall.” However, the bank warned that “Services prices are still increasing at a rapid pace and although the krona has appreciated since September, it is still assessed to be unjustifiably weak.” Lastly, the bank said it was prepared to hike again if needed and underscored the need for policy to remain restrictive. The swaps market is pricing in steady rates over the next three months, followed by 25 bp of easing over the subsequent three months.

Turkey reported November CPI. Headline came in at 61.98% y/y vs. 62.60% expected and 61.36% in November, while core came in at 69.89% y/y vs. 71.40% expected and 69.76% in October. Headline reaccelerated to the highest since December 2022. At the last policy meeting November 23, the central bank delivered a hawkish surprise and hiked rates 500 bp to 4.0% vs. 250 bp expected. However, it said that “The current level of monetary tightness is significantly close to the level required to establish the disinflation course. Accordingly, the pace of monetary tightening will slow down and the tightening cycle will be completed in a short period of time.” The swaps market is pricing in no more rate hikes in this cycle, which we do not think is enough to lower inflation and stabilize the lira. Next policy meeting is December 21 and is the lira continues to weaken, the bank will have to deliver another rate hike.

ASIA

Fitch warned that BOJ losses on its JGB holdings from policy normalization couldhurt the sovereign rating. While those losses would likely be limited to the BOJ’s contribution to the budget, the rating agency noted that even a “relatively modest” boost to the deficit could be significant for Japan’s sovereign rating as interest costs rise. Of note, Fitch has Japan at A, one notch below S&P at A+ and Moody’s at A1. Fitch said its base case is for BOJ to maintain ultra-loose policy for “the next few years” but sees the balance of risks skewed toward higher inflation and faster tightening. We concur but note that BOJ liftoff expectations keep getting pushed out. At the end of September, the market was pricing in liftoff in March; by early November, it was seen in April; by late November, it was seen in June; now, liftoff is priced in for July. These odds will ebb and flow with the data and Japan is going through a soft patch now.