• The Fed narrative has clearly shifted more dovish after Powell’s speech last week; November ISM services PMI will be the highlight today
  
• ECB tightening expectations have solidified; final November services and composite PMI readings were virtually unchanged; eurozone reported soft October retail sales; the CBI set forth a dire outlook for the U.K.; Turkey reported November CPI
  
• Japan and Australia reported slightly improved final November services and composite PMI readings; Caixin reported soft November services and composite PMI readings
  

The dollar is steady as markets await fresh drivers. DXY is flat near 104.58 after trading at a new cycle low today near 104.113. After the break below the August 10 low near 104.636, the mid-June low near 103.418 is the next target. The euro traded at a new cycle high today near $1.0585 and is on track to test the June 27 high near $1.0615, while sterling traded at a new cycle high near $1.2345 today and is on track to rest its June 16 high near $1.2405. USD/JPY is trading near 135.40 after testing its 200-day moving average near 134.60 today and remains on track to test the August 2 low near 130.40. While we still believe the fundamental outlook favors the dollar, we acknowledge that near-term dollar weakness is likely to continue after Powell’s unexpected dovish turn. If the U.S. data continue to weaken, that dovish Fed narrative will only get stronger.

AMERICAS

The Fed narrative has clearly shifted more dovish after Powell’s speech last week. WIRP suggests that a 50 bp hike December 14 is fully priced in, with only around 5% odds of a larger 75 bp move. The swaps market is pricing in a peak policy rate of 5.0% and no longer sees risks of a higher 5.25% peak. At midnight last Friday, the media embargo went into effect and so there will be no Fed speakers until Chair Powell’s post-decision press conference December 14. The dollar has often weakened during these quiet periods this year due to the absence of any hawkish Fed rhetoric to push back against the market’s more dovish take on the Fed.

November ISM services PMI will be the highlight today. All of the other surveys have shown weakness picking up last month and so markets will look for ISM services PMI for confirmation. Headline is expected at 53.3 vs. 54.4 in October. Keep an eye on the components. Prices paid in services remains elevated, unlike the steady drop we’ve seen in manufacturing. The economy remains resilient. The Atlanta Fed’s GDPNow model is currently tracking 2.8% SAAR growth in Q4, down from 4.3% previously but still quite respectable. With more and more Q4 data being reported, expect this reading to be very volatile in the coming weeks. October factory orders will also be reported and are expected at 0.7% m/m vs. 0.3% in September.

EUROPE/MIDDLE EAST/AFRICA

ECB tightening expectations have solidified. Makhlouf said a 50 bp hike this month “is about where we’ll end up” but did not rule out a bigger move, depending on the data. Villeroy also said he favors a 50 bp hike in December and added that it’s too early to discuss the likely terminal rate. No wonder WIRP suggests a 75 bp hike December 15 is only around 15% priced in, down from 45% at the start of last week and fully priced in right after the October decision. Elsewhere, the swaps market is still pricing in a peak policy rate near 3.0% vs. 3.5-3.75% after the October decision. We think there is still room for ECB tightening expectations to fall further and we stand by our call that the ECB will pivot and cut rates before the Fed does.

Final November services and composite PMI readings were virtually unchanged. Headline services fell a tick from the preliminary to 48.5 but the composite remained steady at 47.8. Both Germany and France saw their composite PMI revised down a tick to 46.3 and 48.7, respectively. Italy and Spain reported for the first time and their composite PMIs improved sharply from October to 48.9 and 49.6, respectively. It’s way too soon to get excited about these modest improvements in the monthly readings when all signs point to recession ahead.

Eurozone reported soft October retail sales. Sales came in a tick lower than expected at -1.8% m/m vs. a revised 0.8% (was 0.4%) in September, while the y/y rate also came in a tick lower than expected at -2.7% vs. a revised flat (was -0.6%) in September. Italy reports October retail sales Wednesday. Sales are expected at -0.5% m/m vs. 0.5% in September. If so, the y/y rate would likely fall a percentage point or so from 4.1% in September.

The Confederation of British Industry set forth a dire outlook for the U.K. It warned that the U.K. economy faces a decade of lost growth unless the government takes action in the key areas of investment tax relief, the Northern Ireland protocol, and the shrinking workforce. In its latest forecasts, the CBI said the economy has already fallen into a “short and shallow” recession that will put business investment 9% below 2019 levels and productivity 2% below its pre-pandemic trend by the end of 2024. The CBI forecasts unemployment to rise by around 500,000 next year, pushing the rate up to 5.0% from 3.6% currently, while inflation is forecast to remain above target at 2.6% by end-2024. Not surprisingly, Danker said the government can restore confidence in U.K. industry through massive tax breaks on investment.

Turkey reported November CPI. Headline came in at 84.39% y/y vs. 84.80% expected and 85.51% in October, while core came in at 68.91% y/y vs. 70.80% expected and 70.45% in October. This was the first deceleration in headline since May 2021 but remains well above the 3-7% target range. At the last policy meeting November 24, the central bank rates 150 bp to 9.0% and said that “the current policy rate is adequate and decided to end the rate-cut cycle that started in August.” It promised additional measures “supporting the effective transmission” of monetary policy, suggesting more macroprudential policies will be seen. Even with the easing cycle ending, the damage has been done and inflation is likely to remain elevated without a monetary policy anchor.

ASIA

Japan reported slightly improved final November services and composite PMI readings. The services PMI was revised to 50.3 vs. 50.0 preliminary, but the composite remained steady at 48.9. Still, the overall risks to the economy remain tilted to the downside and so we expect the Bank of Japan to maintain its current accommodative stance for now. Next policy meeting is December 19-20 and no change is expected then.

Australia also reported slightly improved final November services and composite PMI readings. The services PMI was revised to 47.6 vs. 47.2 preliminary, which helped drag the composite up to 48.0 vs. 47.7 preliminary. Reserve Bank of Australia meets tomorrow and is expected to hike rates 25 bp to 3.10%. After October CPI data came in soft last week, WIRP now suggests only around 60% odds of a 25 bp hike vs. 70% at the start of last week, while the swaps market is pricing in a peak policy rate near 3.50%, down from 4.10% at the start of last week.

Caixin reported soft November services and composite PMI readings. Services came in at 46.7 vs. 48.0 expected and 48.4 in October, which helped drag the composite down to 47.0 vs. 48.3 in October. This was the lowest since May and mirrors the drop in the official composite PMI to 47.1 in November. However, optimism on China reopening is running high as more and more cities relax Covid Zero policies. Over the weekend, testing requirements were eased in Shanghai, Hangzhou, Shenzhen, and Dalian. Newswire reports suggest China may announce ten additional Covid-related measures as early as this Wednesday. The relaxation of policies coincides with a drop in daily Covid infections to the lowest in nearly two weeks.