• Fed officials are pushing back against intensifying easing expectations; U.S. yields remains under pressure; Chilean voters rejected the proposed Constitution
  
• ECB easing expectations remain elevated despite the hawkish hold; Germany reported a soft December IFO business climate survey
  
• The two-day BOJ meeting began today and ends tomorrow with an expected hold; Singapore reported mixed November trade data

The dollar has steadied as the new week begins. DXY is trading flat near 102.532 as the recovery off the post-FOMC lows continues. The euro is trading higher near $1.0915 while sterling is trading lower near $1.2660. USD/JPY is trading higher near 142.65 ahead of the BOJ decision tomorrow (see below). Last week’s dovish Fed decision was a game changer even as Fed officials are attempting damage control (see below). Despite strong pushback from the ECB and BOE last week, easing expectations continue to spread to virtually every other major central bank and this has likely helped the dollar get some limited traction. However, a sustained dollar recovery will really come down to the U.S. data. Over the past two weeks, 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 vulnerable.

AMERICAS

Fed officials are pushing back against intensifying easing expectations. Williams said, “we aren’t really talking about rate cuts” and that it is premature to be thinking about a March cut. Indeed, Williams added that the Fed needs to ask if policy is sufficiently restricting and be ready to tighten policy further. Elsewhere, Bostic said he sees two cuts in 2024, likely starting in Q3. If the Fed had been paying attention, it would have known markets would react like this to what was a very dovish message. This is clearly an effort at damage control but really, we find it very disconcerting that the Fed didn't think about the repercussions of Wednesday's messaging. Goolsbee speaks today.

Fed easing expectations have intensified. WIRP suggests 10% odds of a cut January 31 and rising to nearly 85% March 20 and fully priced in May 1. Nearly six cuts are priced in by end-2024 vs. four at the start of last week. While we still strongly disagree with this market pricing, it will now take a much longer string of stronger data to shift the narrative than what was needed before the Fed’s dovish performance last week.

U.S. yields remains under pressure. The 30-year yields traded at a new cycle low today near 3.99% today and is nearing a test of the mid-July low near 3.83%, while the 10-year traded near 3.89% today and is nearing a test of the mid-July low near 3.72%. The continued drop in yields will lead to looser financial conditions at a time when the economy is still growing above trend and inflation remains well above the 2% target.

Only minor data will be reported today. New York Fed services survey will be reported and stood at -11.9 in November. December NAHB housing market index will be reported and is expected at 37 vs. 34 in November.

Chilean voters rejected the proposed Constitution. The vote was 56-44% and broadly in line with recent polls. This second attempt at a new Constitution was somewhat right-leaning after the initial left-leaning proposal was rejected by voters last year. President Boric said “I want to be clear. This vote closes the constitutional process during the rest of my mandate.” If so, the divisive Pinochet-era Constitution will remain in place until the next leader makes another attempt. In some ways, keeping the status quo may be good for markets but we suspect that popular discontent will continue to simmer.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank easing expectations remain elevated despite the hawkish hold. WIRP suggests 10% odds of a cut January 25, rising to 55% for March 7 and fully priced in April 11. Six cuts by the end of next year are now priced in vs. five as the start of last week. Officials continue to push back against easing expectations. Vasle said “Market expectations for interest rates cuts are premature in my view, both with regard to the start of cuts and the totality of moves.” Vujcic, Wunsch, Schnabel, and Lane all speak later today.

Germany reported a soft December IFO business climate survey. Headline came in at 86.4 vs. 87.7 expected and a revised 87.2 (was 87.3) in November. This was the first decline since August and was driven by a drop in current assessment to 88.5 vs. 89.5 expected and 89.4 in November as well as a drop in expectations to 84.3 vs. 85.6 expected and a revised 85.1 (was 85.2) in November. IFO official said “The economy is weak, and we’ve been waiting for a recovery now for some time, and it’s not coming. This is worrying.” January GfK consumer confidence will be reported Wednesday and is expected at -27.0 vs. -27.8 in December.

ASIA

The two-day Bank of Japan meeting began today and ends tomorrow with an expected hold. After some senior officials spoke about normalizing rates this month, liftoff expectations picked up but have since fallen again as the data have come in soft and other officials pushed back. Weak 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. Updated forecasts will come at the January 22-23 meeting. WIRP suggests 40% odds of a hike then, rising to 65% March 18-19 and nearly 95% April 25-26. Of note, the yen tends to weaken on BOJ decision days. It has done so for the past five and six of the past seven.

Singapore reported mixed November trade data. NODX came in at 1.0% y/y vs. 1.5% expected and a revised -3.5% (was -3.4%) in October. This was the first y/y gain since September 2022 but was due in large part to low base effects. Total exports were steady at 2.8% y/y, while electronics exports weakened to -12.7% y/y vs. -5.6% in October. Regional trade and activity have stabilized but has yet to mount a significant recovery.