The majors were mixed last week as the dollar mounted a bit of a comeback. CHF, NZD, and AUD outperformed while NOK, JPY, and CAD underperformed. The backdrop for risk remains rocky, with many major central banks continuing the aggressive tightening process this week. All eyes are on the Fed and we expect it to deliver a very hawkish message. We also see upside risks to CPI data and so the dollar may be able to eke out some more gains.

AMERICAS

The two-day FOMC meeting ends Wednesday. WIRP suggests that a 50 bp hike December 14 is fully priced in, with only around 10% odds of a larger 75 bp move. The swaps market is pricing in a peak policy rate of 5.0%, with very low odds of a higher 5.25% peak. Looking ahead, WIRP suggests around 60% odds of a 50 bp move February 1 and then around 75% odds of a final 25 bp hike in Q2. As always, Powell’s press conference is key and we expect a more hawkish tone than what he delivered to the Brookings Institution last month.

The Fed narrative remains too dovish. With both AHE and core PCE flat-lining near 5% for most of this year, we don’t think this expected tightening path will get inflation back to target, not when the labor market remains so firm and consumption is holding up. Furthermore, the swaps market continues to price in an easing cycle in H2 2023. This seems highly unlikely and so the mispricing continues.

New forecasts will be released. Updated macro forecasts are likely to move closer to market consensus for higher inflation, slower growth, and higher unemployment. Powell has already confirmed that we will see a hawkish shift the December Dot Plots. How hawkish? We believe the 2023 plot is likely to move up to 5.125% from 4.625% in September. 2024 is tricky but we would expect a move up to 4.625% from 3.875% in September, signaling some easing from a higher peak but not by a lot. 2025 should also move up to 3.625% from 2.875% in September.

The data highlight will be November CPI Tuesday. Headline is expected at 7.3% y/y vs. 7.7% in October, while core is expected at 6.1% y/y vs. 6.3% in October. Last week, PPI came in higher than expected and confirmed our concerns that inflation is likely to prove to be much stickier than the markets expect. We see upside risks for CPI this week, especially since last month’s lower than expected readings were due to a statistical quirk.

Retail sales data Thursday will also be important. Headline is expected at -0.2% m/m vs. 1.3% in October, while sales ex-autos are expected at 0.2% m/m vs. 1.3% in October. The so-called control group used for GDP calculations is expected at -0.1% m/m vs. 0.7% in October. For now, consumption continues to hold up. Of note, the Atlanta Fed’s GDPNow model is currently tracking 3.2% SAAR growth in Q4, down from the previous estimate of 3.4% SAAR. The next model update will be Thursday.

We get our first survey readings for December. Regional Fed manufacturing surveys kick off with the Empire and Philly Fed surveys Thursday. Empire is expected at -0.5 vs. 4.5 in November, while Philly Fed is expected at -10.0 vs. -19.4 in November. November IP will also be reported Thursday and is expected at 0.1% m/m vs. -0.1% in October. S&P Global then reports its preliminary PMIs Friday. Manufacturing is expected at 47.9 vs. 47.7 in November, services is expected at 46.5 vs. 46.2 in November, and the composite is expected at 46.8 vs. 46.4 in November. Of note, the S&P Global readings have been weaker than ISM readings in recent months.

Other minor data will be reported. November budget statement will be reported Monday. November NFIB small business optimism and real average hourly earnings will be reported Tuesday. November import/export prices will be reported Wednesday. Weekly jobless claims, October business inventories, and October TIC data will be reported Thursday.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank meets Thursday and is expected to hike rates 50 bp to 2.5%. WIRP suggests a 50 bp hike is fully priced in, with only 20% odds of a larger 75 bp move. Elsewhere, the swaps market is still pricing in a peak policy rate near 3.0%, down from 3.5-3.75% after the October decision. New forecasts will be released. Of course, President Lagarde’s press conference will be key and she is likely to signal another hike at the next meeting February 2. That said, 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. Ahead of the decision, Elderson speaks Wednesday. After the decision, Holzmann and Centeno speak Friday.

Further details about Quantitative Tightening are expected. The pace and timing are key. President Lagarde favors what she calls a “measured and predictable” approach, which suggests a strategy similar to the Fed that would set monthly ceiling for balance sheet runoff that increases over time. We do not think the ECB is contemplating outright bond sales as it could prove to be too disruptive. In terms of timing, QT starting at the March 16 meeting may prove to be the best bet as updated macro forecasts will be released then. The bank will also have a better idea of how the eurozone economy fared during the risky winter months, when energy prices could again prove disruptive. Ahead of that, the February 2 meeting would provide the ECB with an opportunity to fine tune its policy plans.

Eurozone countries will report some key data. Italy reports October IP Tuesday and is expected at -0.3% m/m vs. -1.8% in September. Eurozone-wide IP will be reported Wednesday and is expected at -1.5% m/m vs. 0.9% in September. Germany reports December ZEW survey Tuesday. Expectations are expected at -25.7 vs. -36.7 in November, while current situation is expected at -57.0 vs. -64.5 in November. France reports December business and manufacturing confidence Thursday.

Eurozone preliminary December PMIs will be reported Friday. Headline manufacturing PMI is expected to remain steady at 47.1, services PMI is expected to remain steady at 48.5, and the composite PMI is expected to rise two ticks to 48.0. Looking at the country breakdown, the German composite is expected to rise two ticks to 46.5 and the French composite is expected to remain steady at 48.7. Italy and Spain will be reported along with the final PMI readings in early January.

The Bank of England meets Thursday and is expected to hike rates 50 bp to 3.5%. WIRP suggests a 50 bp hike December 15 is about 90% priced in, with no odds of a larger 75 bp hike. The swaps market is still pricing in a peak policy rate between 4.5-4.75%, down sharply from 6.25% right after the mini-budget in late September. Updated macro forecasts won’t come until the February 2 meeting. Of note, November CPI data will be reported Wednesday. Headline is expected at 10.9% y/y vs. 11.1% in October, core is expected to remain steady at 6.5% y/y, and CPIH is expected to remain steady at 9.6% y/y.

The monthly U.K. data dump arrives. October GDP, IP, services index, construction output, and trade will all be reported Monday. GDP is expected at 0.4% m/m vs. -0.6% in September, IP is expected flat m/m vs. 0.2% in September, services is expected at 0.5% m/m vs. -0.8% in September, construction is expected at 0.1% m/m vs. 0.4% in September, and trade is expected at -GBP3.5 bln vs. -GBP3.1 bln in September. Labor market data will be reported Tuesday. Average weekly earnings for the three months ended in October are expected at 6.1% y/y vs. 6.0% previously, while the unemployment rate is expected to rise a tick to 3.7%. December GfK consumer confidence will be reported Thursday and is expected at -43 vs. -44 in November.

The dump continues. November retail sales data and preliminary December PMIs will be reported Friday. Headline sales are expected at 0.3% m/m vs. 0.6% in October, while sales ex-auto fuel are expected at 0.3% m/m vs. 0.3% in October. Elsewhere, manufacturing PMI is expected to remain steady at 46.5, services is expected at 48.5 vs. 48.8 in November, and the composite is expected at 48.0 vs. 48.2 in November.

The Swiss National Bank meets Thursday and is expected to hike rates 50 bp to 1.0%. At the last meeting September 22, it hiked rates 75 bp to 0.5% and President Jordan said “It cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term,” adding that the bank remains willing to intervene in FX markets if needed and that the strong franc plays a key role in determining inflation . The updated forecasts didn’t suggest any greater urgency to tighten. However, the swaps market is pricing in a peak the policy rate peak near 1.5%, down from 2.0% after the September meeting.

Sweden reports November CPI Wednesday. Headline is expected at 11.6% y/y vs. 10.9% in October, CPIF is expected at 9.6% y/y vs. 9.3% in October, and CPIF ex-energy is expected at 8.2% y/y vs. 7.9% in October. If so, then targeted CPIF would nearly reverse October’s drop from the 9.7% peak in September and move it further above the 2% target. At the last policy meeting November 24, the Riksbank hiked rates 75 bp to 2.5%, as expected. Growth forecasts were cut and inflation forecasts were raised, while the expected rate path was bumped up slightly. The bank noted that “The forecast shows that the policy rate will probably be raised further at the beginning of next year and then be just below 3%.” Minutes from the meeting showed Governor Ingves and Deputy Governor Ohlsson had doubts as to whether planned rate hikes would be enough to tame inflation, while board member Martin Floden saw a chance for the bank to keep rates steady in early 2023. Next policy meeting is February 9 and will be led by incoming Governor Erik Thedeen after Ingves’ term ends December 31. WIRP suggests another 50 bp hike to 3.0% is nearly priced in, while the swaps market is pricing in a peak policy rate near 3.5%. November unemployment will be reported Friday.

Norges Bank meets Thursday and is expected to hike rates 25 bp to 2.75%. At the last meeting November 3, the bank delivered a dovish surprise and hiked rates 25 bp vs. 50 bp expected and said it would “most likely be raised further in December” without specifying the likely size. Norges Bank also noted then that “The policy rate has been raised markedly over a short period, and monetary policy is beginning to have a tightening effect on the economy. This may suggest a more gradual approach to policy rate setting.” Updated macro forecasts and expected rate path will be released at this meeting. Currently, the expected rate path sees the policy rate peaking near 3.0% in Q3 23. This is more hawkish than the swaps market, which sees the policy rate peaking near 2.5%. Of note, November CPI fell to 6.5% y/y from the 7.5% October peak. This is still well above the 2% target and so we believe that the rate path will remain steady and that market pricing will eventually move closer to the Norges Bank’s view. Ahead of the decision, October GDP will be reported Tuesday and November trade will be reported Thursday.

ASIA

Japan reports some key data. November PPI and machine tool orders will be reported Monday. October core machine orders will be reported Wednesday and are expected at 1.2% y/y vs. 2.9% in September. November trade data will be reported Thursday. Exports are expected at 19.7% y/y vs. 25.3% in October, while imports are expected at 27.0% y/y vs. 53.5% in October. The data show the economy slowing in recent months, which should keep the Bank of Japan on hold for now. Next policy meeting is December 19-20 and no change is expected then.

We get some important survey readings. BSI Q4 large manufacturing outlook will be reported Monday. This will be followed by the Q4 Tankan survey Wednesday. Large manufacturing index is expected at 7 vs. 8 in Q3, while large non-manufacturing index is expected at 16 vs. 14 in Q3. Elsewhere, large manufacturing outlook is expected at 7 vs. 9 in Q3, while large non-manufacturing outlook expected at 16 vs. 11 in Q3. All-industry capex is expected at 20.9% vs. 21.5% in Q3. Preliminary December PMIs will be reported Friday.

Australia highlight is the November jobs report Thursday. Consensus sees 11.0k jobs added vs. 32.2k in October, with the unemployment rate seen steady at 3.4%. Ahead of that, November CBA household spending, December Westpac consumer confidence, and November NAB business confidence will all be reported Tuesday. Preliminary December PMIs will be reported Friday. After the RBA hiked rates 25 bp last week, WIRP suggests only 45% odds of a 25 bp hike February 7, while the swaps market is pricing in a peak policy rate near 3.65%.

New Zealand reports some key Q3 data. Current account data will be reported Wednesday and is expected at -8.0% of GDP vs. -7.7% in Q2. GDP data will be reported Thursday. Growth is expected at 0.9% q/q vs. 1.7% in Q2, while the y/y rate is expected at 5.4% vs. 0.4% in Q2. For now, the robust economy and ongoing price pressures should keep the RBNZ on its tightening path. WIRP suggests a 50 bp hike to 4.75% February 22 is priced in, with nearly 55% odds of a larger 75 bp move. The swaps market is pricing in a peak policy rate between 5.25-5.5%.