The major currencies were mixed last week as markets finally recognized the likelihood that aggressive monetary tightening globally will continue well into next year. Global recession risks are rising and so the growth-oriented dollar bloc and Stockie underperformed. Cold weather is hitting Europe and the U.K. at a time when Qatar is threatening to cut off supplies to the EU over a corruption scandal and so we see risks of renewed economic stress. As a result, we suspect risk sentiment will remain sour going this week and going into year-end and should help underpin the dollar.
Plain and simple, the markets got a wakeup call last week. Not only did the Fed hike rates 50 bp, but so too did the European Central Bank, the Bank of England, and the Swiss National Bank. Norges Bank added a 25 bp hike for good measure, and all are expected to continue hiking well into 2023. With the growing realization that the world’s central banks are not going to reverse course at the first sign of economic weakness, markets are starting to price in rising recession risks next year. Bad news is no longer good news. Bad news is now…….bad news.
Markets are still digesting last week’s FOMC decision. After rising as high as 5.5% after the meeting, the terminal rate as seen by the swaps market fell back to just below 5.0%. Similarly, WIRP suggests a 50 bp hike February 1 is only 30% priced in, followed by a final 25 bp hike either March 22 or May 3. We cannot understand why the markets continue to fight the Fed. With the exception of some communications missteps here and there, Powell and company have been resolute about the need to take rates higher for longer. After the decision, several Fed officials confirmed this message. With regards to the latest Dot Plots, Williams said “it could be higher than what we’ve written down.” Elsewhere, Daly said “We still have a long way to go. We are far away from our price stability goal.” Although the media embargo has been lifted, there are no Fed speakers scheduled this week.
November core PCE Friday will be a major focus for the markets. Consensus sees 4.6% y/y vs. 5.0% in October. If so, it would be the second straight deceleration to the lowest since October 2021. That said, this is due in large part to high base effects from 2021. The Fed’s 2% target still seems a long way off. Indeed, we have always felt that getting core PCE from nearly 6% down to 4% is the easy part; getting it from 4% to the 2% target is the hard part and that is where the pain comes in.
November Chicago Fed National Activity Index Thursday will give us a good read on the current state of the economy. It came in at -0.05 in October, while the 3-month moving average came in at 0.09. A zero reading means the economy is growing at around trend. The continued resilience in the economy is noteworthy and suggests the Fed still has a lot more work to do in getting to the desired sub-trend growth. Recall that when that 3-month average moves below -0.7, that signals imminent recession and we are still well above that threshold. This series has taken on greater significance now that the 3-month to 10-year curve has inverted.
We get another revision to Q3 GDP Thursday. Consensus sees steady growth of 2.9% SAAR. Of course, this is old news. Looking ahead, the Atlanta Fed’s GDPNow model is currently tracking 2.8% SAAR growth in Q4, down from the previous estimate of 3.2% SAAR. The next model update will be Tuesday.
Weekly jobless claims Thursday will be in focus. That is because initial claims will be for the BLS survey week containing the 12th of the month, and are expected a 222k vs. 211k the previous week. Continuing claims are reported with a 1-week lag and so next week’s number will be for the BLS survey week. This week, they are expected at 1.685 mln vs. 1.671 mln the previous week. Current consensus for NFP stands at 223k vs. 263k in November, with the unemployment rate seen steady at 3.7% and average hourly earnings falling two ticks to 4.9% y/y.
Housing data are likely to show continued weakening. December NAHB housing market index will be reported Monday. November building permits (-2.1% m/m expected) and housing starts (-1.8% m/m expected) will be reported Tuesday. Existing home sales (-5.2% m/m expected) will be reported Wednesday. New home sales (-5.1% m/m expected) will be reported Friday.
Other minor data will be reported. Q3 current account data (-$223.5 bln expected) and December Conference Board consumer confidence (101.0 expected) will be reported Wednesday. December Kansas City Fed manufacturing survey (-6 expected) and November leading index (-0.5% m/m expected) will be reported Thursday. November durable goods orders will be reported Friday.
Canada reports some key data. October retail sales will be reported Tuesday. November CPI will be reported Wednesday. Headline is expected at 6.6% y/y vs. 6.9% in October. If so, this would be the lowest since February and would continue the deceleration from the 8.1% peak in June. October GDP will be reported Friday. Bank of Canada tightening expectations remain subdued. WIPR suggests odds of a 25 bp hike January 25 are only 50%, which is consistent with swaps market pricing in a peak policy rate between 4.25-4.5%.
Qatar is in the news and it’s not just the World Cup. Last week, Belgian police detained two EU lawmakers and several others linked to the European Parliament on charges that they accepted hundreds of thousands of euros from Qatar to influence their votes. The so-called “Qatargate” corruption scandal led the European Parliament to subsequently suspend the security passes of Qatari officials. In response, Qatar warned that this "will negatively affect regional and global security cooperation, as well as ongoing discussions around global energy poverty and security" while noting that it is an important supplier of liquefied natural gas to Europe. This comes just as cold weather is hitting Europe and the U.K. and so we see risks of renewed economic stress. As a result, we suspect risk sentiment will remain sour this week and going into year-end.
Germany provides most of the key eurozone data in a relatively quiet week. Germany reports December IFO survey Monday. Headline business climate is expected at 87.5 vs. 86.3 in November, driven by gains in both current assessment and expectations to 93.5 and 82.0, respectively. November PPI will be reported Tuesday and is expected at 30.6% y/y vs. 34.5% in October. January GfK consumer confidence will be reported Wednesday and is expected at -38.0 vs. -40.2 in December. Improved eurozone readings have come against a backdrop of relative warm weather and lower energy prices. Recent developments, if sustained, will surely challenge this more optimistic outlook.
Unlike the Fed, the market seems to believe the ECB. After Madame Lagarde’s masterful hawkish performance, the swaps market is now pricing in a peak near 3.75% vs. 3.0% at the start of last week. Elsewhere, WIRP suggests a 50 bp hike February 2 is priced in, with 10% odds of a larger 75 bp move. Another 50 bp hike is 75% priced in for March 16, followed by a 25 bp hike either May 4 or June 15. There are some odds of a final 25 bp hike that would take the deposit rate to 3.5%, up from 3.0% at the start of last week.
The U.K. has a quiet week. CBI releases its December surveys. Industrial trends survey will be reported Monday, with total orders expected at -9 vs. -5 in November. Distributive trades survey will be reported Wednesday, with retailing reported sales expected at -24 vs. -19 in November. November public sector net borrowing will also be reported Wednesday, with ex-banking groups expected at GBP14.8 bln vs. GDP13.5 bln in October. Q3 current account and final GDP data will be reported Thursday.
Bank of England tightening expectations remain subdued after last week’s dovish message. WIRP suggests a 50 bp hike February 2 is about 80% priced in, with no odds of a larger 75 bp hike. The swaps market back to pricing in a peak policy rate between 4.5-4.75% vs. 4.5% right after last week’s BOE decision but still down sharply from 6.25% right after the mini-budget in late September.
The two-day Bank of Japan meeting ends Tuesday. Another dovish hold is widely expected. Despite the recent chatter about a potential policy review next year, we believe it is way too early for the BOJ to commit to one now. Indeed, we believe such an announcement is unlikely during the remainder of Governor Kuroda’s term, which ends in April. Instead, we think it will be up to his successor to initiate a review that sets up a potential BOJ pivot, most likely in H2 of next year at the earliest. Updated macro forecasts won’t be seen until the January 17-18 meeting.
November national CPI will be reported Friday. Headline is expected at 3.9% y/y vs. 3.7% in October, while core (ex-fresh food) is expected at 3.7% y/y vs. 3.6% in October. Core ex-energy is expected at 2.8% y/y vs. 2.5% in October. With inflation running hot, we suspect the forecasts will be tweaked higher next month but not by enough to suggest any imminent policy shift. Department store sales will also be reported Friday.
Reserve Bank of Australia releases its minutes Tuesday. At the December 6 meeting, the bank hiked rates 25 bp to 3.10%, as expected. Governor Lowe said “The board expects to increase interest rates further over the period ahead, but it is not on a pre-set course. The size and timing of future interest rate increases will continue to be determined by the incoming data.” While this simply echoes the bank’s recent policy statements, some were looking for a more dovish tone that might suggest the tightening cycle might be nearing an end and we didn’t get that. WIRP suggests 55% odds of a 25 bp hike February 7, while the swaps market is pricing in a peak policy rate near 3.75%. Updated forecasts will come at that February meeting.