Broad dollar strength against the majors continued last week. SEK, GBP, and EUR outperformed while JPY, CHF, and AUD underperformed. U.S. rates are likely to march higher as markets continue to digest the Fed’s hawkish pivot. As such, the dollar is likely to move higher in early 2025.

AMERICAS

The markets are still digesting the Fed’s hawkish message. The Fed Funds futures market has quickly adjusted and is not fully pricing in the next cut until June. Looking ahead, the market is pricing in only around 50% odds of a second cut in H2. The latest Dot Plots show two cuts next year and so this is one of those rare times when the market is more hawkish than the Fed. Barkin speaks Friday.

U.S. yields continue to climb at the long end. The 10-year yield traded near 4.64%, the highest since May and on track to test the April high near 4.74%. Similarly, the 30-year yield traded near 4.82%, also the highest since May and on track to test the April high near 4.85%. Yields at the short end have not risen as much and so the 3-month to 10-year curve is the steepest since October 2022 at near 35 bp.

Growth remains robust. The Atlanta Fed GDPNow model is tracking Q4 growth at 3.1% SAAR and will be updated Thursday after the data. Elsewhere, the New York Fed's Nowcast model is tracking Q4 growth at 1.9% SAAR and Q1 growth at 2.1% SAAR and will be updated Friday.

December ISM manufacturing PMI Friday will be the data highlight. Headline is expected to fall two ticks to 48.2. Keep an eye on prices paid and employment, which stood at 50.3 and 48.1 in November, respectively. Of note, the preliminary S&P Global manufacturing PMI fell to a 3-month low of 48.3 vs. 49.7 in November and its final reading will be reported Thursday. Chicago PMI will be reported Monday and is expected at 43.0 vs. 40.2 in November. However, this series has not correlated with the national PMIs for the past couple of years and so offers little insight.

Regional Fed surveys for December will wrap up. Dallas Fed manufacturing survey will be reported Monday and is expected at -3.0 vs. -2.7 in November. Dallas Fed services survey will be reported Tuesday and stood at 9.8 in November.

December auto sales will also be reported Friday. Sales are expected to remain steady at a 16.50 mln annual pace, the strongest since May 2021. With the labor market remaining in solid shape, consumption is likely to remain strong going into 2025.

Canada highlight will be December manufacturing PMI Thursday. Despite some signs of softness in the economy, all four major PMI readings for Canada have risen above 50. The Bank of Canada shifted to a less dovish stance at the December 11 meeting and so the market is pricing in only 50 bp of further easing over the next six months.

EUROPE/MIDDLE EAST/AFRICA

Eurozone December CPI data start rolling out. Spain reports Monday. Its EU Harmonised inflation is expected to pick up two ticks to 2.6% y/y while core is expected to remain steady at 2.4% y/y. Other December CPI data won’t be reported until next week. Despite the slight hiccup in CPI data, the overall disinflation story remains intact for the eurozone.

Some ECB hawks remain vocal. Governing Council member Holzmann said “It could be the case that we take more time before lowering rates again. It’s true, some energy prices are trending upwards again. But there are also other scenarios for how inflation could return, such as a stronger depreciation of the euro.” We believe Holzmann is in the minority. The market is fully pricing in a 25 bp cut at the next meeting January 30, as well as 100-125 bp of total easing over the next 12 months that would see the policy rate bottom between 1.75-2.0%.

Final December eurozone manufacturing PMIs will be reported Thursday. Italy and Spain report for the first time and are expected at 45.0 and 53.5, respectively. If so, both would be up about half a point from November. Final December services and composite PMIs will be reported next week.

Swiss highlight will be December PMIs Thursday. Manufacturing is expected to fall two ticks to 48.3. With inflation running below the SNB’s projections, the bank is likely to continue cutting rates. Market is fully pricing in 50 bp of easing in H1 that would take the policy rate to zero, with nearly 30% odds of another cut in H2 that would push that rate into negative territory.

Riksbank December meeting minutes will be published Thursday. At that meeting, the Riksbank cut rates 25 bp to 2.50% but signaled the easing cycle is nearing an end as it indicated that “the policy rate may be cut once again during the first half of 2025” while emphasizing it will “carefully evaluate the need for future interest rate adjustments.” The Riksbank still projects the policy rate to bottom at 2.25% while the market sees the rate bottoming at 2.0% over the next six months. As such, there is room for market expectations to adjust higher in favor of SEK.

ASIA

Japan’s cabinet approved the government’s plan for a record initial budget for FY25. The total budget is projected at JPY115.5 trln ($735 bln), up from the initial JPY112.6 trln budget for the current FY24. The budget includes a 10% boost to defense spending. It will be funded by record tax receipts forecast at JPY78.4 trln, which will allow debt issuance to be cut back to a planned JPY28.6 trln. The budget debate will begin when parliament reconvenes in January and it remains to be seen whether the LDP can muster enough support from other parties to pass it. Stay tuned.

Borrowing costs are moving higher. The government is assuming debt servicing costs of 2.0%, little changed from 1.9% in FY24. This may be too conservative, as JGB yields continue to march upwards to multi-decade highs in response to higher inflation and BOJ tightening expectations. Governor Ueda hinted that the next hike would come later rather than sooner and so the market is pricing in only 40% odds of a January 24 hike, rising to 75% for March 19 and fully priced in for May 1.

Only Japan data is final December manufacturing PMI Monday. The composite PMI continues to flirt with the 50 level, suggesting slowing momentum in the economy as we move into 2025. This is a big reason why Japan policymakers remain cautious.