The dollar saw a broad recovery against the majors last week. CHF, GBP, and EUR outperformed while AUD, NZD, and NOK underperformed. U.S. data last week were on the soft side but we do not think a December cut is a done deal. This week’s inflation data will be key and any signs of accelerating price pressures would upend the December cut narrative and help boost the dollar.
AMERICAS
There are no Fed speakers this week due to the media blackout. As such, there can be no further pushback to markets viewing a December cut as a done deal. The Fed still has to digest CPI, PPI, and retail sales before the December 18 FOMC decision. It’s clear from Fed comments last week that officials (ex-Goolsbee) are worried about sticky inflation and therefore preparing the markets for a pause. The market is pricing in 85% odds of a cut this month. If the Fed does indeed cut, we are very confident that it will be a hawkish cut that sets up a pause in January and perhaps beyond (depending on the data).
November inflation data take center stage this week. CPI will be reported Wednesday. Headline is expected to pick up a tick to 2.7% y/y, while core is expected to remain steady at 3.3% y/y. This is right in line with the Cleveland Fed’s Nowcast model forecasts. Looking ahead to December, that model has headline at 2.8% and core at 3.3%, respectively. Inflation has eased significantly over the past two years, but recent data have raised the possibility that progress on inflation may be stalling well above 2%.
PPI will be reported Thursday. Headline PPI is expected at 2.6% y/y vs. 2.4% in October while core PPI is expected at 3.2% y/y vs. 3.1% in October. Keep an eye on PPI services ex-trade, transportation, and warehousing, as it feeds into the core PCE calculations. In October, this measure of core services PPI rose to a five-month high of 4.6% y/y and remains consistent with sticky underlying inflation.
New York Fed reports November inflation expectations Monday. Expectations across the spectrum have flat-lined well above the 2% target and should keep the Fed in a cautious mood.
Q3 change in household net worth will be reported Thursday. In Q2, it rose $2.76 trln and was the third straight quarterly rise. Strong household balance sheets are a key factor underpinning solid consumption growth.
Bank of Canada meets Wednesday and is expected to cut rates 50 bp to 3.25%. However, the market is split. Nearly a third of the 26 analysts polled by Bloomberg look for a smaller 25 bp cut, while the swaps market sees over 80% odds of a 50 bp cut. We believe the BOC has room to deliver a follow-up 50 bp rate cut, as inflation is close to 2% and inflationary pressures are no longer broad-based. Additionally, monetary policy remains too tight, heightening the downside risk to the economy. At 3.75%, the BOC policy rate remains above the bank’s nominal neutral interest rate estimate of 2.25-3.25%. The next Monetary Policy Report will be released at the January 29 meeting.
EUROPE/MIDDLE EAST/AFRICA
European Central Bank meets Thursday and is expected to cut rates 25 bp. We also expect the ECB to stick to its data-dependent guidance by reiterating that it “is not pre-committing to a particular rate path.” President Lagarde’s press conference should provide more color on the decision. Attention will also be on the update macroeconomic projections. Of note, 2027 will be added to the forecast horizon. Judging from the recent soft batch of eurozone economic data, the ECB will likely tweak lower its inflation and real GDP growth forecasts. This can lead to a downward adjustment to ECB easing expectations that would likely weigh on the euro. The market is currently pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom near 1.75%, but we think it could go even lower.
There are some minor eurozone data points this week. Italy reports October IP Tuesday and is expected at -3.6% y/y vs. -4.0% in September. Germany reports October current account data Thursday followed by trade data Friday. Eurozone reports October IP Friday and is expected at -2.3% y/y vs. -2.8% in September.
Monthly U.K. data dump begins. October GDP, IP, services, and construction output will all be reported Friday. GDP is expected at 0.1% m/m vs. -0.1% in September, IP is expected at 0.3% m/m vs. -0.5% in September, services index is expected at 0.1% m/m vs. 0.0% in September, and construction is expected at 0.3% m/m vs. 0.1% in September. The data will likely be affected by the uncertainty surrounding the Autumn Budget. Indeed, the PMI data indicated that growth momentum in all three sectors of the economy (services, manufacturing, and construction) slowed sharply in October. For reference, the Bank of England forecasts Q4 GDP growth of 0.3% q/q, underpinned by solid household consumption, business investment and government expenditure.
BOE inflation expectations survey will also be reported Friday. 1- and 3-year expectations have been trending lower but 5-year expectations have been creeping higher. This should keep the BOE on its cautious easing path. MPC member Ramsden speaks Monday.
Swiss National Bank meets Thursday and is expected to cut rates 25 bp to 0.75%. A quarter of the 16 analysts polled by Bloomberg see a larger 50 bp cut, while the swaps market sees nearly 50% odds of a 50 bp move. We think the SNB will slash rates 50 bp, as inflation is undershooting the SNB’s Q4 projection of 1.0% even as the contraction in the manufacturing sector deepened in November. The swaps market is pricing in 100 bp of total easing over the next 12 months that would see the policy rate bottom at 0%. However, SNB President Schlegel recently warned that negative interest rates cannot be ruled out.
Norway reports November CPI data Tuesday. Headline is expected at 2.4% y/y vs. 2.6% in October while underlying CPI is expected at 2.8% y/y vs. 2.7% in October. If so, headline would be the lowest since December 2020 and nearing the 2% target. Inflation is tracking slightly below the Norges Bank’s forecast, but the bank emphasized at its November 6 meeting that “the policy rate would most likely be kept at 4.5% to the end of 2024.” The first 25 bp rate cut is fully priced in for March, which is in line with the Norges Bank’s policy guidance.
ASIA
Odds of a Bank of Japan rate hike in December have been volatile of late. After rising as high as 65% earlier this month, the odds plunged to around 35% after a Jiji News Service report last week that argued there's a possibility that policy may be kept steady in December. We agree. Japan’s disinflationary trend is intact, and the growth outlook is unimpressive. October earnings data reported last week were mixed and did not call out for more tightening.
Japan reports two key Q4 surveys this week. The Ministry of Finance’s BSI survey will be reported Wednesday.
The Bank of Japan’s Tankan survey will be reported Friday. Conditions for large companies have improved in recent quarters but are expected to remain steady or fall modestly in Q4. This would still be indicative of a continued modest recovery in real GDP growth.
October current account data Monday will also hold some interest. An adjusted surplus of JPY2.255 trln is expected vs. JPY1.272 trln in September. However, the investment flows will be of more interest. The September data showed that Japan investors were net buyers of U.S. bonds (JPY1.306 trln) for the third straight month. Japan investors turned net sellers (-JPY44.2 bln) of Australian bonds after three straight months of net buying and also turned net sellers of Canadian bonds (-JPY1044.8 mln) after three straight months of buying. Investors stayed net buyers of Italian bonds (JPY267.6 bln) for the second straight month. Overall, Japan investors stayed total net buyers of foreign bonds (JPY2.684 trln) for the second straight month. For now, it seems that Japan investors will continue chasing higher yields abroad.
Reserve Bank of Australia meets and is expected to keep rates steady at 4.35%. The bank is also expected to reiterate that “the Board is not ruling anything in or out” and “the need to remain vigilant to upside risks to inflation.” In fact, Governor Bullock stressed earlier this month that “underlying inflation is still too high to be considering lowering the cash rate target in the near term.” However, Australia’s Q3 GDP report was weak and suggests a dovish surprise cannot be ruled out. For instance, Bullock could highlight during her post-meeting press conference that the Board considered the option of cutting the policy rate. It’s worth noting that following the November meeting, Bullock said that the Board “didn’t explicitly discuss rate hike or cut scenarios.” After the weak GDP data, the market has brought forward the timing of the first 25 bp rate cut to April vs. May before. The next Statement on Monetary Policy will be released following the February 18 policy meeting.
Australia data highlight will be November jobs report Thursday. Consensus sees 25.0k jobs added vs. 15.9k in October, while the unemployment is expected to rise a tick to 4.2%. While this would match the cycle high from July, unemployment would still be tracking below the RBA’s 4.3% year-end forecast. The RBA’s view is that “further falls in vacancies can still occur alongside a relatively modest increase in the unemployment rate,” suggesting it’s in no hurry to start easing.
