The dollar consolidated last week in the absence of major economic data releases. The greenback put in a mixed performance against the majors last week as NZD, NOK, and SEK outperformed while CHF, JPY, and EUR underperformed. The action resumes this week with U.S. reporting inflation, retail sales and consumer sentiment. We expect the data to justify a much less pronounced Fed easing cycle than is currently priced in by the market and that the Fed is nowhere near cutting rates. This should help support the dollar.

AMERICAS

Despite the lack of major U.S. data releases last week, many Fed officials provided insight on current Fed thinking. Everyone single speaker last week took a very cautious tone on potential easing, and we expect that tone to persist this week. U.S. yields are at the upper end of recent trading ranges, and we look for further upside. Bowman, Barkin, and Kashkari speak Monday. Goolsbee and Barr speak Wednesday. Waller and Bostic speak Thursday. Barr and Daly speak Friday.

This is a huge data week for the U.S. After a relatively quiet week last week, we get some top line economic data this week. Inflation data take center stage. CPI will be reported Tuesday. Headline is expected at 2.9% y/y vs. 3.4% in December, while core is expected at 3.7% y/y vs. 3.9% in December. Of note, the Cleveland Fed’s inflation Nowcast model estimates headline and core CPI at 2.9% and 3.8%, respectively. For February, it sees 2.9% and 3.6%, respectively. PPI will be reported Thursday. PPI inflation has been falling sharply since peaking in Q1 2022 but some of the PPI data which feed into the calculation for the policy relevant PCE inflation remain too high. Specifically, PPI final demand services less trade, transportation, and warehousing rose 3.8% y/y in December 2023.

Retail sales data Wednesday will also be important. Consensus sees headline at -0.1% m/m vs. 0.6% in December and ex-autos at 0.2% m/m vs. 0.4% in December. The so-called control group used for GDP calculations is expected at 0.2% m/m vs. 0.8% in December. Note that the y/y rates continued to accelerate in December, and we think that trend can continue in early 2024.

TIC data December Thursday will be closely watched. The TIC data should show that while China continues to lighten up on its holdings of U.S. Treasuries, underlying global demand for USD-denominated assets remains robust.

University of Michigan consumer sentiment Friday will be key. Headline is expected to rise a full point to 80.0 and would be the highest since mid-2021 and consistent with an encouraging household spending outlook.

Reginal Fed surveys for February start rolling out. Empire and Philly Fed manufacturing kick things off Thursday and are expected at -11.8 and -8.6, respectively. Both would be an improvement from January. New York Fed services index will be reported Friday.

EUROPE/MIDDLE EAST/AFRICA

U.K. reports labor market data Tuesday. According to the ONS, the reweighted estimates suggest that over the last five months to November 2023, the unemployment rate may have fallen more quickly than the experimental indicator suggested (3.9% vs. 4.2%). Consensus sees 4.0% for the three months ending in December. Of note, the Bank of England projects an unemployment rate of 4.3% and 4.4% in Q4 2023 and Q1 2024, respectively. Regardless, ongoing challenges with response rates and levels mean that the BOE will likely pay more attention to the wages data. Annual private sector regular average weekly earnings growth has declined from a high of 8.2% in June to 6.5% in November and is expected to fall to 5.6% in December as leading indicators of pay growth point to easing wage growth pressures. The BOE estimates annual private sector regular AWE growth of 6% and 5.7% over Q4 2023 and Q1 2024, respectively. Slower than expected wage growth could weigh on U.K. interest rate expectations and sterling.

U.K. January CPI will be reported Wednesday. Headline is expected at 4.1% y/y vs. 4.0% in December, core is expected at 5.2% y/y vs. 5.1% in December, and CPIH is expected at 4.4% y/y vs/ 4.2% in December. CPI inflation has fallen sharply since September 2023, driven by energy and goods prices. The BOE expects headline CPI to print at 4.1% y/y in January. Of note, services CPI inflation is the BOE’s key indicator of domestic inflationary pressure and remains elevated. The BOE projects services CPI inflation to pick up two ticks to 6.6% y/y in January vs. consensus of 6.8%.

The market has pared back Bank of England easing expectations. The first cut is now priced in for August and only 75 bp of total easing is seen in 2024. Compare this to the start of this year, when markets saw the first cut in June and nearly 125 bp of total easing in 2024. Governor Bailey speaks Monday and Wednesday. Greene and Mann speak Thursday. Chief Economist Pill speaks Friday.

Key U.K. real sector data will be reported Thursday. December GDP is expected at -0.2% m/m vs. 0.3% in November, IP is expected at -0.1% m/m vs. 0.3% in November, services is expected at a -0.2% m/m vs. 0.4% in November, and construction is expected at -0.2% m/m vs. the same in November. Despite the December drop, economic activity is expected to have been broadly flat over Q4. Q4 GDP is expected at -0.1% q/q and 0.1% y/y. if so, that would be the third straight quarter of either contraction or stagnation. The BOE projects the positive contribution to growth from government expenditure to be offset by drags from consumption as well as business and housing investments. Nevertheless, UK PMI data points to upside risk to growth.

U.K. January retail sales will be reported Friday. Consensus sees headline at 1.6% m/m vs. -3.2% in December and ex-auto fuel at 1.7% m/m vs. -3.3% in December. The y/y rates are expected at -1.8% and -1.5%, respectively, and would see modest improvement from December.

Eurozone has a quiet data week. German and eurozone ZEW survey for February will be reported Tuesday. German expectations are expected at 17.5 vs. 15.2 in January, while current situation is expected at -79.0 vs. -77.3 in January. December IP will be reported Wednesday and is expected at -0.2% m/m vs. -0.3% in November.

However, there will be plenty of ECB speakers. De Cos, Lane, and Cipollone speak Monday. Vujcic, Guindos, Cipollone, and Nagel speak Wednesday. Lagarde, Lane, and Nagel speak Thursday. Schnabel speaks Friday. After most policymakers continue to push back against market pricing for ECB easing, market pricing for the first cut has moved to June vs. April previously. Also, 125 bp of total easing is priced in over the next 12 months vs. 150 at the start of the month.

Switzerland highlight will be January CPI Tuesday. Headline is expected to remain steady at 1.7% y/y, while core is expected to pick up a tick to 1.6% y/y. Inflation has been running under the Swiss National Bank’s 2% target since June 2023, boosting the allure of CHF as a store of value. The SNB projects headline CPI inflation to average 1.8% over Q1. Of note, the swaps market is pricing in the first cut in June, followed by another one in December.

Norway reports GDP Q4 Wednesday. Consensus sees mainland GDP growth at 0.1% q/q, same as Q3, while the Norges Bank projects mainland GDP to be flat in Q4. Despite sluggish growth, the Norges Bank maintained its forward guidance that the policy rate will likely remain at 4.5% for some time ahead. However, the swaps market is pricing in the first rate cut over the next six months.

ASIA

Japan highlight will be Q4 GDP data Thursday. The economy likely recovered, as consensus sees 0.3% q/q vs. -0.7% in Q3. Private consumption is expected to be flat q/q vs. -0.2% in Q3, while business spending is expected to rise 0.2% q/q vs. -0.4% in Q3. Inventories are expected to be neutral for growth after subtracting -0.5 ppt in Q3, while net exports are expected to add 0.3 ppt after subtracting -0.1 ppt in Q3. Regardless of the GDP data, the BOJ will not be in a rush to normalize policy until wage growth picks up, which remains a major drag for JPY. Liftoff is still seen in June. January PPI and machine tool orders will be reported Tuesday.

Australia highlight will be January jobs data Thursday. Leading indicators (like job ads and employment intentions) point to further easing in labor demand. Employment is expected to increase by 25.0k in January following a decline of -65.1k the previous month. The unemployment rate is expected to rise a tick to 4.0% and would still be well within the RBA’s estimated full-employment range of 4.0-5.75%. Tight labor market conditions in Australia are an upside risk to services inflation and justifies the RBA not ruling out further increase in interest rates. That said, the market sees no more hikes and the first cut is 90% priced in for August. Ahead of the labor force survey, the February Westpac consumer confidence and January NAB business confidence will offer a timely update on the growth outlook.

RBNZ Governor Orr speaks Thursday. It will be very interesting to see if his tone validates the recent call from a major New Zealand bank for a 25 bp hike to 5.75% this month followed by another 25 bp hike to 6.0% in April. It’s worth recalling that at the last meeting November 29, the bank delivered a hawkish hold as the bank discussed a rate hike before deciding on no change. The expected rate path showed an end-2024 policy rate of 5.7% vs. 5.5% previously, suggesting high odds of one last hike. In underscoring the higher for longer theme, the RBNZ saw an end-2025 policy rate of 4.9% vs. 4.5% previously while the first cut was forecast around Q2 2025 vs. Q1 2025 previously. The market is now pricing in nearly 40% odds of a hike February 28 vs. 10% at the start of last week. Those odds rise to 75% for both April 10 and May 22. However, the market is not pricing in any odds of a second hike.