The dollar was mixed against the majors last week despite heightened Fed tightening expectations. SEK, NOK, and CAD outperformed while EUR, NZD and JPY underperformed. This week brings top tier U.S. economic data that could increase Fed tightening expectations even more and so the dollar recovery should continue and broaden out as well. We believe recent data confirm our belief that markets had gotten too complacent about inflation and that the battle is far from over.

AMERICAS

Top tier U.S. data return to the forefront after last week’s hiatus. Inflation data will be key and January CPI kicks things off Tuesday. Headline is expected at 6.2% y/y vs. 6.5% in December, while core is expected at 5.5% y/y vs. 5.7% in December. The m/m readings have taken on more importance after the annual revisions boosted those readings in H2 (see below), with headline expected at 0.5% and core expected at 0.4%. January PPI will be reported Thursday. Headline is expected at 5.4% y/y vs. 6.2% in December, while core is expected at 4.9% y/y vs. 5.5% in December. Of note, PPI revisions will first be reported Tuesday. From the BLS website: “Each year with the release of PPI data for January, seasonal adjustment factors and relative importance figures are recalculated to reflect price movements from the just-completed calendar year.”

CPI revisions are worth discussing. While the adjustments to the seasonal factors announced last Friday did not affect the y/y rates, the m/m rates showed greater momentum in the second half of 2022. To wit, the m/m changes in headline and core for November were both revised up a tick to 0.2% and 0.3%, respectively. For December, headline was revised up two ticks to 0.1% and core was revised up a tick to 0.4%. This suggests that recent optimism regarding falling inflation pressures may be overdone. We’ll know more this week.

To makes things even trickier, the BLS announced more changes last month. Specifically, “Beginning with the January 2023 index, scheduled for publication on February 14, 2023, BLS plans to update the spending weights in the calculation of the CPI every year instead of every 2 years. Spending weights indicate what share of total expenditures each item represents. This change will improve the relevance of CPI spending weights by using the most recent consumer spending information. By improving the relevance of spending weights, BLS can improve the accuracy of the CPI.” The BLS went from revising these weights every ten years to every two years back in 2002 and so the move to annual revisions is another step in the process.

January retail sales data Wednesday will give us a read on the real economy. Headline is expected at 1.9% m/m vs. -1.1% in December, while ex-autos is expected at 0.8% m/m vs. -1.1% in December. The so-called control group used for GDP calculations is expected at 0.8% m/m vs. -0.7% in December. Of note, the Atlanta Fed’s GDPNow model is currently tracking 2.2% SAAR growth in Q1, up from 2.1% previously. Next model update will be Wednesday after the retail sales data. University of Michigan consumer sentiment rose a point and a half to 66.4 in February, the highest since January 2022. Along with the strong labor market, this suggests potential for consumption to remain robust as 2023 gets under way.

Fed tightening expectations remain high. WIRP suggests 25 bp hikes March 22 and May 3 are nearly priced in, while the odds of a third hike in June or July top out near 45%. Strangely enough, an easing cycle is still expected to begin in Q4 but we believe that will be corrected in the next stage of Fed repricing. Fed speakers will be plentiful this week. Bowman speaks Monday. Barkin, Logan, Harker, and Williams speak Tuesday. Mester, Bullard, and Cook speak Thursday. Barkin and Bowman speak Friday. All are expected to maintain the same hawkish tone that Powell has established.

Fed manufacturing surveys for February start rolling out. Empire survey will be reported Wednesday and is expected at -18.0 vs. -32.9 in January. Philly Fed reports Thursday and is expected at -7.4 vs. -8.9 in January. In between, January IP will be reported Wednesday and is expected at 0.5% m/m vs. -0.7% in December. Within IP, manufacturing is expected at 0.8% m/m vs. -1.3% in December. This sector is clearly slowing but so far has not had much impact on the wider economy, which remains resilient.

Other minor data will be reported. January real average hourly earnings will be reported Tuesday. December business inventories, February NAHB housing market index, and December TIC data will be reported Wednesday. January building permits and housing starts and weekly jobless claims will be reported Thursday. Of note, initial claims are expected at 200k vs. 196k last week, while continue claims are expected at 1.688 mln vs. 1.688 mln last week. The four-week moving average fell for the ninth straight week to 189k, the lowest since late April. January import/export prices and leading index will be reported Friday.

Canada only reports minor data this week. January housing starts, existing home sales, and December manufacturing and wholesale trade sales will be reported Wednesday. After the second straight blowout jobs report, the Bank of Canada will find it harder and harder to justify its pause. No change is expected at the next meeting March 8 but WIRP suggests a final 25 bp hike to 4.75% is now priced in by July 12.

EUROPE/MIDDLE EAST/AFRICA

The eurozone has a quiet week. December IP and trade data will be reported Wednesday. IP is expected at -0.8% m/m vs. 1.0% in November, while the y/y rate is expected at -0.7% vs. 2.0% in November. If so, it would be the first negative reading since July. While some sentiment indicators have been improving recently, the real sector data remain weak and so we cannot get excited about the eurozone economic outlook for 2023. December current account data will be reported Friday.

ECB tightening expectations have steadied. WIRP suggests a 50 bp hike March 16 is nearly priced in. Looking further ahead, a 25 bp hike May 4 is priced in along with 25% odds of a larger 50 bp move. Another 25 bp hike June 15 is priced in, followed by around 40% odds of one last 25 bp hike July 27. These expectations are likely to drift lower if continued disinflation gives the doves the upper hand. We have already seen the cracks reappear last week. ECB speakers are plentiful this week. Centeno speaks Monday. Lagarde speaks Wednesday. Panetta, Nagel, Lane, and Makhlouf speak Thursday. Villeroy speaks Friday.

The U.K. data dump continues. Labor market data will be reported Tuesday. Average weekly earnings for the three months ended December at expected to slow two ticks to 6.2%, while the unemployment rate is seen steady at 3.7%. January inflation data will be reported Wednesday. Headline is expected at 10.3% y/y vs. 10.5% in December, core is expected at 6.2% y/y vs. 6.3% in December, and CPIH is expected at 9.0% y/y vs. 9.2% in December. January retail sales will be reported Friday. Headline is expected at -0.2% m/m vs. -1.0% in December, while sales ex-auto fuel is expected at -0.2% m/m vs. -1.1% in December. Both y/y rates are expected to improve modestly to -5.6% and -5.4%, respectively.

BOE tightening expectations have steadied. WIRP suggests a 25 bp hike March 23 is nearly priced in. After that, a final 25 bp hike is nearly priced in for Q2 and so the expected terminal rate is now back to 4.5% after starting off last week near 4.25%. This is still well below the peak near 6.25% right after the disastrous mini-budget back in September. Chief Economist Pill speaks Thursday.

Markets are finally getting some positive Brexit news. BBC reports that negotiations over the Northern Ireland Protocol are in the end stages. The report goes on to say that a legal text is now being written that would lock in the final binding details of the talks. This news comes even as other reports suggest Prime Minister Sunak is quietly drafting plans to improve future relations with the EU. Areas of improved cooperation have been identified as defense, immigration, and trade. To that end, reports emerged over the weekend that Sunak held a not-so-secret summit last week for business leaders and politicians from across both major parties.

ASIA

Bank of Japan nominations will be formally submitted to Parliament Tuesday. Markets are still digesting the surprise pick of former BOJ board member Kazuo Ueda after current Deputy Governor Amamiya reportedly refused the post. While the knee-jerk reaction looked for hawkishness, Ueda said after the reports that “The Bank of Japan’s current policy is appropriate and monetary easing needs to be continued at this point.” Current BOJ Executive Director in charge of monetary policy Shinichi Uchida and former head of the watchdog Financial Services Agency Ryozo Himino will reportedly be nominated for the two Deputy Governor posts.

Expected BOJ liftoff is not imminent. Next BOJ policy meeting March 9-10 will be the last one under Governor Kuroda and while no change is expected, we simply cannot rule out one last surprise. WIRP suggests nearly 50% odds of liftoff April 28, however, rising to nearly 95% June 16. That said, the actual tightening path is seen as very mild as the market is pricing in 25 bp of tightening over the next 12 months followed by only 25 bp more over the subsequent 24 months. That is why we expect the drop in USD/JPY after liftoff to be fairly limited.

Japan highlight will be Q4 GDP data Tuesday. Growth is expected at 0.5% q/q vs. -0.2% in Q3, while the annualized rate is expected at 2.0% vs. -0.8% in Q3. Private consumption is expected at 0.6% q/q vs. 0.1% in Q3 while business spending is expected at -0.3% q/q vs. 1.5% in Q3. Inventories are expected to subtract -0.1% from growth while net exports are expected to add 0.4%. Despite the expected bounce I Q4, we know policymakers remain concerned about the durability of the recovery.

Other key data will be reported. January trade data and December core machine orders will be reported Thursday. Exports are expected at -1.5% y/y vs. 11.5% in December, while imports are expected at 21.1% y/y vs. 20.7% in December. If so, this would be the first y/y contraction in exports since February 2021. Elsewhere, orders are expected at -6.1% y/y vs. -3.7% in November. While it’s early still, Japan data has shown no impact from China reopening. Neither have data from Korea and Taiwan and so we remain skeptical that China will boost global growth this year as much as optimists are projecting.

Australia data highlight will be January jobs report Thursday. Consensus sees 20.0k jobs added vs. -14.6k in December, while the unemployment rate is expected to remain steady at 3.5%. The latest RBA forecasts see unemployment rising slightly over the course of this year to 3.8% and then rising to 4.3% by end-2024. Given the magnitude of expected tightening, this seems too optimistic.

Reserve Bank of Australia Governor Lowe testifies Friday. He will surely be quizzed about the bank’s unexpectedly hawkish stance taken at last week’s meeting when it hiked 25 bp to 3.35% and signaled more tightening ahead. WIRP suggests a 25 bp hike at the next meeting March 7 is nearly 80% priced in, while the swaps market is pricing in a peak policy rate near 4.25% over the next 12 months. Of note, an easing cycle is priced in over the subsequent 12 months.