The dollar came under downside pressure last week against most major currencies as the broad rally in equity markets buoyed market risk sentiment. NZD, SEK, and GBP outperformed while NOK, JPY, and CAD underperformed. The dollar will likely consolidate near recent lows this week as upcoming U.S. economic data are unlikely to trigger a material upward adjustment to Fed funds futures. Month-end portfolio rebalancing could trigger intra-day FX volatility as the ongoing rally in global equities forces some portfolio managers to re-hedge their currency benchmarks to maintain hedge ratios. Overall, we believe the dollar will eventually gain more traction as U.S. economic outperformance continues.

AMERICAS

The Fed has been very clear about its reluctance to cut rates too soon. Markets are finally beginning to listen. The odds of a March cut have fallen to basically zero, while the odds of a May cut have fallen below 20%. More importantly, the June cut that was fully priced in at the start of last week has seen those odds fall below 80%. It's all going to depend on how the data continue to come in but if we had to pick a side, we think the risks of a cut are tilted towards coming later than June, not sooner.

Fed officials have been remarkably consistent since the January FOMC meeting. We expect this to continue into the March 19-20 meeting. Schmid speaks Monday. Barr speaks Tuesday. Bostic, Collins, and Williams speak Wednesday. Bostic, Goolsbee, Mester, and Williams speak Thursday. Waller, Logan, Bostic, Daly, and Kugler speak Friday. Minutes from the January meeting showed that some officials were worried about loose financial conditions. Since then, conditions have loosened even further. The Chicago Fed's measure of financial conditions loosened for the 17th straight week through the week ended February 16 and are the loosest since January 2022. With yields falling, spreads narrowing, and equities rising last week, we most likely got an 18th straight week when condition are reported Wednesday.

Data highlight will be January PCE Thursday. Headline is expected to fall two ticks to 2.4% y/y, while core is expected to fall a tick to 2.8% y/y. Of note, the expected 0.4% m/m gain for core PCE would be the largest since last January. Given the upside surprises for CPI and PPI, we see upside risks for PCE. The Cleveland Fed’s Nowcast model projects headline and core at 2.3% and 2.7%, respectively, which puts it slightly below consensus. For February, the model projects headline and core at 2.3% and 2.6%, respectively.

Personal income and spending will be reported at the same time. They are expected at 0.4% m/m and 0.2% m/m, respectively. Real personal spending is expected at -0.1% m/m vs. 0.5% in December. There are downside risks to personal spending after the weak January retail sales data, which many chalked up to bad weather across much of the country that month.

February ISM manufacturing PMI Friday will also be closely watched. Headline is expected at 49.5 vs. 49.1 in January. Keep an eye on employment and prices paid. Before that, Chicago PMI will be reported Thursday and is expected at 48.0 vs. 46.0 in January. The improvement in the S&P Global manufacturing PMI to 51.5 vs. 50.7 in January reported last week suggests upside risk to the ISM manufacturing print, which has been in contractionary territory since November 2022.

February Conference Board consumer confidence will be reported Tuesday. Headline is expected to rise two ticks to 115.0 and would be the highest since December 2021. Final February University of Michigan consumer sentiment will be reported Friday. Both measures have been consistent with continued strength in consumption.

Housing data will be important. January new home sales will be reported Monday and is expected at 3.0% m/m vs. 8.0% in December. December FHFA and S&P CoreLogic house prices will be reported Tuesday. Pending home sales will be reported Friday and are expected at 1.1% m/m vs. 8.3% m/m in December. Mortgage rates have been rising in February and so the housing sector recovery may be at risk.

Regional Fed surveys for February will continue rolling out. Dallas Fed manufacturing index (-14.0 expected) will be reported Monday and its services index will be reported Tuesday. Richmond Fed manufacturing (-8 expected) and services indices will both be reported Tuesday. Kansas City Fed reports its manufacturing index Thursday and its services index Friday. So far, the Empire and Philly Fed manufacturing surveys have come in stronger than expected.

We get a revision to Q4 GDP data Wednesday. Growth is expected to remain steady at 3.3% SAAR. Of course, this is old news as markets look ahead to Q1 and beyond. The Atlanta Fed’s GDPNow is tracking Q1 growth at 2.9% SAAR and will be updated Tuesday after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 2.8% and will be updated Friday. This model also starts estimating Q2 growth starting in early March.

Other minor data will be reported. January durable goods orders (-5.0% m/m expected) will be released Tuesday, while advance goods trade and retail and wholesale inventories will be reported Wednesday.

Canada highlight will be Q4 GDP data Thursday. Consensus sees growth at 0.8% SAAR vs. -1.1% in Q3. In contrast, the Bank of Canada estimates growth to have stalled in Q4 as inventory drawdowns and a decline in business investment offset export and consumption spending growth. With price pressures easing, another sluggish GDP print would add to BOC easing expectations. The market sees over 75% odds that the first cut comes June 5, up from around 55% at the start of last week.

EUROPE/MIDDLE EAST/AFRICA

February CPI data will be the eurozone highlight. France, Spain, and Germany report Thursday. France’s EU Harmonized inflation is expected at 3.1% y/y vs. 3.4% in January, Spain’s is expected at 2.8% y/y vs. 3.5% in January, and Germany’s is expected at 2.7% y/y vs. 3.1% in January. Italy and eurozone report Friday. Italy’s ’s EU Harmonized inflation is expected at 1.0% y/y vs. 0.9% in January. For the eurozone as a whole, headline is expected at 2.5% y/y vs. 2.8% in January while core is expected at 2.9% y/y vs. 3.3% in January. The risks are skewed to the upside as the eurozone PMI suggested prices pressures were higher in February. Regardless, the disinflationary process is well on track and below the ECB’s predicted levels.

Final February manufacturing PMIs will be reported Friday. Italy and Spain report for the first time and are expected at 49.1 and 49.8, respectively. If so, both would be six ticks higher than January. Final services and composite PMIs will be reported next week.

Eurozone reports January money supply data Tuesday. Consensus sees M3 growth of 0.3% y/y vs. 0.1% in December. While perhaps showing slight improvement, the data will likely remain consistent with sluggish economic activity. In December, private sector credit growth was muted at 0.5% y/y vs. 0.3% in November.

Germany reports some key data. March GfK consumer confidence will be reported Tuesday and is expected at -29.0 vs. -29.7 in February. January retail sales will be reported Thursday and is expected at 0.5% m/m vs. -1.1% in December. February unemployment will also be reported Thursday and is expected to remain steady at 5.8%.

U.K. data highlight will be January money and credit Thursday. Demand for credit remained weak in December but according to the latest Credit Conditions Survey (CCS), lenders expect demand for both mortgage lending and consumer credit to increase in the three months to February.

Switzerland highlight will be Q4 GDP data Thursday. Growth is expected to soften a tick to 0.2% q/q as subdued demand from abroad and tighter financing conditions weighed on economic activity. The y/y rate is expected at 0.6% vs. 0.3% in Q3 while 2023 growth is anticipated to expand by just 0.7%, which is slightly below the Swiss National Bank’s (SNB) projection of 1%. For February, UBS survey expectations (Wednesday), KOF leading indicator (Thursday), and PMI prints (Friday) will offer an indication of future growth prospects. In our view, the SNB is likely to cut the policy rate by 25 bp at its March 21 meeting vs. market odds of around 55%. Inflation in Switzerland has been running under the SNB’s 2% per annum target since June 2023 and economic growth is soft.

Sweden highlight will also be Q4 GDP data Thursday. The monthly GDP indicator suggests real GDP increased by 0.1% q/q in Q4 vs. -0.3% in Q3. Overall, Sweden’s economic slowdown suggests the Riksbank has room to cut rates in the first half of 2024. The market sees 50 bp of easing over the next six months.

ASIA

Japan highlight will be January national CPI data Tuesday. Headline is expected at 1.9% y/y vs. 2.6% in January, while core (ex-fresh food) is expected at 1.9% y/y vs. 2.3% in January. If so, core would move below the 2% target for the first time since March 2022. Core ex-energy is expected at 3.3% y/y vs. 3.7% in January. If so, core would be the lowest since March 2022 and below the 2% target for the first time since then. Bottom line: Japan’s improving inflation backdrop suggests the BOJ can afford to be patient with policy normalization. Liftoff is still seen as most likely coming in June, but the risk is that it comes later rather than sooner. BOJ board member Takata speaks Friday.

January retail sales, IP, and housing starts Thursday will also be important. IP is expected at -1.6% y/y vs. -1.0% in December, sales are expected at 2.0% y/y vs. 2.3% in December, and housing starts are expected at -7.8% y/y vs. -4.0% in December. The economy was clearly in a soft patch in Q3 and Q4 and that may extend into Q1.

January labor market data will be reported Friday. The unemployment rate is expected to remain steady at 2.4% while the job-to-applicant ratio is expected to remain steady at 1.27. Wage growth remains the missing piece of the puzzle for the BOJ, and the relatively tight labor market suggests upward pressures will pick up in the spring wage negotiations.

Australia highlight will be January CPI data Wednesday. Headline is expected at 3.6% y/y vs. 3.4% in December. If so, it would be the first acceleration since September and move further above the 2-3% target range. In turn, this would support the RBA’s continued cautiousness regarding rate cuts. The market sees 75% odds that the first cut comes in August.

January retail sales data Thursday will also be important. Sales are expected at 1.5% m/m vs. -2.7% in December.

Reserve Bank of New Zealand meets Wednesday and is expected to keep rates steady at 5.5%. It will release its Monetary Policy Statement with updated macro forecasts at the same time. The bank should reiterate “that interest rates will need to remain at a restrictive level for a sustained period of time.” Markets see around 25% odds of a 25 bp hike this week and the focus will be on the updated rate path projections. The RBNZ currently forecasts the OCR to peak at 5.69% in Q3 2024, implying around 75% odds of another 25 bp rate hike. We doubt the revised RBNZ projections will rule out an additional policy rate increase because of stronger than expected non-tradable inflation and private sector wage growth in Q4. As such, NZD risks are skewed to the upside. Governor Orr speaks Friday.