The dollar saw a broad-based rally against the majors last week on the back of strong U.S economic data. CAD, JPY, and CHF outperformed while NOK, AUD, and EUR underperformed. With the Fed unlikely to cut anytime soon because the U.S. economy remains so robust, the dollar should continue to climb as market reprice Fed policy. There are plenty of FOMC speakers this week who will likely lean against Fed rate cut bets.
Markets are still digesting last week’s fundamental developments. The Fed’s hawkish hold was completed justified two days later with the blockbuster jobs report. Simply put, the U.S. economy continues to run hot and it’s hard to justify a rate cut anytime soon. Odds of a March cut have fallen just below 25% from being fully priced in at the start of 2024. A May cut is no longer seen as a sure thing either, with odds falling to around 90%. A total 125 bp of easing is still priced in for 2024, however. While the repricing process has begun, there is a long way to go. Our base case right now is that the first cut comes in June and that the Fed only cuts rates 50-75 bp this year.
There are plenty of Fed speakers this week and we expect all of them to mirror Chair Powell’s cautious tone. Goolsbee and Bostic speak Monday. Mester, Kashkari, Collins, and Harker speak Tuesday. Kugler, Collins, Barkin, and Bowman speak Wednesday. Barkin speaks twice Thursday. Logan speaks Friday.
Growth remains strong in Q1. The Atlanta Fed’s GDPNow model’s first update came in at 4.2% SAAR vs. the first estimate of 3.0%. The early estimates are often volatile, and the next update comes Wednesday after the data. Elsewhere, the New York Fed’s Nowcast model’s Q1 estimate stands at 3.3% SAAR vs. 2.8% previously and will be updated Friday. Its estimates for Q2 will begin in early March.
The Fed’s Senior Loan Officer Opinion Survey (SLOOS) will be reported Monday. It will be an interesting read, particularly following the recent concerns over U.S. regional banks’ commercial property loan exposures. The October SLOOS indicated that in Q3, the majority of banks (mostly banks other than the large ones) reported tightening loan standards and weaker demand for all types of commercial real estate (CRE) loans.
ISM services PMI Monday will be the data highlight. Headline is expected at 52.0 vs. 50.5 in December. Keep an eye on employment and prices paid, which stood at 43.8 and 56.7 in December, respectively. The preliminary S&P Global services PMI came in at 52.9 vs. 51.4 in December and is consistent with a solid expansion in services activity.
The annual CPI revisions will be reported Friday. From the BLS: “Each year with the release of the January CPI, seasonal adjustment factors are recalculated to reflect price movements from the just-completed calendar year. This routine annual recalculation may result in revisions to seasonally adjusted indexes for the previous 5 years. Recalculated seasonally adjusted indexes as well as recalculated seasonal adjustment factors for the period January 2019 through December 2023 will be made available on Friday, February 9, 2024.” We note that the adjustments to the seasonal factors would only impact the m/m rates but will not affect the y/y rates.
Other minor data will be reported. December trade and consumer credit will be reported Wednesday. Weekly jobless claims and December wholesale trade sales and inventories will be reported Thursday. Last week, claims rose unexpectedly but the impact was quickly negated by the jobs report.
Canada highlight will be January jobs data Friday. Consensus sees 15.0k jobs created vs. 100 (yes, 100) in December, while the unemployment rate is expected to rise a tick to 5.9%. Labor market conditions have eased, with the unemployment rate up modestly from 5.5% over Q3, and business surveys reporting declining shortages of labor. The market is pricing in 100 bp of cuts this year, starting in Q2. We doubt the BOC will loosen policy as aggressively as discounted by money markets if wage growth remains elevated around 4-5%.
Other Canadian data will be reported. January S&P Global services and composite PMIs will be reported Monday. January Ivey PMI and December building permits will be reported Tuesday. December trade data will be reported Wednesday.
European Central Bank easing expectations remain elevated. Despite ongoing pushback from bank officials, markets continue to price in 75% odds that the easing cycle begins April 11. A total 125 bp of easing is seen this year. Wunsch and Lane speak Thursday. Nagel and Cipollone speak Friday. December PPI will be reported Monday and is expected at -10.5% y/y vs. -8.8% in November.
ECB reports December inflation expectations Tuesday. Both the 1- and 3-year measures have been falling steadily in recent months and this should continue.
Final January services and composite PMIs will be reported Monday. Italy and Spain report for the first time and their composite PMIs are expected at 50.2 and 52.0, respectively. If so, both would show significant improvement from December.
Eurozone December retail sales will be reported Tuesday. Sales are expected at -1.0% m/m vs. -0.3% in November, while the y/y rate is expected at -0.8% vs. -1.1% in November. Household spending in December was sluggish across the major eurozone member countries. German and Spanish retail sales fell m/m by -1.6% and -0.7%, respectively, while French sales rose 0.9% m/m.
Data should continue to show Germany as the weak link in the eurozone. Germany reports December trade data Monday. Exports are expected at -2.8% m/m vs. 3.8% in November, while imports are expected at -1.5% m/m vs. 1.6% in November. Factory orders will be reported Tuesday and are expected at -5.3% m/m vs. -4.4% in November. IP will be reported Wednesday and is expected at -0.4% m/m vs. -0.7% in November.
Other countries report some key data. Italy reports December retail sales Wednesday and IP Friday. IP is expected at 0.9% m/ vs. -1.5% in November. Spain reports December IP Wednesday and is expected at -0.2% m/m vs. 1.0% in November. Eurozone IP won’t be reported until February 14.
Bank of England easing expectations have fallen slightly after last week’s hold. The market sees 100 bp of rate cuts this year, starting in Q2. In our view, the risk is that the BOE does not deliver this much easing, partly because the projected UK fiscal drag in 2024 will likely be softer as Chancellor Hun is expected to announce pre-election tax cuts at the March 6 Spring Budget. Breeden speaks Wednesday. Mann speaks Thursday.
U.K. will resume publishing key labor market data Monday. Office of National Statistics will publish an article explaining the changes that have been made to improve the data and said that “Alongside this methodological information, the ONS will also publish LFS-based data from July to September 2022 up to the September to November 2023 datapoint, with the full time series following on 13 February.” In the interim, the ONS published an experimental unemployment number and that has been steady at 4.2% the last several months. Final January services and composite PMIs and BRC retail sales will also be reported Monday.
Norway reports January CPI Friday. Headline is expected to remain steady at 4.8% y/y, while underlying is expected at 5.3% y/y vs. 5.5% in December. Inflation has decline over the past six months but remains above the Norges Bank 2% target. According to the Norges Bank, the policy rate is now sufficiently high to return inflation to target within a reasonable time horizon. The market sees steady rates over the next three months, followed by the start of an easing cycle with 25 bp of easing over the subsequent three months.
The Riksbank releases its minutes Wednesday. At last week’s meeting, the bank delivered a dovish hold. It kept rates steady at 4.0%, as expected, but warned that “the policy rate probably can be cut sooner than was indicated in the November forecast.” Governor Thedeen appears before parliament Tuesday and speaks again Wednesday. Deputy Governor Jansson speaks Thursday. Markets see nearly 60% probability of a 25 bp rate cut in March. Over the next 12 months, the OIS curve is pricing in 125-150 bp of easing, which seems too aggressive.
Japan highlight will be December cash earnings and household spending data Tuesday. Nominal earnings are expected at 1.3% y/y vs. 0.7% in November, while real earnings are expected at -1.5% y/y vs. -2.5% in November. Spending is expected at -2.0% y/y vs. -2.9% in November. The Bank of Japan is closely monitoring whether a virtuous cycle between wages and prices will intensify before shifting away from looser policy settings. So far wage growth in Japan have been subdued and suggests the BOJ is unlikely to rush into policy normalization.
Other data will be reported. Final January services and composite PMIs will be reported Monday. December leading and coincident indices will be reported Tuesday.
December current account data will be reported Thursday. The adjusted surplus is expected at JPY1.93 trln vs. JPY1.89 trln in November. However, the investment flows will be of more interest. The November data showed that Japan investors turned net sellers of U.S. bonds (-JPY8 bn) after three straight months of net buying. Japan investors turned net sellers (-JPY223 bln) of Australian bonds again and remained net sellers of Canadian bonds (-JPY31 bln) for the fifth straight month and for ten of the past eleven months. Investors turned net sellers of Italian bonds (-JPY229 bln) again. Overall, Japan investors turned total net sellers of foreign bonds (-JPY1.17 trln) after three straight months of net buying. With Japan yields likely to move higher in 2024, it’s possible that Japan investors will stop chasing higher yields abroad. November data supports this thesis but it’s still too early to say for sure.
Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 4.35%. The RBA is expected to leave the cash rate target at 4.35% but market see a small 15% probability of a 25 bp cut. The risk is that the RBA delivers a dovish hold because of weak Australian economic activity and slower inflation. The NAB business conditions index is at the lowest level since January 2022 consistent with unimpressive growth, nominal retail sales fell sharply in December, and inflation is slowing more rapidly than the RBA forecasted. Specifically, we anticipate the RBA to remove the sentence “whether further tightening of monetary policy is required to ensure that inflation returns to target” from its post-meeting policy statement and bring forward the timing of when they project CPI inflation to reach 3% (currently Q4 2025). The decision will be accompanied by its Statement on Monetary Policy and Governor Bullock’s press conference. Bullock testifies Friday.
Australia reports some key data. Final January services and composite PMIs and December trade data will be reported Monday. Q4 real retail sales will be reported Tuesday and is expected at 0.1% q/q vs. 0.2% in Q3. Household consumption growth is weak and consumer sentiment remains consistent with subdued retail sales activity. Adjusted for inflation, retail sales growth over Q4 is expected to be muted at 0.1%.
New Zealand highlight will be Q4 employment data Wednesday. Employment is expected at 0.3% q/q vs. -0.2% in Q3, while the unemployment rate is expected at 4.3% vs. 3.9% in Q3. Private wages are expected at 0.8% q/q vs. 0.9% in Q3. The Q4 NZIER Quarterly Survey of Business Opinion (QSBO) continued to show a sharp easing in labor shortages, with firms reporting that it is easier to find both skilled and unskilled labor. The RBNZ’s Q4 projections has the unemployment rate rising 0.3 ticks to 4.2%, employment growth of 0.2% q/q, and private sector wage growth of 0.8% q/q. Unless the slowdown in private sector wage growth is more pronounced, the RBNZ will likely remain patient before shifting away from restrictive policy settings.