The dollar is coming off a week of broad-based weakness against the majors. AUD, JPY, and NZD outperformed while GBP, CAD, and EUR underperformed. For all of 2022, every major currency was down against the dollar: CHF (-1%), EUR (-6%), and AUD (-6%) outperformed, while SEK (-13%), JPY (-12%), and GBP (-11%) underperformed. We do not think 2023 offers much relief as the Fed continues to tighten and the U.S. economy remains relatively firm even as much of the world falls into recession. Bottom line: we are maintaining our strong dollar call and the major currencies are likely to remain under pressure this year, particularly in H1. The one likely exception is JPY, which could outperform as Bank of Japan tightening risks rise.
AMERICAS
The December jobs report Friday will be the data highlight. Consensus for NFP stands at 200k vs. 263k in November, while the unemployment rate is seen steady at 3.7% and average hourly earnings are seen down a tick to 5.0% y/y. Annual revisions to the household survey will be seen. Of note, the unemployment rate is derived from the household survey and it will be interesting to see if its -328k reading last month was an outlier or a harbinger of things to come for the establishment survey’s NFP. Ahead of the jobs report, ADP releases its private sector job estimate Thursday and is expected at 145k vs. 127k in November. If the labor market remains tight, the Fed will be forced to tighten even more to get the desired fall in wage and price pressures.
We get important survey readings for December. ISM manufacturing PMI will be reported Wednesday and headline is expected at 48.5 vs. 49.0 in November. Keep an eye on prices paid, which is expected to fall a tick to 42.9. ISM services PMI will be reported Friday and headline is expected at 55.0 vs. 56.5 in November. Last week, Chicago PMI came in 44.9 vs. 40.0 expected and 37.2 in November. Recent data suggest the U.S. economy remains relatively firm. The Atlanta Fed’s GDPNow model is tracking 3.7% SAAR growth in Q4, up from 2.7% previously. The next model update will come this Tuesday.
Other minor data will be reported. November construction spending will be reported Tuesday and is expected at -0.4% m/m vs. -0.3% in October. November JOLTS job openings (10.0 mln expected) and December vehicle sales (13.7 mln annualized) will be reported Wednesday. December Challenger job cuts, November trade (-$72.0 bln expected), and weekly jobless claims will be reported Thursday. November factory orders will be reported Friday and are expected at -0.9% m/m vs. 1.0% in October.
FOMC minutes Wednesday will be very important. At the December meeting, the Fed downshifted to 50 bp hike. However, Chair Powell delivered a very hawkish message at his press conference and so the minutes should help fill in the picture. We continue to believe markets are underestimating the Fed. WIRP suggests a 25 bp hike February 1 is fully priced in, with over 30% odds of a larger 50 bp move. Another 25 bp hike March 22 is fully priced in, with nearly 50% odds of one last 25 bp hike in Q2 that would take the Fed Funds rate ceiling up to 5.25%. However, the swaps market continues to price in an easing cycle by year-end and we just don’t see that happening. Barkin speaks Friday.
There is a potential dovish shift on the FOMC this year. Goolsbee, Harker, Logan, and Kashkari are now voting members of the FOMC. Harker and Logan are considered centrists, Kashkari has transformed into a hawk, and Goolsbee is an unknown quantity. While we hesitate to call these new voters dovish, they replace a group of noted hawks made up of Bullard, Mester, George, and Collins, who become non-voters in 2023. All seven members of the Board of Governors and Williams (New York Fed is a permanent voter) will remain voters this year.
Canada also reports jobs data Friday. In November, 10.1k jobs were added and the unemployment rate was 5.1%. December Ivey PMI will also be reported Friday. Bank of Canada tightening expectations remain subdued. WIRP suggests nearly 75% odds of a 25 bp hike to 4.5% January 25, followed by less than 50% odds of another 25 bp hike by mid-year.
EUROPE/MIDDLE EAST/AFRICA
As 2023 gets under way, the eurozone outlook is certainly better than it was during the summer. With the addition of Croatia, there are now more countries in the eurozone than ever before and none have dropped out. Sentiment indicators have improved modestly and policymakers continue to forecast a short and shallow downturn even as the winter has so far proven to be mild. All of these developments have helped push the euro in recent weeks to its highest level since June. Yet we believe markets have gotten too sanguine about the eurozone outlook, with Italy likely to come more into focus as the ECB continues to tighten. This leads us to believe that the single currency is nearing a top for this current move, perhaps near the May/June highs just below$1.08.
Eurozone inflation data will take center stage. Spain reported first last week and its EU Harmonized measure came in at 5.6% y/y vs. 5.8% expected and 6.7% in November and was the lowest since November 2021. This week, Germany reports December CPI Tuesday and its EU Harmonized measure is expected at 10.2% y/y vs. 11.3% in November. If so, it would be the lowest since August. France reports Wednesday and its EU Harmonized measure is expected at 7.3% y/y vs. 7.1% in November. If so, it would be the highest on record since 1997. Italy reports Thursday and its EU Harmonized measure is expected at 12.3% y/y vs. 12.6% in November. If so, it would be the lowest since September. Eurozone reports Friday, with headline expected at 9.5% y/y vs. 10.1% in November, which would be the lowest since August, while core is expected at a new cycle high of 5.1% y/y vs. 5.0% in November. Of note, November PPI will be reported Thursday and is expected at 27.5% y/y vs. 30.8% in October.
ECB tightening expectations remain steady. WIRP suggests a 50 bp hike February 2 is nearly 90% priced in, followed by 70% odds of another 50 bp hike March 16. Another 50 bp hike is nearly priced in by June 15, with low odds of one last 25 bp hike July 27. Can the ECB basically double the deposit rate from the current 2% even as the eurozone slips into recession? We remain skeptical. Centeno and Lane both speak Friday.
Eurozone final December PMIs will be reported. Manufacturing PMIs were reported yesterday and the headline was steady at 47.8. German fell three ticks from the preliminary to 47.1, while France rose three ticks to 49.2. Italy and Spain reported for the first time and came in at 48.5 and 46.4, respectively. Final services and composite PMIs will be reported Wednesday. Here too, Italy and Spain will be reported for the first time. We believe markets are reading too much into the recent modest improvement in the sentiment indicators. The ECB tightening cycle began in July and so the full impact of the 250 bp in rate hikes so far has yet to be felt, not to mention the additional 150 bp that’s still priced in for 2023.
Germany reports other key data. December unemployment will be reported Tuesday and is expected to remain steady at 5.6%. November trade data will be reported Thursday. November retail sales and factory orders will be reported Friday. Sales are expected at 1.5% m/m vs. -2.7% in October, while orders are expected at -0.5% m/m vs. 0.8% in October. IP will be reported next Monday. With Germany’s second largest trading partner China struggling with the pandemic, we do no think this recent bounce in the data can be sustained.
U.K. reports only minor data. Final December PMIs will be reported. Manufacturing will be reported Tuesday. Services and composite PMIs will be reported Thursday. Construction PMI will be reported Friday. Here too, we downplay the recent modest improvement in the sentiment indicators. With both fiscal and monetary tightening in the pipeline, it’s hard to see where growth would come from. In between, November consumer credit will be reported Wednesday.
BOE tightening expectations remain steady. WIRP suggests 66% odds of a 50 bp hike February 2, followed by nearly 60% odds of another 50 bp hike March 23. After that, one final 25 bp hike is nearly priced in June 22 that would see the policy rates peak near 4.75%. Similarly, can the BOE continue hiking rates even as tighter fiscal policy weighs on growth? Mann speaks Saturday. Sterling has been a laggard and remains stuck near $1.20 after trading as high as $1.2445 in mid-December. We expect sterling to continue underperforming this year and note that the major retracement objectives from the September-December rally come in near $1.1645 (38%), $1.14 (50%), and $1.1150 (62%).
ASIA
Japan data highlight is November labor cash earnings Friday. Nominal earnings are expected at 1.7% y/y vs. 1.4% in October, while real earnings are expected at -2.8% y/y vs. -2.9% in October. Last week, Japan reported mixed labor market and retail sales data. The unemployment rate fell a tick to 2.5% but sales came in at -1.1% m/m vs. 0.2% expected and 0.3% in October. This suggests that despite the firm labor market, the ongoing erosion in real earnings is taking a toll on consumption.
BOJ tightening expectations remain elevated. WIRP suggests nearly 60% odds of liftoff at the March 9-10 meeting. Recent reports suggest the bank will raise its core inflation forecasts close to its 2% target in its Outlook Report for the January 17-18 meeting. Specifically, the bank is expected to raise its FY23 forecast to between 1.6-2.0% and its FY24 forecast to almost 2%. If so, the upgrades would seem to support our view that liftoff is likely to come earlier than we previously anticipated, with risks of a move in Q2 and even Q1 vs. H2 seen previously. Given Kuroda’s penchant for surprises, we cannot rule anything out right now.
The market should continue testing the BOJ’s commitment to Yield Curve Control. Last week, the bank was forced to hold several rounds of bond-buying across the curve as yields continued to climb in anticipation of the end of YCC. It appears that shorting both JGBs and USD/JPY is the trade of the moment now that the BOJ blinked. USD/JPY is nearing a test of the December 20 low near 130.60, which was itself a test of the August 2 low near 130.40. Break below would set up a test of the May low near 126.35. After that is the March 31 low near 121.30.
