The majors were firmer across the board last week as the dollar came under broad-based pressure after CPI data showed ongoing disinflation. JPY, EUR, and AUD outperformed last week while CHF, CAD, and NZD underperformed. Until the dovish Fed narrative shifts more hawkish, risk assets should continue to build on recent gains. The China reopening story is also adding to risk on impulses, though we expect data to remain relatively weak due to ongoing viral outbreaks.

AMERICAS

December PPI will be reported Wednesday. Headline is expected at 6.8% y/y vs. 7.4% in November, while core is expected at 5.5% y/y vs. 6.2% in November. CPI data last week came in as expected and markets continue to price in a less hawkish Fed ahead. While inflation pressures continue to ease, we note that core PCE remains well above the Fed’s 2% target and more work clearly needs to be done to get it lower.

December retail sales will also be reported Wednesday. Headline is expected at -0.8% m/m vs. -0.6% in November, while ex-autos is expected at -0.5% y/y vs. -0.2% in November. The so-called control group used for GDP calculations is expected at -0.3% m/m vs. -0.2% in November. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q4 growth at 4.1% SAAR, up from 3.8% previously. The next model update comes Wednesday.

The Fed releases its Beige Book report Wednesday. Since the last FOMC meeting December 13-14, most indicators suggest further slowing in the real economy as well as lower price and wage pressures. However, labor market data suggests ongoing robustness in hiring and we think that will ultimately limit the drop in average hourly earnings. Overall, we expect the Beige Book to paint a mixed picture of the economy that suggests a willingness to continue tightening if data warrant. Williams speaks Tuesday. Bostic, Harker, and Logan speak Wednesday. Collins, Brainard, and Williams speak Thursday. Harker and Waller speak Friday. We expect Fed speakers to remain hawkish as financial conditions continue to loosen.

We continue to believe markets are underestimating the Fed. WIRP suggests a 25 bp hike February 1 is fully priced in, with only 10% odds of a larger 50 bp move. Another 25 bp hike March 22 is almost priced in, while one last 25 bp hike in Q2 is only 35% priced in. We think these odds are too low. Furthermore, the swaps market continues to price in an easing cycle by year-end and we just don’t see that happening.

The regional Fed manufacturing surveys for January start rolling out. Empire survey will be reported Tuesday and is expected at -7.5 vs. -11.2 in December. Philly Fed reports Thursday and is expected at -10.0 vs. -13.8 in December. In between, December IP will be reported Wednesday and is expected at -0.1% m/m vs. -0.2% in November. There can be no doubt that the manufacturing sector is also slowing along with the housing sector. However, this is exactly what the Fed wants to see.

Housing data are expected to show further weakness. January NAHB housing index will be reported Wednesday and is expected to remain steady at 31. December building permits (1.4% m/m expected) and housing starts (-4.9% m/m expected) will be reported Thursday. Existing home sales will be reported Friday and are expected at -3.4% m/m vs. -7.7% in November. With the Fed continuing to tighten, weakness in housing is expected to intensify. November business inventories and TIC data will be reported Wednesday.

Weekly jobless claims Thursday will be of interest. That is because initial claims will be for the BLS survey week containing the 12th of the month and are expected at 211k vs. 205k the previous week. Continuing claims are reported with a one-week lag and so next week’s reading will be for the BLS survey week. If claims data remain low, we can expect another solid NFP reading for January that will follow 223k in December. Until the labor market weakens, it’s hard to see how wages will fall enough for the Fed to feel comfortable pivoting.

The U.S. debt ceiling is likely to come more into focus. That’s because ahead of the weekend, Treasury Secretary Yellen projected that the U.S. would hit that ceiling this Thursday. She said Treasury will resort to “extraordinary measures” to avoid default and buy some time until Congress either raises the $31.4 trln ceiling or suspends it again. Yellen warned that it's “critical that Congress act in a timely manner. Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability. In the past, even threats that the U.S. government might fail to meet its obligations have caused real harms, including the only credit rating downgrade in the history of our nation in 2011.” This is a potential risk off event that has not gotten much attention. Yet.

Canada highlight will be December CPI Tuesday. Headline is expected at 6.4% y/y vs. 6.8% in November. If so, it would continue the deceleration from the 8.1% peak in June to the lowest since February 2021. Bank of Canada tightening expectations remain steady. WIRP suggests nearly 80% odds of a 25 bp hike to 4.5% January 25. Looking ahead, odds of another 25 bp hike in Q2 top out at around 45%. Recent data have come in firm and so we see risks of a peak policy rate that’s higher than markets are pricing in. BOC releases its Q4 business outlook survey Monday.

Other key Canadian data will be reported. November retail sales will be reported Friday. Headline is expected at -0.5% m/m vs. 1.4% in October, while ex-autos is expected at -0.7% m/m vs. 1.7% in October. Ahead of that, November manufacturing sales and December existing home sales will be reported Monday. December housing starts will be reported Tuesday. November wholesale trade sales will be reported Thursday.

EUROPE/MIDDLE EAST/AFRICA

Eurozone has a quiet week in terms of data. The highlight will be when Germany reports January ZEW expectations Tuesday. Both expectations and current situation are expected to improve to -15.0 and -57.0, respectively. Many of the survey indicators have improved recently but we think it’s way too early to say it’s all clear.

The ECB publishes the account of its December 15 meeting Thursday. At that meeting, the bank hiked rates 50 bp to 2.5% and said that it expected to hike rates further but will decide meeting by meeting. In her press conference, Madame Lagarde said it was obvious to expect more 50 bp hikes “for a period of time.” She stressed that market rate bets wouldn’t lead to inflation converging with the 2% target and that the ECB needs to do more than what the market expects. Lastly, Lagarde said that anyone who thinks the ECB is pivoting is wrong, as the bank wants rates at a sufficiently restrictive level to achieve its inflation target. Reports suggested that more than a third of the ECB policymakers favored a 75 bp hike then but settled for a smaller 50 bp move in return for more hawkish messaging on future hikes as well as a firm commitment to promptly start Quantitative Tightening.

ECB tightening expectations are little changed. WIRP suggests a 50 bp hike February 2 is almost fully priced in, followed by 65% odds of another 50 bp hike March 16. A 25 bp hike May 4 is about 75% priced in, while a last 25 bp hike in Q3 is about 75% priced in that would see the deposit rate peak near 3.5% vs. 3.75% last week. If inflation continues to slow, we think the expected peak rate is likely to move down to 3.25% and perhaps even to 3.0%, which is where it stood back in mid-December. De Cos speaks Monday. Centeno speaks Tuesday. Villeroy speaks Wednesday. Lagarde, Knot, and Schnabel speak Thursday. Nagel, Villeroy, and Lagarde speak Friday.

The U.K. data dump continues. Labor market data will be reported Tuesday. December payrolled employees are expected at 63k vs. 107k in November. For the three months ended November, the unemployment rate is expected to remain steady at 3.7% while average weekly earnings are expected to rise a tick to 6.2% y/y. January GfK consumer confidence will be reported Thursday. December retail sales will be reported Friday. Headline is expected at 0.5% m/m vs. -0.4% in November while sales ex-auto fuel are expected at 0.4% m/m vs. -0.3% in November.

December CPI will be reported Wednesday. Headline is expected at 10.5% y/y vs. 10.7%, core is expected at 6.2% y/y vs. 6.3% in November, and CPIH is expected at 9.1% y/y vs. 9.3% in November. If so, headline would decelerate for the second straight month from the 11.1% peak in October but would remain far above the 2% target.

BOE tightening expectations remain steady. WIRP suggest nearly 80% odds of a 50 bp hike February 2, while a 25 bp hike March 23 is now priced in rather than 50 bp previously. After that, a 25 bp hike in either Q2 or Q3 is nearly priced in that would see the bank rate peak near 4.5% vs. 4.75% last week.

Norges Bank meets Thursday and is expected to hike rates 25 bp to 3.0%. This could end the tightening cycle but much will depend on how the economy evolves in H1. At the last policy meeting December 15, the bank hiked rates 25 bp to 2.75% and noted that the policy rate “will most likely be raised further in the first quarter of next year.” Governor Bache stressed then that “The forecasts for the Norwegian economy are more uncertain than normal, but if the economy evolves as anticipated, the policy rate will be around 3% next year.” Since then, December CPI was reported and headline came in at 5.9% y/y vs. 6.1% expected and 6.5% in November, while underlying came in at 5.8% y/y vs. 5.7% expected and actual in November. Headline decelerated for the second straight month from the 7.5% peak in October but remains well above the 2% target. The expected rate path still saw the policy rate peaking near 3.0%, with gradual easing expected in H2 24. The swaps market is now pricing in a peak policy rate near 3.0% vs. 3.25% right after the December meeting.

ASIA

The two-day Bank of Japan meeting ends Wednesday. WIRP suggests over 30% odds of liftoff, followed by 65% for the March 9-10 meeting and fully priced in for the April 27-28 meeting. While a hike this week seems unlikely, we think it’s quite possible that the BOJ abandons YCC in order to set up liftoff at the March or April meeting. This is the basic roadmap for tightening that’s been well-established by the Fed. Of note, the BOJ’s balance sheet has continued to grow as a result of YCC but we do not foresee Quantitative Tightening until 2024 at the earliest.

New forecasts will be released in the Outlook Report. Reports suggest the bank will raise its core inflation forecasts close to its 2% target. Specifically, the bank is expected to raise its FY23 forecast to between 1.6-2.0% and its FY24 forecast to almost 2% vs. 1.6% for both in the October forecasts. If so, the upgrades would support our view that liftoff is likely to come earlier than we previously anticipated, with risks of a move in Q2 or perhaps even Q1 vs. H2 seen previously.

Japan also reports key data. December national CPI Friday will be the highlight. Headline is expected at 4.0% y/y vs. 3.8% in November, core is expected at 4.0% y/y vs. 3.7% in November, and core ex-energy is expected at 3.1% y/y vs. 2.8% in November. Ahead of that December PPI will be reported Monday and is expected at 9.5% y/y vs. 9.3% in November.

Other key data will be reported. December machine tool orders will be reported Monday. November core machine orders will be reported Wednesday and are expected at -1.2% m/m vs. 5.4% in October. Both are likely to contract y/y, which bodes ill for IP and exports in the coming months. December trade data will be reported Thursday. Exports are expected at 10.6% y/y vs. 20.0% in November, while imports are expected at 22.6% y/y vs. 30.3% in November.

Australia highlight will be December jobs data Thursday. Consensus sees 25.0k jobs added vs. 64.0k in November, while the unemployment rate is seen steady at 3.4%. Of note, November CPI ran hot as headline inflation came in a tick higher than expected at 7.3% y/y vs. 6.9% in October and trimmed mean came in a tick higher than expected at 5.6% y/y vs. a revised 5.4% (was 5.3%) in October. Headline matched the cycle high from September and moved further above the 2-3% target range. At the last policy meeting December 6, the Reserve Bank of Australia hiked rates 25 bp to 3.10%. The next policy meeting is February 7 and WIRP suggests nearly 65% odds of a 25 bp hike, while the swaps market is pricing in a peak policy rate near 3.85%. Given how robust the economy remains despite the 300 bp of tightening seen so far, we believe there are upside risks to the terminal rate. Updated forecasts will come at that meeting.