The dollar rallied last week against all major currencies as 10-year Treasury yields rose to multi-week highs around 4.18%. Both were underpinned by the healthy state of the U.S. economy. Retail sales growth in December 2023 was much better than expected and the University of Michigan consumer sentiment report points to continued strength in household spending. It's a busy week ahead. Four G10 central banks hold policy-setting meetings (BOJ, BOC, Norges Bank, and ECB), there are a bunch of key leading economic indicators to be released (notably the January PMIs).

AMERICAS

The Fed funds futures curve has adjusted a little higher. However, it still prices in over 125 bp of easing over the course of 2024 starting in May. This seems unlikely. By contrast, the December Dot Plot implies 75 bp of rate cuts. If the data remain firm as we expect, there is room for Fed funds future pricing to converge towards the FOMC’s projections and support a firmer USD. Due to the media blackout, there are no Fed speakers this week.

December PCE data Friday will be the data highlight. Headline is expected to remain steady at 2.6% y/y while core is expected to fall two ticks to 3.0%. Of note, the 6 and 3-month change in core PCE inflation has been hovering close to the FOMC’s 2% inflation goal. The Cleveland Fed’s inflation Nowcast model sees headline and core at 2.7% y/y and 3.0% y/y, respectivley. For January, it sees them at 2.30% y/y and 2.75% y/y, respectively.

Personal income and spending will be reported at the same time. Income is expected at 0.3% m/m vs. 0.4% in November, while spending is expected at 0.4% m/m vs. 0.2% in November. December retail sales accelerated in y/y terms from November and so we expect personal spending (which includes services) to also accelerate from November.

Q4 GDP data Thursday will also be key. Growth is expected at 1.9% SAAR vs. 4.9% in Q3, with personal consumption expected at 2.3% SAAR vs. 3.1% in Q3. The risks are clearly skewed to the upside as both the Atlanta Fed GDPNow and New York Fed Nowcast models forecast Q4 growth at 2.4% SAAR. The Atlanta Fed will begin estimating Q1 growth this Friday, while the New York Fed currently estimates Q1 growth at 2.4% SAAR. December Chicago Fed National Activity Index will be reported Thursday too.

S&P Global reports its preliminary January PMIs Wednesday. Manufacturing is expected at 47.5 vs. 47.9 in December, services is expected at 51.0 vs. 51.4 in December, and the composite is expected at 51.0 vs. 50.9 in December. As a background, the US services PMI signaled a quicker expansion in activity in December with the index rising 0.6 tick to 51.4. Meanwhile, the manufacturing sector slipped further into contraction at the end of 2023.

Regional Fed surveys for January continue rolling out. Philly Fed non-manufacturing and Richmond manufacturing and non-manufacturing indices will be reported Tuesday. Kansas City manufacturing index will be reported Thursday, followed by its services index Friday.

Weekly jobless claims will be closely watched. That’s because continuing claims will be for the BLS survey week containing the 12th of the month. These are expected at 1.840 mln vs. 1.806 mln last week, the lowest since mid-October. Initial claims are expected at 200k vs. 187k last week, the lowest since September 2022. Bloomberg consensus for January NFP stands at 155k, while its whisper number stands at 161k.

Housing data will remain in focus. December new home sales will be reported Thursday and are expected at 10.0% m/m vs. -12.2% in November. Pending home sales will be reported Friday and are expected at 2.0% m/m vs. 0.0% m/m in November.

Other minor data will be reported. December leading index will be reported Monday and is expected at -0.3% m/m vs. -0.5% in November. December advance goods trade, retail and wholesale inventories, and durable goods orders will all be reported Thursday. Orders are expected at 1.1% m/m vs. 5.4% in November.

The Bank of Canada meeting ends Wednesday with a decision. The bank is widely expected to leave the overnight rate at 5.0%. Importantly, the BOC is likely to emphasize again that it “is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed” which is CAD supportive. Indeed, underlying inflation in Canada remains too high and sticky between 3.5-4.0% since May 2023. Updated macro forecasts will be released.

EUROPE/MIDDLE EAST/AFRICA

The two-day European Central Bank meeting ends Thursday with a decision. The bank is widely expected to leave the policy rate at 4% and reiterate its plan to reduce reinvestment from maturing securities purchased under the PEPP over the second half of the year and discontinue them at the end of 2024. Ahead of the decision, the ECB releases the results of it bank lending survey Tuesday. After the decision, Panetta, Kazaks, and Vujcic speak Friday.

President Lagarde’s press conference will be key. Lagarde will likely further lean against money market bets on policy loosening. Indeed, the ECB’s Account of the December 2023 policy meeting noted that “it was widely regarded as important not to accommodate market expectations in the post-meeting communication” as it could derail the disinflationary process. If all goes as expected with the ECB, the euro will likely take its cue from the eurozone data this week. Confirmation that a recovery in eurozone economic activity is underway can offer the euro broad intra-day support. Otherwise, EUR will come under renewed downside pressure against most major currencies.

Eurozone reports preliminary January PMIs Wednesday. Headline manufacturing is expected at 44.7 vs. 44.4 in December, services is expected at 49.0 vs. 48.8 in December, and the composite is expected at 48.0 vs. 47.6 in December. Looking at the country breakdown, the German composite is expected at 47.8 vs. 47.4 in December while the French composite is expected at 45.2 vs. 44.8 in December. Italy and Spain won’t report until final PMI readings are reported in early February.

Germany reports some key sentiment indicators. IFO survey for January will be reported Thursday. Headline is expected to rise two ticks to 86.6. February GfK consumer confidence will be reported Friday and is expected to rise four ticks to -24.7.

U.K reports preliminary January PMIs Wednesday. Manufacturing is expected at 46.7 vs. 46.2 in December, services is expected at 53.2 vs. 53.4 in December, and the composite is expected at 52.2 vs. 52.1 in December. Overall, the market is looking for roughly 125 bp of policy rate cuts this year (starting in Q2). However, poor U.K. consumer spending activity and high underlying inflation complicates the BOE’s task of achieving price stability in a way that helps sustain growth. This will be a drag on sterling.

Other minor U.K. data will be reported. December public sector net borrowing will be reported Tuesday. January CBI industrial trends survey will be reported Wednesday. Total orders are expected at -22 vs. -23 in December, while selling prices are expected at 5 vs. 7 in December. Its distributive trades survey will be reported Thursday and retailing reported sales are expected at -20 vs. -32 in December. January GfK consumer confidence will also be reported Thursday and is expected to improve a point to -21.

Norges Bank meeting ends Thursday with a decision. The bank is widely expected to leave the policy rate at 4.5%. At the December meeting, the Norges Bank unexpectedly lifted the policy rate by 25 bp to 4.5% (consensus was no change) but emphasized that it planned to keep rates at that level until Q3 2024 before gradually moving down. Inflation and economic activity are largely tracking the Norges Bank forecasts and so we don’t expect any major dovish/hawkish surprises this week. WIRP suggests the first cut is priced in for June 20.

ASIA

The two-day Bank of Japan meeting ends Tuesday with a decision. No policy changes are anticipated and Japan’s encouraging disinflation backdrop suggests the BOJ can afford to be patient with policy normalization. WIRP suggests liftoff is not priced in until July. The risk is the BOJ cuts its inflation forecasts, which could further weigh on Japan’s OIS curve and JPY. The yen tends to weaken on BOJ decision days. It has done so for the past six straight and seven of the past eight.

December national CPI will be the data highlight. Headline is expected at 2.0% y/y vs. 2.4% in December, core is expected at 1.9% y/y vs. 2.1% in December, and core ex-energy is expected at 3.4% y/y vs. 3.5% in December. If so, core would be the lowest since May 2022 and below the 2% target.

Japan reports December trade data Wednesday. Exports are expected at 9.2% y/y vs. -0.2% in November, while imports are expected at -5.4% y/y vs. -11.9% in November. If so, exports would be the strongest since December 2022.

Japan reports preliminary January PMIs Wednesday. The composite PMI has been gyrating around the key 50 level the past three months.

Australia reports preliminary January PMIs Wednesday. The composite PMI has been below 50 for three straight months and is unlikely to move above that level anytime soon.

New Zealand highlight will be Q4 CPI data Wednesday. Headline CPI is expected at 0.5% q/q vs. 1.8% in Q3, while the y/y rate is expected at 4.7% y/y vs. 5.6% in Q3. If so, it would be the lowest since Q2 2021 but still well above the 1-3% target range. Of note, the RBNZ’s Q4 CPI projection comes in higher at 0.8% q/q and 5.0% y/y. Net RBNZ meeting is February 28 and no change is expected then. However, the market is pricing in almost 100 bp of policy rate cuts this year starting midyear. This looks too aggressive and NZD can benefit from a potential repricing of rate cut expectations. Indeed, New Zealand’s December ANZ Business Outlook survey points to a rebound in activity, and firmer whole milk powder prices (its biggest commodity export) will have a positive net wealth effect to the real economy.