The dollar saw broad-based weakness against the majors last week. GBP, NZD, and SEK outperformed while JPY, AUD, and CAD underperformed. The less hawkish Fed narrative was supported by the U.S. data last week, but weakness in retail sales and IP have raised concerns about global recession. In our view, stronger growth in China and Europe are unlikely to fully offset any U.S. slowdown and so global growth is likely to run into greater headwinds as the year progresses.

AMERICAS

There are no Fed speakers this week due to the media embargo ahead of the January 31-February 1 FOMC meeting. WIRP suggests a 25 bp hike February 1 is fully priced in, with less than 5% odds of a larger 50 bp move. Another 25 bp hike March 22 is about 80% priced in, while one last 25 bp hike in Q2 is only 30% 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. Until this Fed narrative changes, however, the dollar is likely to remain under pressure.

December core PCE Friday will be the data highlight. Consensus sees 4.4% y/y vs. 4.7% in November. If so, it would be the lowest since October 2021 but still more than double the Fed’s 2% target. Personal income and spending will be reported at the same time and are expected at 0.2% m/m and -0.1% m/m, respectively. December retail sales data came in very weak and so it will be interesting to see if overall spending that includes services also weakened.

Q4 GDP data Thursday will be of interest. Consensus sees 2.7% SAAR growth vs. 3.2% in Q3. Personal consumption is seen at 2.8% SAAR vs. 2.3% in Q3. Of note, the Atlanta Fed’s final estimate for Q4 came in at 3.5% SAAR. Its first estimate for Q1 will be released this Friday, where Bloomberg consensus currently stands at 0.0% SAAR. It does appear that the U.S. economy lost some momentum as we moved into the new year, as evidenced by weakness in the retail sales and IP data reported last week.

We get more January survey readings. Philly Fed non-manufacturing index. S&P Global preliminary January PMIs, and Richmond Fed manufacturing index will be reported Tuesday. Headline manufacturing PMI is expected at 46.0 vs. 46.2 in December, services PMI is expected at 45.0 vs. 44.7 in December, and the composite is expected at 47.0 vs. 45.0 in December. Richmond Fed is expected at -5 vs. 1 in December. Kansas City Fed manufacturing index will be reported Thursday and is expected at -8 vs. -9 in December, followed by its services index Friday.

December Chicago Fed National Activity Index will be reported Thursday. We need a good read on the current state of the economy. November was never released and so we assume both months will be reported at the same time. As things stand, October came in at -0.05 and was the first negative reading since June, while the 3-month moving average was 0.09. A zero reading means the economy is growing at around trend. Recall that when that 3-month average moves below -0.7, that signals imminent recession and we are still well above that threshold. This series has taken on greater significance now that the 3-month to 10-year curve has inverted deeply. The continued resilience in the economy is noteworthy and suggests the Fed still has a lot more work to do in getting to the desired sub-trend growth.

Other minor data will round out the U.S. economic outlook. December leading index will be reported Monday and is expected at -0.7% m/m vs. -1.0% in November. December wholesale and retail inventories, advance goods balance (-$88.1 bln expected), durable goods orders (2.5% m/m expected), weekly jobless claims, and new home sales (-4.7% m/m expected) will be reported Thursday. Pending home sales (-1.0% m/m expected) will be reported Friday along with final January University of Michigan consumer sentiment.

Bank of Canada meets Wednesday and is expected to hike rates 25 bp to 4.5%. A few analysts polled by Bloomberg see steady rates. Headline inflation continues to decelerate while core continues to accelerate, making the central bank’s decision a bit more difficult. The labor market remained red hot in December, as 100k jobs created (mostly full-time) helped push the unemployment rate down to 5.0%, just a tick above the cycle low from this past summer. WIRP suggests nearly 80% odds of a 25 bp hike this week, while the odds of another 25 bp hike in Q2 top out at around 20% in June. Recent data have come in firm and so we see risks of a peak policy rate that’s higher than the 4.5% that markets are pricing in.

EUROPE/MIDDLE EAST/AFRICA

The eurozone has a quiet week. Preliminary January PMIs will be reported Tuesday. Headline manufacturing PMI is expected at 48.5 vs. 47.8 in December, services PMI is expected at 50.2 vs. 49.8 in December, and the composite is expected at 49.8 vs. 49.3 in December. If so, it would be the third straight monthly rise from the 47.3 trough in October. Looking at the country breakdown, the German composite is expected at 49.7 vs. 49.0 in December and the French composite is expected at 49.5 vs. 49.1 in December. Italy and Spain will be reported with the final PMI readings in early February.

Germany reports some key sentiment indicators. February GfK consumer confidence Tuesday and is expected at -33.0 vs. -37.8 in January. January IFO business climate will be reported Wednesday. Headline is expected at 90.3 vs. 88.6 in December, driven by gains in both current assessment and expectations to 95.0 and 85.5, respectively. Last week, Chancellor Scholz said he’s sure that Germany will avoid recession this year, buoyed by improved sentiment readings and a warm winter so far.

Spain will be the first to report Q4 GDP Friday. Growth is expected to remain steady at 0.1% q/q, while the y/y rate is expected at 2.2% vs. 4.4% in Q3. France, Germany, Italy, and eurozone GDP will be reported the following week.

ECB tightening expectations are little changed. WIRP suggests a 50 bp hike February 2 is almost fully priced in, followed by nearly 70% 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 70% priced in that would see the deposit rate peak near 3.5%. If inflation continues to slow, we think the expected peak rate is likely to move back down to 3.25% as it did last week and perhaps even down to 3.0%, which is where it stood back in mid-December. December M3 data will be reported Friday and is expected at 4.6% y/y vs. 4.8% in November.

The U.K. has a quiet week. Preliminary January PMIs and December public sector net borrowing will be reported Tuesday. Headline manufacturing PMI is expected at 45.4 vs. 45.3 in December, services PMI is expected at 49.5 vs. 49.9 in December, and the composite is expected at 48.9 vs. 49.0 in December. PSNB ex-banking groups is expected at GBP17.0 bln vs. GBP22.0 bln in November. CBI also releases the results of its January surveys. Industrial trends will be reported Tuesday, with total orders expected at -9 vs. -6 in December. Distributive trades will be reported Thursday.

BOE tightening expectations remain steady. WIRP suggest nearly 85% 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 June is priced in that would see the bank rate peak near 4.5%. Last week, Governor Bailey said inflation has peaked and will fall “quite rapidly” in late spring due to largely energy prices.

ASIA

Japan reports key data this week. January Tokyo CPI Friday will be the highlight. Headline is expected at 4.0% y/y vs. a revised 3.9% (was 4.0%) in December, core (ex-fresh food) is expected at 4.2% y/y vs. a revised 3.9% (was 4.0%) in December, and core ex-energy is expected at 2.9% y/y vs. 2.7% in December. Last week, Governor Kuroda remained dovish and said the bank will maintain current policy. He expects inflation to decline starting in February. Markets are still positioned for BOJ liftoff in H1 but once past the knee-jerk reaction to the inflection point, it's not like the yen is a screaming buy. The May 2022 low near 126.35 is very likely to be tested. After that is the March 2022 low near 121.30 and we think that may be it for the move. The January 2022 low near 113.45 seems a bridge too far given that any BOJ tightening is likely to be very modest.

Other data should give us an idea of how the real sector is holding up. Preliminary January PMIs and December department store sales will be reported Tuesday. The composite recovered in December from the 48.9 trough in November but the 2023 outlook remains cloudy, especially if the BOJ starts to withdraw accommodation.

Australia highlight will be December and Q4 CPI data Wednesday. Headline inflation is expected at 7.5% y/y in Q4 vs. 7.3% in Q3, while trimmed mean is expected at 6.5% y/y vs. 6.1% in Q3. For December alone, headline is expected at 7.7% y/y vs. 7.3% in November, while trimmed mean is expected at 5.8% y/y vs. 5.6% in November. All these inflation readings would be new cycle highs. 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 3.55%, down from 3.65% last week and 3.85% at the start of the year. Given that inflation is rising again despite the 300 bp of tightening seen so far, we believe there are upside risks to the terminal rate. Updated macro forecasts will come at the February meeting. Preliminary January PMIs will be reported Tuesday, while Q4 PPI will be reported Friday.

New Zealand highlight will be Q4 CPI data Wednesday. Headline inflation is expected to ease a tick to 7.1% y/y. If so, it would be the second straight quarter of deceleration from the 7.3% peak in Q2 2022 but still well above the 1-3% target range. At the last policy meeting November 23, the RBNZ hiked rates 75 bp to 4.25% and signaled further tightening ahead. Updated forecasts were released and showed an upward shift in the expected rate path to 5.5% this year, up sharply from 4.1% previously. Next policy meeting is February 22 and a 50 bp hike is fully priced in, with over 50% odds of larger 75 bp move. New forecasts will be released then. The swaps market is pricing in a peak policy rate near 5.5%, which matches the bank’s expected rate path.