The dollar came under broad-based selling pressure last week against the majors. GBP, SEK, and NOK outperformed while CHF, CAD, and JPY underperformed. The dollar was hurt last week by stories of delayed tariffs but that should reverse this week now that the tariff wars are upon us. President Trump over the weekend announced travel bans and immediate 25% tariffs on Colombian imports in retaliation for Colombia refusing to accept two U.S. military planes deporting 160 Colombians. Colombia President Petro announced 25% retaliatory tariffs on all U.S. goods. Of note, Mexico also announced over the weekend that it would not allow a U.S. military plane carrying deportees to land. Stay tuned.
AMERICAS
The two-day FOMC meeting ends Wednesday with a widely expected hold. We see some risks that the Fed’s decision is not unanimous after Governor Waller went full dove ahead of the media blackout. However, we believe he is in the clear minority, with most other officials preferring to keep policy on hold until the economic outlook becomes clearer. There are no updated Summary of Economic Projections, as the next one will be published in March.
Chair Powell’s post meeting press conference will be highly anticipated following President Trump’s jab at the Fed. Trump said that “with oil prices going down, I'll demand that interest rates drop immediately.” When asked if he believed Fed officials would listen to him, Trump responded “Yeah.” We expect Powell to emphasize again that the FOMC can be “more cautious as we consider further adjustments to our policy rate.” Of note, the next cut is now fully priced in for June and a second hike is now about 7%% priced in. Both are slightly more dovish than previous pricing but it will all come down to the data.
December PCE data Friday will be important. Headline is expected to pick up a tick to 2.5% y/y while core is expected to remain steady at 2.8% y/y. Of note, the Cleveland Fed’s inflation Nowcast model estimates headline and core PCE at 2.6% and 2.8%, respectively. For January, the model estimates 2.4% and 2.6%, respectively. The already released December CPI data continue to show that progress on inflation is stalling well above 2%, which supports the case for a shallow Fed easing cycle.
Personal income and spending will be reported at the same time. Income is expected at 0.4% m/m vs. 0.3% in November, spending is expected at 0.5% m/m vs. 0.4% in November, and real spending is expected to remain steady at 0.3% m/m. As long as jobs are being created, spending will be well-supported.
Chicago Fed National Activity Index for December will be reported Monday. Headline is expected at -0.06 vs. -0.12 in November. If so, the three-month moving average would rise to -0.23 vs. -0.31 in November, the highest since September and further away from the -0.7 threshold that typically signals recession.
Conference Board consumer confidence for January will be reported Tuesday. Headline is expected at 105.6 vs. 104.7 in December. If so, it would remain within the same narrow range that’s held throughout the past two years. Positive US real wage growth, encouraging labor demand, and strong household balance sheets suggest household spending will remain an important tailwind to GDP growth. Watch out for the labor index (jobs plentiful minus jobs hard to get). In December, that index rose to a seven-month high of 22.2, suggesting consumers are more optimistic about future labor market conditions.
We get our first official read for Q4 GDP Thursday. Consensus sees growth of 2.7% SAAR vs. 3.1% in Q3, driven in large part by strong personal consumption of 3.2% SAAR expected vs. 3.7% in Q3.
Growth remains robust. The New York Fed's Nowcast model is tracking Q4 growth at 2.6% SAAR and Q1 growth at 3.0% SAAR and will be updated Friday. Elsewhere, the Atlanta Fed GDPNow model is tracking Q4 growth at 3.0% SAAR and will next be updated Tuesday.
Q4 employment cost index will be reported Friday. ECI is expected to rise 0.9% q/q vs. 0.8% in Q3. This is the Fed’s favorite wage data because it’s more comprehensive and controls for changes in the composition of employment. On a y/y basis, ECI wages & salaries eased from a high of 5.3% in Q2 2022 to 3.9% in Q3 2024. Average hourly earnings and the Atlanta Fed wage growth tracker points to ECI wages & salaries y/y growth between 3.9-4.2%. This would be consistent with the Fed’s 2% inflation stability goal as productivity growth is around 2%.
Key surveys for January will continue to roll out. Dallas Fed manufacturing will be reported Monday and is expected at -30 vs. 3.4 in December. Dallas Fed services and Richmond Fed manufacturing (-12 expected) and services will be reported Tuesday. Chicago PMI will be reported Friday and is expected at 40.0 vs. 36.9 in December.
Bank of Canada also meets Wednesday and is expected to cut rates 25 bp to 3.0%. The bank is expected to cut rates 25 bp to 3.0% following two consecutive 50 bp cuts. Inflation is stabilizing around 2% and business sentiment remains subdued but has improved. Governor Macklem effectively ruled out additional jumbo cuts, pointing out that officials will consider further rate cuts but likely at a slower pace. Updated macro forecasts will be released and could provide some clues to the bank’s rate path. Markets are still pricing in 50 bp of total easing over next 12 months that would see the policy rate bottom near 2.75%.
EUROPE/MIDDLE EAST/AFRICA
European Central Bank meets Thursday and is expected to cut rates 25 bp. We expect the ECB to stick to its data-dependent guidance by reiterating it “is not pre-committing to a particular rate path.” President Lagarde’s post-meeting conference may offer more near-term policy guidance. Watch out to see if Lagarde re-emphasizes the need for a “very cautious” easing cycle and/or acknowledge if there were once again some discussions around a proposal for a 50 bp cut. There are no new macroeconomic projections due at this meeting as the next updates will be published in March.
Eurozone CPI data for January will roll out. Spain kicks things off Thursday. Its EU Harmonised inflation is expected to remain steady at 2.8% y/y. Spain is one of the only eurozone countries to report core inflation and it is expected to fall a tick to 2.5% y/y. France and Germany report Friday. France’s EU Harmonised inflation is expected to pick up a tick to 1.9% y/y, while Germany’s is expected to remain steady at 2.8% y/y. Italy and the eurozone report next Monday.
ECB December inflation expectations will be reported Friday. 1-year expectations are seen up a tick to 2.7% while 3-year expectations are seen steady at 2.4%. Overall, the eurozone’s soggy growth outlook leaves plenty of room for the ECB to bring down the policy rate towards the middle of its neutral range - estimated at around 1.5-3.0% - which is an ongoing drag for EUR. Markets are pricing in between 100 bp of total ECB easing over next 12 months that should see the policy rate bottom around 2.0%.
Eurozone reports Q4 GDP data Thursday. Growth is expected at 0.1% q/q vs. 0.4% in Q3, while the y/y rate is expected at 1.0% vs. 0.9% in Q3. France, Germany, and Italy also report GDP Thursday. French growth is expected at 0.0% q/q vs. 0.4% in Q3 and 0.8% y/y vs. 1.2% in Q3, German growth is expected at -0.1% q/q vs. 0.1% in Q3 and 0.0% y/y vs. -0.3% in Q3, and Italian growth is expected at 0.1% q/q vs. 0.0% in Q3 and 0.6% y/y vs. 0.4% in Q3. Ahead of that, Spain reports GDP data Wednesday. Growth is expected at 0.6% q/q vs. 0.8% in Q3, while the y/y rate is expected at 3.2% vs. 3.3% in Q3.
Eurozone consumption data for December will also roll out. France reports consumer spending Thursday and is expected at 0.2% y/y vs. 0.3% in November. Germany reports retail sales Friday and is expected at 2.6% y/y vs. 2.9% in November. Spain reports retail sales Friday and is expected at 2.0% y/y vs. 1.0% in November.
German IFO business climate survey for January will be reported Monday. Headline is expected to rise a tick to 84.8, current assessment is expected to rise three ticks to 85.1, and expectations is expected to rise six ticks to 85.0. Germany remains the weak link in the eurozone.
Only U.K. data of note is January BRC shop prices Monday. Shop prices are expected at -0.7% y/y vs. -1.0% in December. If so, it would suggest that official CPI inflation will be favorable. Markets are pricing in a 25 bp cut to 4.5% at the next BOE meeting February 6, as well as 75 bp of total easing over the next 12 months that would see the policy rate bottom near 4.0%..
Riksbank meets Wednesday and is expected to cut rates 25 bp to 3.0%. Markets are pricing in 70% odds of a cut, while an overwhelming majority of analysts surveyed by Bloomberg forecast a cut. In December, the Riksbank indicated “the policy rate may be cut once again during the first half of 2025” while emphasizing it will “carefully evaluate the need for future interest rate adjustments.” Inflation was cooler than anticipated in December, suggesting it is still too soon for the Riksbank to pause easing. Of note, the Riksbank sees the policy rate bottoming at 2.25% but the markets see nearly 50% odds of the rate falling to 2.0% over the next 12 months.
ASIA
Japan highlight will be January Tokyo CPI Friday. Headline is expected to fall a tick to 3.0% y/y, core (ex-fresh food) is expected to pick up a tick to 2.5% y/y, and core ex-energy is expected to pick up a tick to 1.9% y/y. If so, Tokyo core would be the highest since February 2024 and suggests upside risks to the national reading. After last week’s BOJ hike, the market is now pricing in the policy rate to peak near 1.25% over the next two years vs. 1.0% before the decision. This may keep USD/JPY near the bottom of the recent 155-160 trading range.
December labor market and real sector data Friday will also be important. Both the unemployment rate and the job-to-applicant ratio are expected to remain steady at 2.5% and 1.25, respectively. Retail sales are expected at 3.4% y/y vs. 2.8% in November, IP is expected at -3.0% y/y vs. -2.7% in November, and housing starts are expected at -3.9% y/y vs. -1.8% in November.
Australia highlight will be CPI data Wednesday. December headline is expected to pick up two ticks to 2.5% y/y, while Q4 headline is expected to fall three ticks to 2.5% y/y and trimmed mean is expected to fall two ticks to 3.3% y/y. PPI will be reported Friday. In December, the RBA noted “the Board is gaining some confidence that inflation is moving sustainably towards target” and added that “some of the upside risks to inflation appear to have eased.” As such, we believe the Q4 CPI data will either lock in a rate cut at the next meeting February 18 or give the RBA space to delay the start of easing a bit longer. Markets see roughly 75% odds of a 25 bp cut in February.
RBNZ Chief Economist Conway speaks Wednesday. The title of his speech is “Beyond the Cycle: Growth and interest rates in the long run.” Conway will likely stick to the RBNZ’s guidance for another 50 bp cut to 3.75% in February and a slower pace of easing after that. The RBNZ has already flagged it does not plan to the policy rate below neutral (around 3%) throughout 2027. Markets agree and see the policy rate bottoming near 3.0% over the next 12 months. Indeed, leading indicators (see below) have improved lately and suggests a turnaround in economic activity is underway.
January ANZ business confidence index will be reported Thursday. In December, business confidence dipped 3 points to a three-month low of 62.3, but the expected own activity rose 2 points to 50.3, the highest level since May 2014.
January ANZ consumer confidence index will be reported Friday. In December, consumer confidence improved to more than a three-year high of 100.2 and there was a sharp lift in the proportion of households thinking it’s a good time to buy a major household item.