The dollar was mixed against the majors last week. The dollar bloc outperformed while the yen and Scandies underperformed. This is a key week for the U.S. in terms of data, with the Friday jobs report the highlight. The Fed is likely to deliver a hawkish message this week along with an expected 25 bp hike. How the dollar fares will depend in large part on whether Chair Powell can finally convince the markets that the Fed means business. Financial conditions have loosened too much and the Fed is likely to push back aggressively this week.
AMERICAS
The two-day FOMC meeting begins Tuesday and will end Wednesday with an expected 25 bp hike. That is the safe choice right now and we see no need for the Fed to deviate from its cautious path. However, the hard part for the Fed will be convincing the markets that they are wrong about its perceived pivot. The Fed will leave the door wide open for further rate hikes and Chair Powell will stress that the Fed is prepared to continue hiking rates beyond 5% and keep them there until 2024, as the December Dot Plots showed. As things stand, the Fed is seen starting an easing cycle in H2 and we view that as highly unlikely. New Dot Plots and macro forecasts won’t come until the March 21-22 meeting. We will send out a more detailed FOMC Preview Monday morning.
The January jobs report will be the data highlight. Consensus sees 185k jobs added vs. 223k in December, with the unemployment rate seen up a tick to 3.6% and average hourly earnings at 4.3% y/y vs. 4.6% in December. Ahead of that, ADP reports its private sector jobs estimate Wednesday and is expected at 170k vs. 235k in December. December JOLTS data will also be reported Wednesday and expected at 10.293 mln vs. 10.458 mln in December. Q4 employment cost index will be reported Tuesday and is expected at 1.1% q/q vs. 1.2% in Q3. The labor market picture will be rounded out by January Challenger job cuts, Q4 unit labor costs, and weekly jobless claims that will all be reported Thursday. All in all, the labor market remains tight and it’s hard to see how wage pressures can fall that much further given this tightness.
We get some key January survey readings too. Dallas Fed manufacturing index will be reported Monday and is expected at -15.0 vs. -18.8 in December. Dallas Fed services index and Chicago PMI will be reported Tuesday, with the latter expected to fall a tick to 45.0. ISM manufacturing will be reported Wednesday, with headline expected at 48.0 vs. 48.4 in December. Prices paid component is expected at 41.8 vs. 39.4 in December. ISM services will be reported Friday, with headline expected at 50.5 vs. 49.2 in December.
Other data will round out week. November FHFA and S&P CoreLogic house price indices and January Conference Board consumer confidence (109.0 expected) will be reported Tuesday. December construction spending (flat m/m expected) and January vehicle sales (15.5 mln annual pace) will be reported Wednesday. December factory orders will be reported Thursday and are expected at 2.3% m/m vs. -1.8% in November. Of note, the Atlanta Fed’s GDPNow model has an initial estimate for Q1 GDP growth of 0.7% SAAR. The next model update will come Wednesday.
Canada has a quiet week. Due to the calendar, January jobs data will be reported next Friday. November GDP will be reported Tuesday, January S&P Global manufacturing PMI will be reported Wednesday, and December building permits will be reported Thursday. Bank of Canada tightening expectations have eased after it hiked rates 25 bp to 4.5% last week and signaled a pause. Despite the bank’s pause, the swaps market is pricing in steady rates in H1 followed by the start of an easing cycle in H2. Recent data have come in firm and so we do not think the tightening cycle is over by any stretch. Indeed, if the economy remains firm, we see risks of a peak policy rate that’s higher than the 4.5% that markets are pricing in now. Of note, Governor Macklem stressed that it’s still “far too early to be talking about cuts.” We concur.
EUROPE/MIDDLE EAST/AFRICA
The European Central Bank meets Thursday and is expected to hike all rates by 50 bp. WIRP suggests nearly 75% odds of another 50 bp hike March 16. A 25 bp hike May 4 is about 85% priced in, while a last 25 bp hike in Q3 is about 65% 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. For now, however, we expect President Lagarde to stick with her existing forward guidance that points to a 50 bp hike at the March 16 meeting as well, when updated macro forecasts will be released.
Eurozone reports January CPI data. Spain reports Monday and its EU Harmonised inflation is expected at 4.8% y/y vs. 5.5% in December. Germany and France report Tuesday. Germany’s EU Harmonised inflation is expected at 10.2% y/y vs. 9.6% in December, while France’s is expected at 7.0% y/y vs. 6.7% in December. Italy reports Wednesday and its EU Harmonised inflation is expected at 10.7% y/y vs. 12.3% in December. Eurozone also reports Wednesday. Headline is expected at 9.0% y/y vs. 9.2% in December, while core is expected at 5.1% y/y vs. 5.2% in December. While inflation is easing, it remains high enough for the ECB hawks to remain in control of the narrative, at least for now.
Eurozone also reports Q4 GDP data. Spain reported last week and growth came in a tick higher than expected at 0.2% q/q vs. a revised 0.2% (was 0.1%) in Q3, while the y/y rate came in 2.7% vs. 2.2% expected and a revised 4.8% (was 4.4%) in Q3. Q4 GDP data for Germany (flat q/q expected) will be reported Monday. France (flat q/q expected), Italy (-0.2% q/q expected), and eurozone (-0.1% q/q expected) will be reported Tuesday. Let’s see if Germany’s recent optimism about avoiding a recession is warranted.
Final eurozone PMIs will also be reported this week. January manufacturing PMI will be reported Wednesday. Italy and Spain report for the first time and are expected at 49.5 and 47.9, respectively. Final services and composite PMIs will be reported Friday. Here too, Italy and Spain report for the first time and their composite PMIs are expected at 50.2 and 50.5, respectively.
Individual eurozone countries also report key data. Germany reports December retail sales Tuesday and is expected at -0.5% m/m vs. 1.7% in November. January unemployment will be reported Tuesday and is expected at 5k vs. -13k in November. December trade data will be reported Thursday, with exports expected at -3.3% m/m and imports expected at -1.8% m/m. France reports December consumer spending Tuesday and is expected at 0.1% m/m vs. 0.5% in November. IP will be reported Friday and is expected at 0.2% vs. 2.0% in November. Spain reports December retail sales Monday and January unemployment Thursday.
The Bank of England meets Thursday and is expected to hike rates by 50 bp. However, nearly a third of the analysts polled by Bloomberg see a smaller 25 bp move. Indeed, WIRP suggest only 55% odds of a 50 bp hike, down from 85% at the start of last week, while odds of a 25 bp hike March 23 are no longer fully priced in. After that, odds of a final 25 bp hike in June or August top out near 60% that would see the bank rate peak near 4.5%. Recall that for the 50 bp hike at the last meeting December 15, , the 6-3 vote was surprising in that Dhingra and Tenreyro voted to keep rates steady and Mann voted for a larger 75 bp move. Updated macro forecasts will be released this week.
Other than that, the U.K. has a quiet week. December consumer credit will be reported Tuesday. Final January manufacturing PMI will be reported Wednesday, followed by final services and composite PMIs Friday. The data are likely to continue worsening as the full weight of monetary and fiscal tightening has yet to be felt.
ASIA
Japan reports some key data. December labor market data will be reported Tuesday. Unemployment is expected to remain steady at 2.5%, while the job-to-applicant ratio is expected to rise a tick to 1.36. We know that BOJ officials are focused on wage growth and believe that greater wage pressures are needed before the bank can feel comfortable about meeting its 2% inflation target “sustainably.” Next policy meeting is March 9-10 and while liftoff then is unlikely, we believe it’s possible that Yield Curve Control is eliminated than in order to set the table for eventual liftoff at either the April 27-28 or June 15-16 meetings.
Other real sector data will be reported. December retail sales, housing starts, IP, and January consumer confidence will all be reported Tuesday. Sales are expected at 0.8% m/m vs. -1.3% in November, while IP is expected at -1.2% m/m vs. 0.2% in November. Housing starts are expected at 0.4% y/y vs. -1.4% in November, while confidence is expected to rise a tick to 30.4. Final January manufacturing PMI will be reported Wednesday, followed by final services and composite PMIs Friday.
Australia reports some key data. December retail sales, private sector credit, and January CoreLogic house price index will be reported Tuesday. Sales are expected at -0.2% m/m vs. 1.4% in November, while credit growth is expected to remain steady at 0.5% m/m. Final January manufacturing PMI will be reported Wednesday, followed by final services and composite PMIs Saturday. In between, December building approvals and Q4 business confidence will be reported Thursday, followed by December home loan data Friday.
RBA tightening expectations have picked up as inflation readings hit 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 80% odds of a 25 bp hike, while the swaps market is pricing in a peak policy rate near 3.90%, up from 3.55% at the start of last week. Given that inflation is still rising despite the 300 bp of tightening seen so far, we believe there are upside risks to the expected terminal rate. Updated macro forecasts will come at the February meeting.
New Zealand also reports some key data. December trade data will be reported Monday. Q4 labor market data will be reported Wednesday. Unemployment is expected to remain steady at 3.3% even as employment is expected to rise 0.3% q/q and 1.5% y/y. Total private wages are expected to slow a tick from Q3 to 1.1% q/q while private wages excluding overtime are expected to remain steady from Q3 at 1.1% q/q. December building permits will be reported Thursday. January consumer confidence will be reported Friday.
RBNZ tightening expectations remain elevated. 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 WIRP suggests a 50 bp hike is fully priced in, with nearly 40% odds of a larger 75 bp move. New forecasts will be released then. The swaps market is pricing in a peak policy rate between 5.25-5.5%, which is close to the bank’s expected rate path.
