The dollar has mounted a broad-based recovery to start the new year. Last week, GBP, EUR, and CAD outperformed while JPY, SEK, and AUD underperformed. U.S. data continue to come in strong and this week’s inflation data will be very important. The dollar has been able to post gains despite very little change in Fed expectations. If the data remain firm, those expectations should shift and likely lead to another leg higher for the greenback.

AMERICAS

Markets were very volatile in the aftermath of the jobs data. That’s because the data contained many conflicting signals. For instance, the stronger than expected headline reading of 216k for NFP was offset by -71k in revisions for the previous two months. Elsewhere, the household survey showed -683k jobs in December vs. +586k in November but the unemployment rate was steady because of a -676k drop in the labor force. Average hourly earnings picked up a tick to 4.1% y/y, while average weakly hours fell a tick to 34.3. As a result, Fed easing expectations ended up little changed on the day.

We see underlying strength in the economy, and this is likely to persist. The Atlanta Fed’s GDPNow model has Q4 growth at 2.5% SAAR vs. 2.0% previously and will be updated Tuesday after the data. Elsewhere, the New York Fed’s Nowcast model has Q4 growth at 2.5% SAAR and Q1 growth at 2.7% SAAR and will be updated Friday. Bottom line: the US economy is still growing above trend in Q4 and quite possible Q1. Of note, the early Q4 reads were based largely on strike-depressed October data. If November and December data continue to bounce back as we’ve seen already, the Q4 growth estimates should rise accordingly. In turn, this momentum is likely to carry over into Q1.

December inflation data will be key. CPI will be reported Thursday. Headline is expected to pick up a tick to 3.2% y/y while core is expected to fall two ticks to 3.8% y/y. The Cleveland Fed’s inflation Nowcast model estimates the headline and core y/y rates at 3.3% and 3.9%, respectively. However, this model has consistently overstated inflation in recent months. For January, it sees 3.0% and 3.8%, respectively. PPI will then be reported Friday. Headline is expected to pick up four ticks to 1.3% y/y while core is expected to remain steady at 2.0% y/y.

The New York Fed reports December inflation expectations Monday. Of note, 1-year expectations have been consistently falling in recent months, while 3- and 5-year expectations have been flatlining a bit. All three remain well above the Fed’s 2% target, which will be concerning to policymakers.

Fed easing expectations have started to adjust. WIRP suggests 5% odds of a cut January 31 and rising to nearly 75% March 20 after being nearly priced in at the start of last week. Five rate cuts are priced in vs. six at the start of last week, though there are still 50% odds of a sixth cut. Bostic speaks Monday. Barr speaks Tuesday. Williams speaks Wednesday. Kashkari speaks Friday.

Other minor data will be reported. November consumer credit will be reported Monday and is expected at $9.0 bln vs. $5.134 bln in October. December NFIB small business optimism (91.0 expected) and November trade data (-$65.0 bln expected) will be reported Tuesday. November wholesale inventories and trade sales will be reported Wednesday. Weekly jobless claims and December budget statement will be reported Thursday. Of note, jobless claims remain low and point to ongoing strength in the labor market. Next week’s initial claims data will be for the BLS survey week containing the 12th of the month.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reports November retail sales Monday. Sales are expected at -0.3% m/m vs. 0.1% in October, while the y/y rate is expected at -1.5% vs. -1.2% in October. However, the -2.5% m/m plunge in German retail sales reported last week points to downside risks here. Italy reports retail sales Wednesday and France reports consumer spending Friday.

November eurozone IP data start rolling out. Germany reports IP Tuesday and is expected at 0.3% m/m vs. -0.4% in October. France reports IP Wednesday and is expected at 0.1% m/m vs. -0.3% in October. Italy and Spain report IP Thursday. Italy is expected at -0.2% m/m vs. -0.2% in October. Eurozone-wide IP will be reported January 15,

Other key German data will be reported. Germany reports November factory orders and trade data Monday. Orders are expected at -3.4% m/m vs. -7.3% in October. Elsewhere, exports are expected at 0.5% m/m vs. -0.1% in October and imports are expected at 0.4% m/m vs. -1.0% in October. Current account data will be reported Thursday.

European Central Bank easing expectations remain elevated. We believe the eurozone disinflationary backdrop and weak economic growth outlook reinforce the case for the ECB to start cutting rates in Q2 and this is a clear headwind for euro. WIRP suggests 5% odds of a cut January 25, rising to 50% March 7 and fully priced in April 11. A total of six cuts are priced in for 2024. Villeroy speaks Tuesday. Guindos, Schnabel, and de Cos speak Wednesday. Vujcic speaks twice Thursday. Lane speaks Friday.

The monthly U.K. data dump begins. November GDP, IP, services, construction, and trade will all be reported Friday. GDP is expected to come in at 0.2% m/m vs. -0.3% in October, IP is expected to come in at 0.3% m/m vs. -0.8% in October, services is expected to come in at 0.2% m/m vs. -0.2% in October, and construction is expected to come in a 0.3% m/m vs. -0.5% in October. The Bank of England penciled in a 0.1% rise in real GDP over Q4 2023 and so a poor November GDP print will further weigh on interest rate expectations. The trade deficit is expected at -GBP3.0 bln vs. -GBP4.48 bln in October.

Bank of England easing expectations remain elevated. WIRP suggests nearly 5% odds of a cut February 1, rising to 30% March 21 and 80% May 9. Five cuts are priced in for 2024. Bailey testifies to Parliament Wednesday.

Switzerland reports December CPI Monday. Headline is expected at 1.6% y/y vs. 1.4% in November, while core is expected to remain steady at 1.4% y/y. At the last meeting December 14, the Swiss National Bank kept rates steady at 1.75% and President Jordan said “Monetary conditions are currently appropriate. Our conditional inflation forecast is now within the price stability range over the entire forecast horizon for the first time in some time.” Language on possible rate hikes was dropped from the statement. Jordan stressed that a rate cut was not discussed but added that officials will have to shift their stance if franc strength makes monetary conditions too restrictive. Jordan also stressed that FX intervention can be in both directions and that the SNB is no longer focusing just on selling foreign currency. The SNB was the first major central bank to reach its 2% inflation target and boosts the allure of CHF as a store of value despite relatively low Swiss rates. WIRP suggests 50% odds of a cut March 21 and is fully priced in June 20. Two cuts are priced in for 2024.

Norway reports December CPI Wednesday. Headline is expected to remain steady at 4.8% y/y, while underlying is expected at 5.6% y/y vs. 5.8% in November. At the last meeting December 14, Norges Bank delivered a hawkish surprise and hiked rates 25 bp to 4.5%. Governor Bache said “The economy is cooling down, but inflation is still too high. An increase in the policy rate now reduces the risk of inflation remaining high for a long period of time. The policy rate will likely be kept at 4.5% for some time.” The bank signaled higher for longer by raising its 2024 rate forecast to 4.5%, implying no rate cuts until 2025. However, the market doesn’t believe it. WIRP suggests no odds of a cut January 25 but rises to 25% March 21, 60% May 3, and fully priced in June 20. Norges Bank releases its Q4 survey of bank lending Thursday.

ASIA

Japan data highlight will be December Tokyo CPI Tuesday. Headline is expected at 2.5% y/y vs. 2.7% in November, core (ex-fresh food) is expected at 2.1% y/y vs. 2.3% in November, and core ex-energy is expected at 3.5% y/y vs. 3.6% in November. If so, Tokyo core inflation would be the lowest since June 2022 and bodes well for the national reading.

November cash earnings Wednesday will also be important. Nominal earnings are expected to remain steady at 1.5% y/y while real earnings are expected at -2.0% y/y vs. -2.3% in October. The BOJ has made rising wages an important factor for removing policy accommodation and we have yet to see significant upward wage pressures. Household spending will be reported Tuesday and is expected at -2.3% y/y vs. -2.5% in October.

Bank of Japan liftoff expectations remain low. WIRP suggests only 5% odds of liftoff January 23, rising to 20% March 19, 55% April 26, 75% June 14, and fully priced in July 31. Market pricing for the timing of liftoff continues to get pushed out. For instance, March liftoff was priced in at the start of October, then shifted to April at the start of November, and then shifted to June at the start of December.

Japan reports November current account data Friday. The adjusted surplus is expected at JPY2.18 trln vs. JPY2.62 trln in October. However, the investment flows will be of more interest. The October data showed that Japan investors remained net buyers of U.S. bonds (JPY2.0 trln) for the third straight month and five of the past six months. Japan investors turned net buyers (JPY101 bln) of Australian bonds again and for seven of the past eight months and remained net sellers of Canadian bonds (-JPY14 bln) for the fourth straight month and for nine of the past ten months. Investors turned net buyers of Italian bonds (JPY288 bln) after two straight months of net selling. Japan investors remained total net buyers of foreign bonds (JPY1.15 trln) for the third straight month and for five of the past six months. With Japan yields likely to move higher in 2024, it’s possible that Japan investors will stop chasing higher yields abroad but it’s still too early to say.

Australia data highlight will be November CPI Wednesday. Headline is expected at 4.5% y/y vs. 4.9% in October. If so, it would be the lowest since December 2021 but still well above the 2-3% target range. RBA easing expectations have ebbed a bit. WIRP suggests very little odds of a cut February 6 or March 19, then rising to 35% May 7, 55% June 18, and nearly 90% August 6. At the start of last week, there were 85% odds of a cut May 7. Nearly two cuts are priced in for 2024 vs. three at the start of last week.

Australia November retail sales data Tuesday will also be key. Sales are expected at 1.2% m/m vs. -0.2% in October. The RBA is concerned that current weakness in household consumption will persist for longer than expected. Household real final consumption expenditure was flat over Q3 2023. If the rebound in retail sales in November falls significantly short of expectations, RBA rate cut bets for will likely increase and weigh on AUD. November building approvals will also be reported Tuesday and are expected at -2.0% m/m vs. 7.5% in October. November trade data will be reported Thursday.