The major currencies were mostly weaker last week as the dollar mounted a bit of a comeback. NZD and GBP outperformed and were up modestly, while the Scandies and Swissie underperformed and were down significantly. There are no major U.S. data releases this holiday-shortened week but FOMC minutes Wednesday should help underscore the Fed’s commitment to ongoing tightening. We remain positive on the dollar as we believe uptrend remains largely intact. However, we acknowledge that this correction may be quite extended.

AMERICAS

U.S. yields are starting to stir. The U.S. 2-year yield ended lats week near 4.53%, further above the recent low near 4.29% from November 10. The 10-year yield ended last week near 3.83%, moving further away from the recent low near 3.67% from last Wednesday. The firm October retail sales report may have put in a near-term floor for yields but we are likely to need a lot more to really get the market’s attention. A 50 bp hike December 14 is still priced in, as is a peak policy rate near 5.0%. However, it’s worth noting that the market is starting to again price in some odds of even higher rates.

FOMC minutes will be released Wednesday. Recall that markets seized on the phrase in the Fed’s policy statement that “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” Some further clarity on this might be contained in the minutes but make no mistake, there is unlikely to be any doubt as to the Fed’s commitment to tighten. In his press conference, Powell said it’s very premature to think about pausing rate hikes. While he admitted that it will be appropriate to slow rate hikes at some point, he added that the Fed still has “some ways to go” and that the ultimate level of rates is higher than previously expected. Powell said the Fed will likely have a discussion of a smaller hike at the December meeting but he firmly downplayed the importance of the pace of hiking and put more weight on how high the terminal rate will be. Powell also said that the Fed wants to get where real rates are positive across the curve.

Looking ahead to the December 13-14 meeting, WIRP suggests a 50 bp hike is fully priced in with around 10% odds of a larger 75 bp move. Those odds will surely change after we get core PCE December 1, jobs data December 2, PPI December 9, and CPI December 13. Updated forecasts will be released then and are likely to move closer to market consensus of higher inflation, slower growth, and higher unemployment. We pretty much all knew that the December Dot Plots would show a hawkish shift and Powell confirmed that this month, which was very unusual for a non-Dot Plot meeting. As things stand now, we believe the 2023 plot is likely to move up to 5.125% from 4.625% in September. 2024 is tricky but we would expect a move up to 4.625% from 3.875% in September, signaling some easing from a higher peak but not by a lot. 2025 should also be moved up to 3.625% from 2.875% in September. Ahead of the minutes, Daly speaks Monday, while Mester, George, and Bullard speak Tuesday.

October Chicago Fed National Activity Index will be reported Monday. It is expected at -0.03 vs. 0.10 in September. If so, it would be the first negative reading since June and the 3-month moving average would come in at 0.06 vs. 0.17 in September. A zero reading means the economy is growing at around trend. The resilience in the economy is noteworthy and suggests the Fed still has a lot more work to do in getting the desired sub-trend growth. 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.

Regional Fed manufacturing surveys for November will continue rolling out. Richmond reports Tuesday and is expected at -8 vs. -10 in October. So far, Philly Fed came in at -19.4 vs. -8.7 in October, Kansas City Fed came in at -6 vs. -7 in October, and Empire came in 4.5 vs. -9.1 in October. Preliminary November S&P Global PMI readings will be reported Wednesday. Manufacturing is expected at 50.0 vs. 50.4 in October, services is expected at 48.0 vs. 47.8 in October, and composite is expected at 48.0 vs. 48.2 in October. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q4 GDP growth at 4.2% SAAR, down slightly from 4.4% previously. The next model update comes this Wednesday.

Otherwise, it’s a quiet, holiday-shortened week. October durable goods orders, new home sales, and weekly jobless claims will be reported Wednesday. Orders are expected to remains steady at 0.4% m/m, orders ex-transportation are expected flat m/m vs. -0.5% in September, and core orders (non-defense ex-aircraft) are expected at 0.1% m/m vs. -0.4% in September. Initial claims are expected at 225k vs. 222k the previous week, while continuing claims are expected at 1.52 mln vs. 1.507 mln the previous week. Current consensus for November NFP stands at 200k vs. 261k in October, while the unemployment rate is expected to rise a tick to 3.8%. New home sales are expected at -5.5% m/m vs. -10.9% in September.

Canada highlight is September retail sales Tuesday. Headline is expected at -0.5% m/m vs. 0.7% in August, while ex-autos is expected at -0.6% m/m vs. 0.7% in August. The economy remains firm overall while inflation data came in mixed last week. Bank of Canada next meets December 7 and is expected to hike rates 25 bp to 4.0%. WIRP suggests 40% odds of a larger 50 bp move. Of note, the swaps market is pricing in a peak policy rate near 4.5%, down from 4.75% in late October.

EUROPE/MIDDLE EAST/AFRICA

The eurozone has a quiet week. September current account data will be reported Tuesday. Preliminary November PMI readings will be reported Wednesday. Headline manufacturing is expected at 46.0 vs. 46.4 in October, services is expected at 48.0 vs. 48.6 in October, and composite is expected at 47.0 vs. 47.3 in October. Looking at the country breakdown, Germany’s composite is expected to fall a tick to 45.0 and France’s composite is expected at 49.5 vs. 50.2 in October. Italy and Spain will be reported with the final eurozone readings in early December.

Germany reports some key survey readings. November IFO survey will be reported Thursday. Headline is expected at 85.0 vs. 84.3 in October, driven mostly by a rise in expectations to 77.0 vs. 75.6 in October. December GfK consumer confidence will be reported Friday and is expected at -39.6 vs. -41.9 in November. Of note, Germany’s ZEW survey came in higher than expected last week and so there are upside risks to this week’s sentiment indicators.

The ECB publishes the account of its October 27 meeting Thursday. At that meeting, the bank hiked rates 75 bp, as expected, but the vote was split as three policymakers wanted a smaller 50 bp move. Furthermore, the bank cited “substantial progress” in normalizing policy and removed the reference to further hikes “over the next several meetings” from its statement. These developments were seen as a pivot by the ECB, which was likely confirmed by reports last week that policymakers were discussing a 50 bp move next month. President Lagarde tried some damage control in her press conference, noting that the bank “might well” still hike at several more meetings and that the size of future hikes will depend on the data. She acknowledged that the ECB deliberately didn’t discuss Quantitative Tightening (QT) at that meeting and will decide on those principles at the December 15 meeting.

ECB tightening expectations have been pared back. WIRP suggests a 75 bp for December 15 is only around 30% priced in vs. 45% odds at the start of last week and fully priced in after the October decision. Elsewhere, the swaps market is pricing in a peak policy rate near 3.0% vs. 3.5-3.75% after the October decision. We think there is still room for ECB tightening expectations to fall further and we stand by our call that the ECB will pivot and cut rates before the Fed does. Vasle, Holzmann, Simkus, Centeno, and Nagel speak Monday. Holzmann, Rehn, and Nagel speak Tuesday. Guindos speaks Wednesday. Schnabel and Nagel speak Thursday. Muller speaks Friday.

Markets digested Chancellor Hunt’s budget statement without a hiccup. Gilts unperformed slightly last week but for the most part, the bond market is giving Hunt a pass, at least for now. Same goes for the FX market as sterling ended modestly higher on the week. The Office of Budget Responsibility testifies to Parliament about the budget statement Tuesday. Last week, it forecast U.K. living standards will fall 7% over the next two years. Chancellor Hunt testifies to Parliament about his budget statement Wednesday.

The U.K. has a quiet week. October public sector net borrowing will be reported Tuesday. PSNB ex-banking groups is expected at GBP21.0 bln vs. GBP20.0 bln in September. Preliminary November PMI readings will be reported Wednesday. Manufacturing is expected at 45.8 vs. 46.2 in October, services is expected at 48.0 vs. 48.8 in October, and composite is expected at 47.5 vs. 48.2 in October. November CBI industrial trends survey will be reported Thursday, with total orders expected at -9 vs. -4 in October.

Bank of England tightening expectations are still adjusting. WIRP suggests a 50 bp hike December 15 is priced in, with 35% odds of a larger 75 bp hike, down from over 60% at the start of last week. The swaps market is still pricing in 175 bp of tightening over the next 12 months that would see the policy rate peak near 4.75%, down sharply from 6.25% right after the mini-budget in late September. There are several key BOE speakers this week. Cunliffe speaks Monday. Pill speaks Wednesday. Ramsden and Mann speak Thursday. All four voted for 75 bp at the November 3 meeting.

Swedish Riksbank meets Thursday and is expected to hike rates 75 bp to 2.5%. However, there is a split between the analysts and the markets as WIRP suggests only 33% odds of a 75 bp hike. Last week, October CPI data came in soft. Headline came in at 10.9% y/y vs. 11.1% expected and 10.8% in September, while targeted CPIF came in at 9.3% y/y vs. 9.8% expected and 9.7% in September. At the last meeting September 20, the bank delivered a hawkish surprise and hiked rates 100 bp to 1.75% vs. 75 bp expected. The bank noted then that “The risk is still large that inflation becomes entrenched, and it is extremely important that monetary policy acts to ensure that inflation falls back and stabilizes. Monetary policy now needs to act more than was anticipated in June.” However, the rest of its messaging was decidedly dovish. The Riksbank saw the policy rate peaking at 2.5% in 2023, while the swaps market is pricing in 150 bp of tightening over the next 12 months that would see the policy rate peak near 3.25%. We expect a hawkish shift this week that moves the Riksbank closer to the market. October PPI will be reported Friday.

ASIA

Japan reports some key data. Preliminary November PMI readings and October department store sales will be reported Thursday. November Tokyo CPI will be reported Friday. Headline is expected at 3.6% y/y vs. 3.5% in October, core (ex-fresh food) is expected at 3.5% y/y vs. 3.4% in October, and core ex-energy is expected at 2.3% y/y vs. 2.2% in October. Last week, October national CPI data came in hot. Headline came in at 3.7% y/y vs. 3.6% expected and 3.0% in September, while core came in at 3.6% y/y vs. 3.5% expected and 3.0% in September. In a sign that inflation is becoming more broad-based, core ex-energy came in at 2.5% y/y vs. 2.4% expected and 1.8% in September.

Yet the BOJ shows no signs of pivoting under Governor Kuroda. After the CPI data last week, Kuroda reiterated that the bank’s current stance remains appropriate even as he acknowledged that the latest readings were significant and could accelerate further. Next policy meeting is December 19-20 and no change is expected then. We continue to see no change through the rest of his term, which ends in April.

Reserve Bank of New Zealand meets Wednesday and is expected to hike rates 75 bp to 4.25%. However, a handful of analysts look for a smaller 50 bp move while WIRP suggests only 55% odds of a 75 bp hike. At the last meeting October 5, the bank hiked rates 50 bp to 3.5% and noted that “The Committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and contribute to maximum sustainable employment. Core consumer price inflation is too high and labor resources are scarce.” The bank acknowledged that it discussed a 75 bp move before settling on 50 bp. Updated forecasts will come at this meeting. The swaps market is pricing in 150 bp of tightening over the next 12 months that would see the policy rate peak near 5.0%, which is well above the bank’s current expected rate path. We expect a hawkish shift in that path this week.

New Zealand also reports some key data. October trade data will be reported Tuesday. Q3 real retail sales will be reported Friday and expected at 0.5% q/q vs. -2.3% in Q2. For now, the economy is holding up well even as price pressures remain high. CPI rose 7.2% y/y in Q3, down just a tick from the 7.3% peak in Q2 and still well above the 1-3% target range.