• With no tariff noise, we go back to focusing on the U.S. exceptionalism; we could get some fireworks from President Trump at Davos; weekly jobless claims will be of interest; regional Fed surveys for January will continue to roll out; Canada highlight will be November retail sales; Mexico reports mid-January CPI
  
• The ECB hawks don’t have a leg to stand on; U.K. CBI reported a soft January industrial trends survey; Norges Bank kept rates steady at 4.5%, as expected; Turkey cut rates 250 bp to 47.5%, as expected
  
• Two-day BOJ meeting began today; Japan reported soft December trade data; China announced measures to support local equity markets; Singapore reported December CPI data

The dollar is getting modest traction in the absence of any tariff noise. DXY is trading higher for the second straight day near 108.286 but remains at the whim of potential tape-bombs from President Trump at Davos (see below). USD/JPY traded at the highest since January 15 near 156.75 today as the two-day BOJ meeting began (see below). Sterling is trading lower near $1.2305 after soft CBI survey (see below), while the euro is trading lower near $1.04 despite hawkish ECB comments (see below). NOK and TRY are little changed after their central bank decisions met expectations (see below). More and more tariff noise is likely in the coming days and weeks but we continue to look through that and focus on the underlying fundamental backdrop, which remains unchanged. Simply put, the strong U.S. fundamental story of strong growth, elevated inflation, and a more hawkish Fed continues to favor higher U.S. yields and a stronger dollar. We’ll know more tomorrow after the global PMIs for January are reported.

AMERICAS

With no tariff noise recently, we go back to focusing on the U.S. exceptionalism. Tomorrow brings global PMIs for January that should underscore ongoing economic divergences that favor the dollar. Growth remains strong at 2.5-3.0% SAAR in both Q4 and Q1, jobs are still being created and is fueling consumption, which in turn is helping to keep price pressures elevated. The Fed meets next week and is widely expected to deliver a hold and quite frankly, there really is no reason for it to cut anytime soon. Financial conditions through last week as measured by the Chicago Fed will be reported today. Conditions eased for 11th straight week through January 10 and were the loosest since October 2021. We expect further loosening ahead and that will support growth in 2025.

We could get some fireworks from President Trump. He speaks today at the World Economic Forum in Davos (11:00 AM ET/400 PM GMT) and could deliver some tape-bombs to the markets. Stay tuned.

Weekly jobless claims will be of interest. That‘s because initial claims are for the BLS survey week containing the 12th of the month, and are expected at 220k vs. 217k previously. Continuing claims are reported with a one-week lag and are expected at 1.866 mln vs. 1.859 mln previously. Most indicators point to a robust labor market. Bloomberg consensus for January NFP is 180k vs. 256k actual in December, while its whisper number currently stands at 182k.

Regional Fed surveys for January will continue to roll out. Kansas City Fed manufacturing will be reported and is expected at 0 vs. -4 in December. Its services survey will be reported tomorrow and stood at 2 in December.

Canada highlight will be November retail sales data. Consensus sees headline at 0.2% m/m vs. 0.6% in October and ex-autos steady at 0.1% m/m. Statistics Canada’s advanced retail indicator suggests sales were relatively unchanged in November. USD/CAD has scope to overshoot to fresh cyclical highs due to Fed/BOC policy divergence, risk of all-out trade war between Canada and the U.S., and the Trump administration’s focus on lowering energy prices.

Mexico reports mid-January CPI data. Headline is expected at 3.72% y/y vs. 3.99% previously, while core is expected at 3.68% y/y vs. 3.69% previously. If so, headline would be the lowest since February 2021 and further within the 2-4% target range. At the last meeting December 19, Banco de Mexico cut rates 25 bp to 10.0% and noted that “The Board expects that the inflationary environment will allow further reference rate reductions. In view of the progress on disinflation, larger downward adjustments could be considered in some meetings, albeit maintaining a restrictive stance.” The swaps market is now pricing in 150 bp of easing over the next 12 months that would see the policy rate bottom near 8.5%.

EUROPE/MIDDLE EAST/AFRICA

The ECB hawks don’t have a leg to stand on. Governing Council member Holzmann said yesterday that it would be better for the ECB “to wait a bit more” before lowering interest rates again because inflation gauges are still very strong. However, he added “I can be persuaded [to cut rates next week] if there are good arguments.” These comments aren’t surprising, as Holzmann was the sole member to oppose the rate cut last June. He’s likely to do the same next week but no one else on the GC is in his corner. Indeed, President Lagarde stuck to the dovish guidance emphasizing the downside risk to eurozone growth and confidence that the disinflationary process is continuing. Today, Escriva said the ECB should move to a neutral stance “over the next semester or so.” Markets are pricing in a cut next week and 100 bp of total ECB easing over next 12 months that should see the policy rate bottom around 2.00%.

U.K. CBI reported a soft January industrial trends survey. Total orders came in a point higher than expected at -34 vs. -40 in December, while selling prices came in at 27 vs. 20 expected and 23 in December. Most importantly, its quarterly measure of business optimism plunged to -47 vs. -24 in Q3. This is the lowest since October 2022 and is indicative of a deteriorating business investment backdrop. To make matters worse, the BRC’s consumer survey showed that 48% expect the economy to worsen over the next three months vs. 42% in December and 38% in November. GfK consumer confidence will be reported tonight and is expected to fall a point to -18. Distributive trades will be reported tomorrow. Retailing reported sales are expected at -10 vs. -15 in December.

Norges Bank kept rates steady at 4.5%, as expected. Forward guidance was unchanged as the bank reiterated that “The policy rate will most likely be reduced in March.” Updated macro forecasts will come at that meeting. Markets have virtually fully priced in the start of an easing cycle in March as inflation is tracking below the Norges Bank projection. The market is pricing in 75 bp of easing over the next 12 months followed by another 25 bp over the subsequent 12 months that would see the policy rate bottom near 3.5%. Such a shallow Norges bank easing cycle should offer NOK support on the crosses vs. SEK and EUR.

Turkey central bank cut rates 250 bp to 47.5%, as expected. The bank noted that “The policy rate will be determined in a way to ensure the tightness required by the projected disinflation path taking into account realized and expected inflation, and the underlying trend.” It added that the disinflation process is strengthening but that it will make its decisions meeting by meeting. This was the second straight 250 bp cut after it started easing at the December 26 meeting. The swaps market is pricing in 1650 bp of total easing over the next 12 months that would take the policy rate to 28.5%.

ASIA

Two-day Bank of Japan meeting began today. Markets have firmed up the odds of a 25 bp hike over the past week to around 95% after several senior BOJ officials expressed more confidence on wage growth gathering momentum. The BOJ is also set to publish its updated Outlook Report and is expected to raise its inflation projections as both core (less fresh food) and core (less fresh food and energy) are tracking higher than it anticipated back in October. In our view, the bar for a hawkish surprise is high because the BOJ will want to avoid unsettling the markets as it did back in July. If the bank delivers a 25 bp cut along with neutral forward guidance, we see a likely “buy the yen is likely to remain under downside pressure as the markets continue to price in the policy rate to peak around 1% over the next two years.

Japan reported soft December trade data. Exports came in at 2.8% y/y vs. 2.4% expected and 3.8% in November, while imports came in at 1.8% y/y vs. 3.2% expected and -3.8% in November. Export growth has been flattered recently by low base effects but those drop out in favor of high base effects in H1. Of note, the cumulative 12-monh trade surplus with the US narrowed slightly in December but remains historically high at over JPY8.6 trln (1.4% of GDP), placing Japan’s economy at a disadvantage in case trade tensions with the U.S. intensify.

China announced measures to support local equity markets. Head of the China Securities Regulatory Commission Wu Qing said mutual funds should increase their holdings of onshore equities by at least 10% per annum for the next three years. Furthermore, large state-owned insurers will need to invest 30% of their new policy premiums in equities starting this year. CNH is little changed while China’s benchmark CSI 300 Index recovered this week’s losses. While these measures may give local equity markets a temporary boost, they do not address the root causes of China’s malaise, namely a burst property bubble and a huge debt overhang. Until those are addressed, we remain negative on China.

Singapore reported December CPI data. Headline came in a tick higher than expected at 1.6% y/y and was steady from November, while core came in a tick higher than expected at 1.8% y/y vs. 1.9% in November. Headline remains near the cycle lows while core was the lowest since November 2021. The Monetary Authority of Singapore meets tomorrow. While the MAS does not have an explicit inflation target, low price pressures should allow it to ease policy in 2025 if the economy slows too much. This meeting is probably too soon, as MAS chief Chia said recently that its current policy setting is still appropriate for now.