The broad dollar rally continued last week. CAD, JPY, and EUR outperformed while GBP, AUD, and NZD underperformed. Strong U.S. data is keeping the Fed hawkish, and the next cut has been pushed out to September. Inflation and retail sales data this week should underscore this “higher for longer” backdrop and that means the dollar rally is likely to continue. Meanwhile, U.K. assets are likely to remain under pressure as the fiscal outlook deteriorates further.
AMERICAS
Strong U.S data and hawkish Fed officials have conspired to push the dollar to new cycle highs. The 256k NFP reading for December was not a fluke, as most other indicators point to a robust labor market. This is not surprising given ongoing strength in the economy. The New York Fed's Nowcast model is tracking Q4 growth at 2.4% SAAR vs. 1.9% last week and Q1 growth at 2.7% SAAR vs. 2.2% last week and will be updated again this Friday. Elsewhere, the Atlanta Fed GDPNow model is tracking Q4 growth at 2.7% SAAR and will be updated this Thursday after the data. Growth creates jobs, jobs create demand, and demand creates pricing power.
December inflation data will be the highlight. PPI will be reported Tuesday. Headline PPI is expected at 3.5% y/y vs. 3.0% in November while core PPI is expected at 3.8% y/y vs. 3.4% in November. Keep an eye on PPI services ex-trade, transportation, and warehousing, as it feeds into the core PCE calculations. In November, this measure of core services PPI remained at a multi-month high of 4.6% y/y and is consistent with sticky underlying inflation.
CPI will be reported Wednesday. Headline CPI is expected at 2.9% y/y vs. 2.7% in November and core CPI is expected to remain steady at 3.3% y/y. The Cleveland Fed’s Nowcast model forecasts headline and core at 2.9% y/y and 3.3% y/y, respectively. Looking ahead, the model sees December headline and core at 2.8% y/y and 3.2% y/y, respectively. Recent data have raised the possibility that progress on inflation may be stalling well above 2%.
New York Fed inflation expectations for December will be reported Monday. Here, expectations have been creeping higher throughout the spectrum and mirrors a similar rise in private sector inflation expectations. There are plenty of Fed speakers this week. Schmid and Williams speak Tuesday. Barkin, Kashkari, Williams, and Goolsbee speak Wednesday. At midnight Friday, the media blackout goes into effect and there will be no more Fed speakers until chair Powell’s post-decision press conference January 29.
The Fed Beige Book report for the January meeting will be released Wednesday. The previous report for the December meeting was roughly balanced. On overall economic activity: Economic activity rose slightly in most Districts. Three regions exhibited modest or moderate growth that offset flat or slightly declining activity in two others. On labor markets: Employment levels were flat or up only slightly across Districts. Wage growth softened to a modest pace across most Districts, as did expectations for wage growth in coming months. On prices: Prices rose only at a modest pace across Federal Reserve Districts. Contacts indicated they expect the current pace of price growth to persist, but businesses in several Districts indicated tariffs pose a significant upside risk to inflation. We expect a slightly more hawkish tone in this report.
December retail sales data Thursday will also be important. Consensus sees headline at 0.6% m/m vs. 0.7% in November and ex-autos at 0.5% m/m vs. 0.2% in November. More importantly, the so-called control group used for GDP calculations is expected at 0.4% m/m vs. 0.4% in November. Overall, consumer spending is supported by positive real wage growth, a healthy labor market, and strong household balance sheets.
Regional Fed surveys for January will start rolling out. Empire manufacturing survey kicks things off Wednesday and is expected at 3.0 vs. 0.2 in December. Philly Fed manufacturing (-5.0 expected) and New York Fed services surveys will be reported Thursday.
November TIC data will be reported Friday. We expect the U.S. to remain a magnet for foreign investment inflows. The U.S. Treasury auctions last week showed that the market was capable of absorbing heavy issuance at elevated yields, with indirect bidders (a proxy for foreign demand) taking a high share.
EUROPE/MIDDLE EAST/AFRICA
European Central Bank releases its account of the December 11-12 meeting Thursday. At that meeting, the ECB reduced the policy rate 25 bp to 3.0%, as expected. However, the ECB signaled more easing was in the pipeline. The ECB tweaked its macro projections lower and scrapped reference that it “will keep policy rates sufficiently restrictive for as long as necessary.” President Lagarde acknowledged there were some discussions around the proposal for a 50 bp cut. However, she also emphasized the need to be “very cautious” when domestic inflation is still around 4% y/y. Rehn speaks Monday. Lane (twice) and Holzmann speak Tuesday. Guindos, Villeroy, and Vujcic speak Wednesday. Escriva speaks Friday.
Eurozone reports November IP Wednesday. It is expected at 0.3% m/m vs. flat in October, while the y/y rate is expected at -1.8% vs. -1.2% in October. Ahead of that, Italy reports IP Tuesday and is expected to remain flat m/m, same as October, while the y/y rate is expected at -2.4% vs. -3.6% in October.
U.K. highlight will be December CPI data Wednesday. Headline is expected to remain steady at 2.6% y/y, core is expected to fall a tick to 3.4% y/y, and CPIH is expected to rise a tick to 3.6% y/y. Of note, services CPI is expected to fall two ticks to 4.8% y/y. For reference, the BOE projects headline CPI at 2.5% y/y and services CPI at 4.7% y/y for December. Sticky U.K. services inflation should keep the BOE on a very cautious easing path despite a weak economy.
November real sector data will be reported Thursday. GDP is expected at 0.2% m/m vs. -0.1% in October, IP is expected at 0.1% m/m vs. -0.6% in October, services index is expected at 0.1% m/m vs. 0.0% in October, and construction is expected at 0.5% m/m vs. -0.4% in October. Risks are skewed to the downside as composite PMI readings of 50.5 in November and 50.4 in December suggest growth momentum has stalled.
December retail sales will be reported Friday. Total retail sales volume is expected at 0.4% m/m vs. 0.2% in November, reflecting the Black Friday deals. The recent U.K. debt market sell-off threatens to curtail consumption spending growth as more mortgage holders reduce spending in anticipation of paying higher mortgage rates. According to the Bank of England, around 800,000 fixed-rate mortgages currently with an interest rate of 3% or below are expected to be refinanced per year, on average, until the end of 2027.
The Bank of England continues to face a policy dilemma. Elevated inflation readings argue for cautious easing, but recent economic data have been soft. A 25 bp cut at the next meeting February 6 is likely, but then the market is pricing in only one more 25 bp cut after that. With the specter of stagflation still looming, the fiscal outlook remains poor from the combination of higher borrowing costs, falling revenues, and rising outlays. This week’s economic data releases are unlikely to offer the positive surprise necessary to halt the sell-off in GBP and gilts. Breeden speaks Tuesday. Taylor speaks Wednesday.
ASIA
Bank of Japan Deputy Governor Himino speaks Tuesday. We’d downplay reports last week that suggest the BOJ is considering a hike this month. Yes, every meeting is live but with market odds of a hike around 50%, we do not think the BOJ will risk another market meltdown from a hawkish surprise. Odds of a hike rise to 80% in March and fully priced in for May.
Japan reports October current account data Tuesday. An adjusted surplus of JPY2.578 bln is expected vs. JPY2.409 trln in September. However, the investment flows will be of more interest. The October data showed that Japan investors became net sellers of U.S. bonds (-JPY1.676 trln) after three straight months of net buying. Japan investors stayed net sellers (-JPY223.4 bln) of Australian bonds for the second straight month and also stayed net sellers of Canadian bonds (-JPY116.2 mln) for the second straight month. Investors turned net sellers of Italian bonds (-JPY408.1 bln) after two straight months of net buying. Overall, Japan investors turned total net sellers of foreign bonds (-JPY4.238 trln) after two straight months of net buying. While it's the biggest month of total net selling since June 2022, it’s still too early to say that Japan investors have stopped chasing higher yields abroad.
Australia highlight will be December jobs data Thursday. Consensus sees 15.0k jobs added vs. 35.6 k in November. The unemployment rate is expected to rise a tick to 4.0% despite expectations of a steady participation rate of 67.0%. If so, unemployment would track below the RBA’s 4.3% end of year forecast. Nonetheless, the RBA signaled in December it may start cutting the policy rate in February. First, the RBA scrapped its previous neutral policy guidance that “the Board is not ruling anything in or out”. Second, the RBA noted “the Board is gaining some confidence that inflation is moving sustainably towards target”, adding that “some of the upside risks to inflation appear to have eased.” Previously, the RBA warned of “the need to remain vigilant to upside risks to inflation.” Markets continue to price in roughly 70% odds of a 25 bp rate cut in February.
