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Overview:  The US dollar is trading lower against most currencies, but the intraday momentum indicators are stretched, suggesting the selling pressure may not be sustained in North America today. December US personal income and consumption data was contained in yesterday's Q4 23 GDP data, but the market wants to see the monthly print, which is expected to see the core measure ease with the headline rate flat. Tokyo's January CPI was much softer than expected, falling to 1.6% at the headline and core rates. Still, the market looks for the BOJ to exit its negative interest rate policy in April.

Chinese stocks, which rallied almost 4% in the past three sessions, helped by formal and informal official action, eased today with the CSI 300 slipping around 0.3%. Disappointing Intel earnings yesterday may have contributed to the retreat in Asia Pacific indices today (India and Australia markets were closed. The MSCI regional index fell for the first time in seven sessions. Europe's Stoxx 600, less tech-sensitive, is up for the third consecutive session. Its weekly gain (~2.9%), if sustained would be the largest since early November. Meanwhile, the US S&P and NASDAQ are poised to snap six-day advances today unless a strong recovery is seen. The weaker-than-expected Tokyo CPI saw the yield on the 10-year JGB pull back a few basis points to 0.70%. European benchmark 10-year yields are mostly 2-4 bp lower, while the 10-year Treasury yield is little changed near 4.11%. Gold is in a narrow range between around $2018 and $2024. It is marginally lower on the week. With China warning against striking its ships in the Red Sea, crude oil is a little heavier after the March WTI contract reached $77.50 yesterday. Still, near $76.60, March WTI is up about 4.6% this week, the largest surge since last October. 
 

Asia Pacific

The BOJ meeting earlier this week boosted confidence that an exit from the negative interest rate policy is likely in April. Yet, at the same time, it seems that the BOJ's assessment of the trajectory of inflation is proving correct. Today's January Tokyo CPI, which runs about 0.2 percentage points above the national figures, fell by more than expected. Specifically, the headline rate dropped to 1.6% from 2.4%. It is the lowest since March 2022. The core rate, which excludes fresh food, is at 1.6%, the first sub-2% reading since May 2022. The measure that excludes fresh food and energy, has proven considerably stickier, thanks in part to processed food prices. Still, the decline reported today (3.1% vs. 3.5%) is the fifth consecutive monthly decline. Comments by BOJ Governor Ueda earlier this week put an emphasis on services prices. They slowed to 1.7% from 2.2%. It is the national core rate that the BOJ targets. Today's report suggests that before the BOJ lifts its -0.10% target rate, the national core rate may be below the 2% target. 

Next week's regional highlights include China's January PMI. It may be too early to see the impact of the stepped-up measures to support the economy. Japan reports December retail sales, industrial production, and employment. Industrial output is expected to jump back (~2.5% after a 0.9% decline in November) and retail sales are expected to rise by about 0.6% after a 1.1% gain in November. It would take the two months to recoup October's 1.7% decline. These data points will help economists fine-tune Q4 23 GDP forecasts. Currently, the median in Bloomberg's survey sees a 1.1% annualized expansion after a 2.9% contraction in Q3. Business investment and consumption are expected to have risen for the first time in three quarters. Australia's December retail sales are expected to have fallen by around 1.5% after rising 2.0% in November. Consumer price inflation is expected to have slowed to around 4.3% in Q4 23 from 5.4% in Q3.

The dollar was confined yesterday to about half of a yen on either side of Wednesday's settlement near JPY147.50. It is trading quietly today in about half of a yen range below JPY148.10. In fact, if the dollar cannot close above the current session high, it will post its first weekly loss of the year against the yen. While it continues to consolidate today, we expect next week's FOMC meeting and US employment data to inject more volatility in the exchange rate. Our bias is to view the consolidation as a continuation pattern, and for a stronger dollar that could complete the upside correction seen since the start of the month. The Australian dollar continues to trade poorly. In the past four sessions, the Australian dollar has an unsustainable rally and settled near its lows. The market looks as if it is rebuffing attempts to establish a foothold above $0.6600. If it is unable to close above there today, it would mark the fourth consecutive weekly loss for the Aussie, its longest losing streak since last August. So far this week, though, the bears cannot drive it through $0.6550, and last week's low was near $0.6525. The Chinese yuan snapped a four-day advance yesterday but is slightly firmer today. The PBOC set the dollar's reference rate at CNY7.1074 (CNY7.1044 yesterday), while the average in Bloomberg's survey was CNY7.1702 (CNY7.1649 yesterday). The dollar rose to a three-day high near CNY7.1822 before coming back off. The greenback is poised to record its first losing week of the year against the offshore yuan. 
 

Europe

There were no surprises from the ECB yesterday. The policy was left on hold, but ECB President Lagarde failed to convince the market that it was too early to discuss rate cuts. In fact, the odds of an April move increased to around 80% from about 65%. It now is closer to 90%. The extent of this year's cuts is seen around 145 bp (vs. 132 bp a week ago). Lagarde warned that growth risks were still tilted lower, while geopolitical developments pose an upside risk for inflation. She also noted that wage pressures were beginning to ease. Separately, today the ECB published December M3 money supply, and it rose on a year-over-year basis for the first time since June, extending its recovery for the fourth consecutive month. Gradually, it appears that the credit conditions in the eurozone are bottoming out. 

Next week's highlights include the eurozone's Q4 GDP. Lagarde warned of stagnation. The median forecast in Bloomberg's survey is for a 0.1% contraction, which would match Q3's performance. The eurozone sees the initial estimate of January's CPI. The median projection in Bloomberg's survey sees a 0.3% month-over-month decline, which would allow the year-over-year rate to slip to 2.8% from 2.9%. The core rate is expected to be unchanged at 3.4%. In the February-May period, the base effect suggests the eurozone CPI could fall below 2%. Of note, the Germany's EU harmonized measure is seen falling to 3.0% from 3.8%, while France's CPI may ease to 3.7% from 4.1%.

The Bank of England meets on February 1. There is practically no chance of a change in policy. The swaps market has a little better than a 50% chance of a cut in May, and it is fully priced in for June. At the end of last year, the swaps market was discounting almost 58 bp of cuts by mid-2024. In late December 2023, the market had priced in about 172 bp in cuts this year, and it scaled it back to slightly more than 100 bp, from nearly seven quarter-point cuts to four. 

The drop in eurozone rates and the stronger-than-expected US Q3 GDP weighed on the euro. The single currency continued to be sold on intraday moves above $1.09. In fact, it has not closed above $1.09 since January 15. It held the week's low, slightly above $1.0820, yesterday, but was pushed to a marginal new low today a little below $1.0815. There are options for 910 mln euros at $1.08 that expire today. The euro recovered to almost $1.0870 in the European morning, which is stretching the intraday momentum indicators and may give early North American operators a new selling opportunity. Our reading of the charts suggests potential toward $1.0765, and possibly $1.0725. The head and shoulders pattern that might have been forged projects toward $1.06, which given the state of the momentum indicators, seems a bit much. Sterling remains in a $1.26-$1.28 range. It made a marginal near three-day low today near $1.2675 before recovering back a little above $1.2740. Yesterday's high slightly below $1.2745. Here, too, the momentum indicators are stretched, warning of the adverse risk-reward considerations in the two-cent range.
 

America

The world's largest economy expanded by 3.3% at an annualized rate in Q4 23, better than nearly everyone expected. Consumption slowed less than expected (2.8% vs. 3.1%), and business investment, government, inventories, and net exports all contributed to the expansion. Moreover, the strong growth took place with less inflation. The GDP deflator was more than halved to 1.5% from 3.3%. It is the slowest since the deflation in Q2 20. The core deflator was steady at 2.0%. The GDP reported embedded today's personal income and consumption data. The consumption component suggests an upside risk to the 0.5% gain expected in December, while income expected to have risen by 0.3% (after 0.4% in November). The headline PCE deflator is seen steady at 2.6%, while the core rate may have ticked down to 3.0% from 3.2%. With little meaningful January data, except for some surveys and weekly jobless claims, economists are pessimistic about the outlook for the first quarter. Bloomberg's monthly survey found a median forecast of 0.6%. This seems exceptionally dour. The Atlanta Fed GDP tracker will offer its first estimate for Q1 24 GDP later today. It tends not to be particularly accurate at this stage of the data cycle. Consider it a preliminary place holder. 

Next week's US highlights include the FOMC meeting and the January employment report. The Federal Reserve will stand pat. A combination of Fed-speak and economic data have succeeded in prompting the market to push back first cut. At the end of last year, the Fed funds futures had a March cut fully discounted. Now it is seen as a 50/50 proposition. The market has also taken back one quarter point cut in expected this year, so it now has 137 bp of cuts discounted down from 168 bp in mid-January (five quarter-point cuts and ~50% chance of a sixth).

There are several employment reports next week, include JOLTS, ADP, the Employment Cost Index, weekly jobless claims, and the monthly nonfarm payroll report. It is widely recognized that jobs growth is slowing, and that government and health care employment growth has helped carry the labor market. The median forecast in Bloomberg's survey is that the US economy added about 168k people to payrolls. If accurate, that would match the average job growth in Q4 23. On average, and taking the downward revisions into account, the US created about 225k jobs a month in 2023, down from almost 400k a month in 2022. In Q4 23, the private sector grew about 115k jobs a month. The 2023 average was almost 170k after 377k average in 2022. Still, the unemployment rate may tick up to 3.8% from 3.7%. A 0.2% increase in average hourly earnings will keep the year-over-year pace at 4.1%. 

The US dollar peaked yesterday in Asia, setting a new high for the week near CAD1.3535, a smidgeon below the month's high set last week slightly above CAD1.3540. The failed attempt to make a new high spurred some position adjustment and fell slightly below CAD1.3470, which is also where the 200-day moving average is found. Follow-through action today has pushed the greenback to CAD1.3445. The intraday momentum indicators are stretched, and the US dollar may stall ahead of the next support area CAD1.3400-15 area, which is more important from the technical perspective. Mexico reports its December trade figures today ahead of next week's Q4 GDP. There is a strong seasonal tendency for Mexico's trade balance to improve in December. The median forecast in Bloomberg's survey is a for a $1.84 bln surplus, almost three-times larger than November. It would be the largest monthly surplus in three years. More important for the peso will be the broader dollar movement. This week's dollar high was within a few pips of previous week's high (~MXN17.3860). In between, the dollar had fallen to about MXN17.0565. Since the second high was recorded, the dollar set a low near MXN17.14. It consolidated yesterday in the narrowest range of the week, roughly a five-centavos range on both sides of MXN17.22. It has slipped to MXN17.1575 in European turnover, but looks poised to recover in North America today.

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