Market Brief: Dollar Slips As Fed Expectations Stabilize

CalendarJanuary 26, 2024

The dollar is down roughly a quarter percentage point against most of its major rivals and traders are moving into high-beta currencies under the assumption that today’s December personal income, spending, and inflation numbers will help keep Federal Reserve expectations in neutral.

The drama associated with this morning’s data has been somewhat diminished by yesterday’s print: income and spending should come in at healthy levels, and the core consumption expenditures index is believed to have risen 0.2 percent from November - but there is some risk of a lower-than-anticipated outcome if prior months are revised.

The euro is struggling to regain territory lost after a surprisingly dovish performance from European Central Bank president Christine Lagarde during yesterday’s post-decision press conference. Speaking to reporters, she said the “disinflation process is at work,” calling December’s uptick in prices “weaker than expected” and suggesting that wage growth was already slowing in much of the euro area - wording that would seem to suggest that a rate cut could come before the June meeting. As with prior communication missteps, we’re not sure whether to take this at face value - other officials could be dispatched in coming days to row her comments back.

The Japanese yen is the lone major-currency loser against the dollar even after minutes of the Bank of Japan’s December policy meeting pointed to a live debate on moving interest rates into positive territory. Although a few officials felt it was risky to move too far, too fast, others agreed that the “timing of normalisation is getting closer,” with some arguing that the discussion of rate hikes should “deepen” at future get-togethers. Inflation in Tokyo - considered a bellwether for the national print - cooled in early January as consumer prices excluding fresh food and energy rose 3.1 percent year-over-year, marking the slowest pace in five months. Prices in the services sector, which sit at the intersection of consumer demand and wage gains, climbed just 1.7 percent, down from 2.2 percent in December. 

In the US, a soft landing seems to have been achieved. Yesterday’s fourth-quarter gross domestic product print showed the economy coming astonishingly close to achieving the “immaculate disinflation” once derided by much of the economic establishment in the fourth quarter of 2023. Price growth fell below the Fed’s target even as wages climbed, unemployment held near record lows, and personal spending surged.

But central bankers might want to soft-pedal the self-congratulations. Counter-factuals are impossible to prove, yet it isn’t clear that policy changes played a major role in the economic outcomes currently making themselves felt. Herculean tightening efforts over the last two years unquestionably helped keep inflation expectations anchored and probably prevented a wider melt-up in housing prices - but pandemic-related shocks were probably going to correct anyway, and the strong credit creation, employment income, and consumer demand evidenced in yesterday’s report are all signs that monetary transmission channels aren’t working as theory would suggest. The last few years have been a humbling experience for all of us, and policymakers should be no different.


Karl Schamotta

Karl Schamotta

Chief Market Strategist