2024 is off to an inauspicious start. Ten-year Treasury yields are pushing toward the 4-percent threshold, equity futures are pointing to another day of losses, and risk-sensitive currency units are retreating against a resurgent dollar as traders turn incrementally more cautious on the likelihood of an imminent and aggressive easing cycle from the Federal Reserve. Investors are currently assigning circa-70-percent odds to a rate cut at the central bank’s March meeting, down from above 85 percent last week.

The Fed will publish minutes taken during its December meeting this afternoon, providing insight into the thinking that motivated Jerome Powell’s dovish pivot and led to a rally across most financial markets. We expect the record will show the central bank cautiously tip-toeing toward rate cuts, but the broader tone is likely to remain relatively hawkish as officials work to dampen enthusiasm in financial markets. Markets still have at least six rate cuts priced in for 2024, almost twice as many as Fed officials have penciled in over the same period – a mismatch that suggests a serious misunderstanding of the central bank’s reaction function, either on the part of investors, or among policymakers themselves.

USD: The dollar looks set to add to its gains after staging its biggest one-day rally since October on a flurry of position adjustment. Traders appear worried that December’s “everything rally” went too far, too fast, and are proving reluctant to chase further gains ahead of today’s Fed minutes and Friday’s non-farm payrolls report. We don’t think this will last – markets will seize on any excuse to drive yields lower, and renewed declines are likely in the short run. But with significant Fed easing already priced in, and upside for other currencies looking strictly limited, it is difficult to see the consensus bet on prolonged dollar weakness playing out over the year ahead – we think the greenback could again defy extraordinarily-bearish projections.

CAD: The Canadian dollar is unwinding some of last month’s gains amid a lack of currency-relevant newsflow, suggesting that mean reversion effects are in play. A strong headline gain in Friday’s jobs report could help to put a floor under the currency, but we will remain focused on the unemployment rate – which triggered the “Sahm Rule” a few months ago, indicating that a recession is likely imminent. Two-year yield differentials are holding effectively unchanged, with US instruments offering 36 basis points more than their Canadian equivalents. The Bank of Canada is seen delivering 134 basis points in rate cuts over the course of 2024, with the Federal Reserve expected to reduce rates by 147 basis points over the same period.

EUR: Unemployment in Germany – the common currency area’s largest economy – ticked higher in December to 5.9 percent, but remained near post-reunification lows, suggesting that the European Central Bank’s tightening efforts aren’t clobbering growth as badly as had been feared. Data out yesterday showed the negative credit impulse for households and non-financial corporations shrinking from -5.2 percent of gross domestic product to -4.5 percent in October, meaning that the decline in lending activity is slowing, and exacting a more manageable toll on overall demand. The bloc remains on course toward an early-year contraction, but could show some signs of stability in the coming months, helping the currency grind its way back above the 1.10 mark agains the dollar.

Still Ahead

WEDNESDAY

The Institute for Supply Management’s manufacturing index probably showed signs of modest improvement in December, but should remain well below the 50 threshold that separates expansion from contraction. Market consensus is pointing to a print close to the 47.3 mark, up from 46.7 in November, with a rise in new orders helping bolster activity across the long-depressed factory sector. (10:00 EDT)

The number of job openings available to each unemployed worker likely rose in November, with postings remaining steady against a decline in jobless rolls. The Job Openings and Labor Turnover Survey is expected to show 8.7 million positions vacant in the month, essentially unchanged relative to October’s print. (10:00 EDT)

Minutes taken during the Federal Reserve’s December meeting should provide a more nuanced perspective on the factors leading up to Jerome Powell’s remarkably-dovish performance during the post-decision press conference. Officials could express growing concern over softness in the economy, but discussion of the conditions needed to trigger a shift to loosening policy should remain extremely high level, and an explicit ratification of market rate cut bets remains unlikely. (14:00 EDT)

THURSDAY

Weekly jobless claims should remain consistent with data released in late December, meaning that the four-week moving average will likely hold close to 215,000. The continuing claims number might continue to creep up, exhibiting signs of increasing strain as skills mismatches limit the employment uptake in an economy that is generating jobs in an ever-narrower subset of sectors. (08:30 EDT)

Although forward guidance provided at the time was largely unchanged, Mexico’s central bank likely turned more dovish in December, with the meeting record expected to exhibit a willingness to follow the Federal Reserve in cutting rates early this year. If, as we expect, domestic inflation continues decelerating, and the US economy loses momentum, the conditions should be in place for a relatively steady unwind in rate hikes through the year – and we think officials are looking at the same writing on the wall. (10:00 EDT)

FRIDAY

Euro area inflation rates likely staged a counter-intuitive rebound in December, with last year’s on-time energy offset from the German government generating unfavourable base effects. Core price growth probably continued slowing however, with services costs beginning to fade more aggressively in the face of ebbing demand. Markets expect the core price measure to slip to 3.4 percent year over year from 3.6 percent in November. (05:00 EDT)

2023’s final non-farm payroll report should show job generation slowing from November’s level, with the unemployment rate creeping back up. Seasonal hiring could deliver an upside surprise, but consensus estimates suggest 170,000 new jobs were created in the month, with the jobless rate climbing to 3.9 percent from 3.7 percent previously – exhibiting a worrisome direction of travel, but one not yet consistent with recessionary conditions. Revisions could play an interesting role however – if prior months are revised in a negative direction, market bets on a harder landing could come back into vogue. (08:30 EDT)

With population growth outpacing job creation, Canada’s labour market may have loosened further in December. Market consensus is aligned around a circa-10,000-position job gain in the month, but the unemployment rate is seen ticking up to 5.9 percent, setting the stage for another cautionary statement from the Bank of Canada on January 24th. (08:30 EDT)

The US services sector probably slowed in December, with the Institute for Supply Management’s services index slipping from November’s 52.7 level as consumers and businesses turned more cautious into year end. Overall activity should remain strongly positive however, pointing to continued resilience in household spending – which we expect will begin fading in the months ahead. (10:00 EDT)