Opinions

This week’s holiday-shortened economic calendar is light given that Fed officials will be in their self-imposed communications blackout ahead of next Wednesday’s FOMC meeting. The main focus will be Thursday’s release of the delayed October and November personal income and consumption report which will also provide the latest readings on core PCE inflation. Though Oct and Nov data are stale data, we are tracking Dec Core PCE at .4% MoM. We also expect the final reading of Q3GDP to come stronger at 4.6% from the previous reading of 4.3%. We have 2nd tier macro data in US this week such as pending home sales, initial jobless claims & S&P PMIs. On dated supply, we have $13 BN of 20yr UST auction on Wednesday & $21 BN of 10 year TIPS. In tariff news, we expect EU parliament to announce a pause on the US EU trade deal by Wednesday. This matter will escalate further before it settles down. This issue is -ve for EUR, risk assets specially DM equities, +ve for Gold & Silver. On US rate view, we are bullish on UST long end yields since early Nov & are targetting 4.30% levels on the 10yr UST. There is too much uncertainty on the present inflation data and hence Fed might want to wait for a few more month’s data to get clarity & certainty on the inflation front. On the employment front, labor demand supply looks balanced & hence there is no pressing reason for the FOMC to ignore the uncertainty on inflation front. Hence, we continue to believe the Fed will likely keep policy rates on hold until a new Fed chair is sworn in. We continue to expect 2 cuts of 25 bps each in June & Sep after a new Fed Chair arrives by May. In the news flow on Iran, we still believe there might be a regime change soon in Iran initiated by Israel attacking key Iranian establishments and backed by US. Hence the geopolitical risk premium in crude can remain for some time in short term but eventually as the regime gets replaced by a US friendly regime, crude supply will further overtake demand leading to Brent prices falling to $50 levels by mid CY26. In RoW data, we have UK CPI, German ZEW, Canadian CPI & Chinese Q4GDP (expected weak at 4.5%).

With the December jobs report in the rear-view mirror, the focus for the upcoming week’s data turns to inflation and growth. Tuesday’s December CPI report will capture most of the limelight. Our expectations are for these data to come in on the stronger side, unwinding some of the distortions induced by the government shutdown. We expect a strong no at .45% MoM for core CPI against current consensus of .3% MoM. In other US macro data, we have retail sales, existing home sales, PPI & industrial production. In US dated treasuries supply, we have $58 BN sale of 3 yr USTs on Monday, $39 BN sale of 10 yr USTs on Monday again & $22 BN sale of 30 yr USTs on Wednesday. We also have a likely decision on 14th Jan from Supreme Court on the validity of Trump's reciprocal tariffs. The week ahead has a multitude of Fed speakers across the spectrum which should give markets some light on their policy outlook. Our own thought process is that employment looks not breaking down, unemployment rate is stabilising & inflation looks set to be higher in the next few months due to positive residual seasonality. Thus, unless labor markets deteriorate sharply, uncertainty around the inflation outlook will likely keep policymakers vigilant on inflation risks. We continue to believe the Fed will likely keep policy rates on hold until a new Fed chair is sworn in. We continue to expect 2 cuts of 25 bps each in June & Sep after a new Fed Chair arrives by May. We have been bullish on long end UST yields since 9th Nov when we had recommended shorting 10yr UST at then yield of 4.09. Currently it is at 4.16 and we have an eventual target of 4.30. We have been bullish on DXY for some time (since 98.4 levels) and now it’s playing out. We expect DXY to test 100.50 from the current 99.13 levels as US exceptionalism narrative returns with tax cuts, stable employment and AI led productivity growth. On US equities we have been optimistic since 8th Nov when we released following report: https://macro-spectrum.com/trade-recommendation/buy-sp-500 At the time of the release of the above trade reco, S&P was at 6729 and currently it is at 6966. Our eventual target is 7015. In RoW data, we have Euro area sentix & Eurozone industrial production this week. We also have Chinese trade data as well as aggregate financing data this week.

We expect Core CPI inflation to have rebounded sharply to 0.45% m-o-m in December after having softened in the prior months due to two reasons. First being carry forward imputation applied to October CPI data likely led to positive payback in certain components (almost 40% of core CPI basket) through bi-monthly pricing practices. Second being delayed data collection in November seems to have brought forward seasonal price declines from December. This should lead to a rebound in month-on-month core CPI in December as seasonal adjustment factors catch up. We also expect core PCE inflation for December also accelerated to 0.38% m-o-m from 0.1-0.2% in the prior months. The recent volatility caused by the government shutdown makes it difficult to gauge the underlying inflation trend. Moreover, positive residual seasonality will likely push up inflation data early this year. Thus, unless labor markets deteriorate sharply, uncertainty around the inflation outlook will likely keep policymakers vigilant on inflation risks. We continue to believe the Fed will likely keep policy rates on hold until a new Fed chair is sworn in. We continue to expect two more rate cuts of 25 bps each in CY26, one in the 17th June FOMC meeting & the last cut in the 16th Sep FOMC meeting. We expect long end UST yields to eventually move northwards to our target of 4.3%. On 9th Nov, we had released the following trade recommendation on selling 10yr USTs: https://macro-spectrum.com/trade-recommendation/sell-10yr-ust

The first full week of the new year features a busy data docket capped off by Friday’s December employment report. Following two volatile months of labor data the December employment report should give Fed officials a somewhat better read on the underlying trends. Regarding our forecasts, we project modest gains on headline (+85k forecast vs. previous +64k) payrolls alongside a one-tenth decline in the unemployment rate (4.5% vs. 4.6%). On US economy growth profile, most of the market including us spent much of the past year anticipating an economic slowdown during 2025 followed by a modest growth rebound in 2026. But by the time 2026 arrived, stronger GDP outcomes meant that we were instead forecasting stable growth just below 2.0% across both 2025 and 2026—albeit still slower than 2024’s 2.4% gain. However, as the activity data rolls in, there is diminishing evidence that there was ever much of a GDP slowdown despite notably softer job growth. On the labor front, recent QCEW data show the gap with NFP has narrowed materially, with Q2 employment only 53k below payroll estimates. Given typical positive QCEW revisions, this suggests little risk of NFP overstatement and supports recent signs of a rebound in job growth. In US macro data this week, we have ISM manufacturing, ISM services, JOLTS, Michigan prelim reading for Jan and Dec'25 NFP. The Dec NFP report should confirm that the labor market remains resilient. If our forecasts are correct, the three-month average of private-sector job gains would sit near the upper end of Fed officials’ breakeven NFP estimates, reinforcing our view that improving labor market fundamentals will keep the Fed on hold for the remainder of Powell’s term as chair. We continue to expect 2 cuts of 25 bps each in June & Sep after a new Fed Chair arrives by May. There is no dated UST supply this week. Markets will be focusing more on news flow from Venezuela on Monday opening. We expect Brent to move towards $50 levels by Q3CY26. In RoW data, we have inflation data from France & Germany on Tuesday which we expect to be soft.

We expect headline job gains in Dec inched up to 85k from Nov’s 64k supported by stronger private sector hiring. Government employment likely edged up following a one-off negative impact from DOGE-related resignations. The unemployment rate likely fell to 4.5%, unwinding November’s shutdown-related distortion with lower claims and easing job loss concerns pointing to near-term mean reversion. But there is some elevated uncertainty with respect to our unemployment rate forecast due to last 2 month combined readings, lower survey response rate & composite weighting changes. Leading indicators for the labor market has been largely +ve as see in low initial jobless claims, accelerating ADP's weekly measure of private employment growth & optimistic service sector surveys. In summary, we expect the Dec NFP report to show a stable labor market. If our expectations are correct, the 3month average of private sector gains will be near the upper end of Fed's breakeven NFP estimates. Hence we don't expect to see any rate cut till Powell term ends in May. We continue to expect 2 cuts of 25 bps each in June & Sep after a new Fed Chair arrives by May. We have been bullish on long end UST yields since 9th Nov when we had recommended shorting 10yr UST at then yield of 4.09. Currently it is at 4.19 and we have an eventual target of 4.30. We are bullish on DXY also at current levels and expect DXY to test 100.50 from the current 98.4 levels as US exceptionalism narrative returns with tax cuts, stable employment and AI led productivity growth. On US equities we have been optimistic since our early Nov. At the time of the release of our 8th Nov trade reco, S&P was at 6729 and currently it is at 6858. Our eventual target is 7015. US equities might be supported by stronger earnings due to forthcoming tax breaks as well as expected tariff relief coming soon from US Supreme Court.

The week ahead is a data loaded week for US macros. We have Nov and Oct NFPs on 16th Dec and Nov & Oct CPIs on Thursday. We also have retail sales, existing homes sales & Univ of Michigan data this week. Our sense on NFP is -20k for Oct and +80k for Nov. We expect unemployment rate to have stayed at 4.4% in Nov. On CPI front, we expect .22% MoM for Oct & .26% MoM for Nov in the core CPI. Oct & Nov NFP & CPI data can be very noisy and markets might not get a straight conclusion post the data release. Hence, we expect rate cuts pricing to not change significantly post the NFP data release. We continue to expect two more rate cuts of 25 bps each in CY26, one in the 17th June FOMC meeting & the last cut in the 16th Sep FOMC meeting. We expect long end UST yields to eventually move northwards to our target of 4.3%. In Fed speak, we have Williams, Bostic, Waller & Miran this week. The unanimous reappointment ("the unanimous concurrence of Federal Reserve Board members") of 11 regional Fed presidents (except for Bostic, who is retiring) appear to have *marginally* lowered the possibility of the Board of Governors firing regional Fed presidents in the future. In UST dated supply, we have $13 BN of 20 year UST auction on Wednesday & $24 BN of 5 year TIPS auction on Thursday. In RoW events, we have ECB meeting on Thursday which we expect to see status quo & release of HICP figures for CY28. We have BOE on Thursday where we expect a neutral 25bps cut to 3.75% policy rates with 6-3 voting margin. We expect a final cut from the Bank in April to take rates to a terminal level of 3.50%. In the BOJ meeting on Friday, we expect a dovish 25 bps hike from BOJ leading to JPY moving towards 160 levels. BOJ might not be able to give any guidance on future rate hikes leading to markets again pummeling JPY. This is also supported by our view that DXY is headed higher due to US economy exceptionalism and US might not see any cuts till June’26.