On Monday, as the US government avoided a shutdown crisis and traders continued to weigh the prospect of a smaller rate cut next year, the US dollar index continued to hover at a two-year high. As of now, the US dollar is quoted at 108.12.
The US Conference Board Consumer Confidence Index fell to 104.7 in December, lower than the expected 113; the initial value of US durable goods orders in November was -1.1% month-on-month, the largest monthly decline since June; the total number of new home sales in the United States in November was 664,000 units on an annualized basis, expected to be 670,000 units, and the previous value was 610,000 units.
Kremlin spokesman: There is no plan to facilitate a face-to-face meeting between Russian President Vladimir Putin and US President-elect Donald Trump.
The new French government was formally formed and the list of cabinet members was announced. Iran may hold talks with Britain, France and Germany on the Iranian nuclear issue in January next year.
Like the market, the Federal Reserve also needs to consider US tariffs and immigration policies when making inflation and economic growth outlooks. We believe that the subtle slowdown in the US labor market will still be the most important concern of the Federal Reserve. Although there are always uncertainties, our basic expectation of a policy rate of 3.75% remains unchanged. This is a far cry from the average US policy rate of 1.7% in the past 20 years.
With the start of the Christmas holiday, only a small amount of data will be released in the next few weeks. Among them, the preliminary value of the December consumer confidence index released on January 8 should remain stable. In addition, the November M3 money supply data released on December 30 may improve compared with the previous value, but there will be no significant changes. Interestingly, we expect the January HICP report to show that the overall inflation level has risen again to 2.4%, while core inflation may stabilize at 2.7%, indicating that the ECB needs to continue to be cautious. In Germany, we believe that the unemployment rate will rise slightly in December. Industrial production in Germany and France will still be weak in December.
After the Fed's interest rate decision last week, our US dollar trade-weighted index (TWI) has now exceeded the peak in 2022 and has surpassed all previous periods of strength in the US dollar, except for the surge in data before the Plaza Accord, which was also related to the Fed's actions to fight inflation at the time. We cautiously believe that the attitude shift similar to that before and after the FOMC meeting in June this year has proved to be short-lived, especially when the market has significantly predicted the "left-side tail risk". On the other hand, we believe that the reaction of the foreign exchange market is reasonable because the Fed's attitude shift is indeed a meaningful boost to the US dollar index, which will lead the market or policymakers to adopt higher standards for evaluating the economic data to be released in the future.
The above background is a series of events in the market since we released our 2025 outlook, and these developments have strengthened our expectations that the US dollar will perform strongly. We believe that the market may believe that the upcoming policy changes will have a positive impact on US economic growth. Indeed, after Trump's victory, we believed that the tariff proposals would eventually evolve into more comprehensive policy solutions, including more comprehensive economic policies such as tax policy adjustments and formal investigations. These policy solutions may include new taxes on specific goods or services, or more in-depth investigations of trading partners to address issues such as trade imbalances. At the same time, these policy solutions are also aimed at addressing more complex economic challenges, such as bilateral trade deficits, that is, the trade deficit between one country and another.
Therefore, our base case takes into account a more balanced risk between the global growth outlook and Fed policy, which means that there is some downside risk to the US dollar in the short term. However, the current strength of the US dollar is consistent with the upcoming economic data. We believe that the current market has not fully priced in the risks brought by the tariff policy, and we believe that the risks brought by the tariff policy to the US dollar index will be biased to the upside, although the US dollar has risen to a high this year.
The Canadian economy started the fourth quarter stronger than initially expected. Gross domestic product rose 0.3% in October from the previous month, beating expectations for a 0.2% rise, and output data for September was also revised upward. But the good news stopped there, as Statistics Canada said preliminary estimates showed a decline in GDP in November. CIBC Capital Markets said GDP is expected to grow at an annualized rate of 1.7% in the fourth quarter, slightly below the Bank of Canada's forecast of 2%. The bank added that this level of growth is below the long-term potential of the Canadian economy, setting the stage for further rate cuts in 2025. The bank expects the Bank of Canada's rate-cutting cycle to end once the policy rate falls to 2.25%.