Morning from Europe.

The USD is back in the driver’s seat against both European and Asian FX after the Taiwenese election results and the (very) soft wage numbers from the UK this morning.

The consensus for 2024 is already being tested a few weeks into the year as there are early hiccups in the US disinflation momentum, the anticipated weakness in the USD and potentially in the dovish Fed expectations soon as well. Everything currently points to a better equity than bond environment in our view.

The PCE inflation numbers released on Jan 26 is the next key event for USD interest rates, and we’d like to remind you that the spread between CPI inflation and PCE inflation is directionally correlated to underlying inflation pressures.

Should the gap between the CPI and the PCE widen further, it is hence probably not a reason to celebrate for the Fed (See chart 1).

Chart 1: CPI vs PCE is directionally correlated to underlying inflation momentum