Drivers for the Week Ahead

  • The dollar rally continues despite President Trump’s complaints over the weekend that it is too strong
  • The US 10-year yield traded at 2.76%, the highest since January 28
  • The February jobs data Friday could be an important catalyst for even higher US yields
  • ECB meeting Thursday will be the highlight of the week in Europe
  • China’s annual National People’s Conference begins in Beijing Tuesday; reports suggest the US and China are nearing a deal on trade
  • Reserve Bank of Australia meets Tuesday; Bank of Canada meets Wednesday
  • It’s another busy week of EM central bank meetings

The dollar is mostly firmer against the majors as the new week begins.  Kiwi and sterling are outperforming, while the Scandies are underperforming.  EM currencies are mostly weaker.  RUB and CNY are outperforming, while MXN and THB are underperforming.  MSCI Asia Pacific was up 0.4%, with the Nikkei rising 1%.  MSCI EM is up 0.1% so far today, with the Shanghai Composite rising 1.1%.  Euro Stoxx 600 is up 0.3% near midday, while US equity futures are pointing to a higher open.  10-year UST yields are flat at 2.75%.  Commodity prices are mixed, with Brent oil up 1%, copper down 1.1%, and gold down 0.5%.

The dollar rally continues despite President Trump’s complaints over the weekend that it is too strong.  He also took another swipe and Fed Chairman Powell.  However, we’d note that the comments were made at CPAC and so Trump may have just been playing to his base with these comments.

The US 10-year yield traded at 2.76%, the highest since January 28.  The 2-year yield has risen too to trade at 2.56%, the highest since January 30.  The 3-month to 10-year spread on the US yield curve has steepened to 33 bp, the most since February 4.  While US rates have come off a tick today, we think the yield curve should steepen further.  The short end is anchored for now so steepening will have to come from the long end.  Perhaps some more strong US data points might do the trick.

The February jobs data Friday could be an important catalyst for even higher US yields.  Consensus sees +185k non-farm payrolls vs. +304k in January.  Average hourly earnings are expected to rise 3.3% y/y vs. 3.2% in January, which would match the cycle high.  Unemployment is seen ticking down to 3.9%.

We have the first two pieces of the February jobs puzzle and they are conflicting.  Weekly initial jobless claims number for the survey week (the one that includes the 12th of the month) fell to 216k (later revised to 217k).  This is the lowest reading since the week of January 18 (last month’s survey week) when claims came in at 200k.  On the other hand, the jobs component in February ISM fell from 55.5 to 52.3.  ADP releases its estimate of private sector jobs Wednesday.

Ahead of the jobs data, the Fed releases its Beige Book report Wednesday for the upcoming March 20 FOMC meeting.  The report should present a cautious, balanced picture of the US economy.  There are also several Fed speakers this week.  Kashkari and Barkin (both non-voters) speak Tuesday, followed by Williams (voter) and Mester (non-voter) Wednesday.  Brainard (voter) speaks Thursday and Powell (voter) speaks Friday.

Other US data may be of some minor interest to the markets.  December new home sales, January budget data, and February non-manufacturing PMI will be reported Tuesday.  December trade will be reported Wednesday, February Challenger job cuts will be reported Thursday, followed by January housing starts and building permits Friday.

The US debt ceiling came back into effect over the weekend.  However, the CBO estimated last week that the US Treasury has the wherewithal to keep the government running until September or so.  Given the dysfunctional environment in Washington, we fear that brinksmanship will keep a deal unlikely until that deadline gets very, very close.  Expect the rating agencies to weigh in on this from time to time.

ECB meeting Thursday will be the highlight of the week in Europe.  A dovish hold is expected, with lowered staff forecasts likely to reflect the deteriorating growth outlook.  However, we think it may be too soon to push out its official forward guidance.  It may announce Thursday that a new TLTRO will come later this year, with details to be given at either the April 10 (most likely) or June 6 meetings.

Ahead of the ECB decision, we will get final February services and composite PMI readings for the eurozone Tuesday.  Besides any revisions, the country breakdown will be expanded beyond just Germany and France.  The final manufacturing PMI breakdown was disappointing, as Spain fell to 49.9 from 52.4 in January and joined the sub-50 club of Italy (47.7) and Germany (47.6).

UK continues to report February PMI readings.  Friday, manufacturing PMI came in lower than expected at 52.0, while construction PMI came in lower than expected today at 49.5, the first sub-50 reading since March 2018.  Tuesday brings services (49.9 expected) and composite (50.1 expected) PMI readings.  Next BOE meeting is March 21.  With Brexit uncertainty continuing, the bank will remain on hold.

There is a limited amount of data from Japan this week.  Services and composite February PMI will be reported Tuesday.  Final Q4 GDP (1.7% SAAR expected) will be reported Thursday, followed by January current account data (JPY1.4 trln adjusted expected) Friday.  Recent yen weakness should take some pressure off the BOJ to do anything near-term.  Instead, the bank can hopefully keep its power dry until the consumption tax hike this fall.  Next BOJ meeting is March 15 and no change is expected then.

China’s annual National People’s Conference begins in Beijing Tuesday.  The government will announce a growth target for this year.  China reports February trade Friday, while February CPI and PPI will come out Saturday morning local time.  The rise in the Caixin manufacturing PMI in February suggests some impact is being felt from stimulus but more evidence of a turnaround is needed.

Reports suggest the US and China are nearing a deal on trade.  China is reportedly insisting that all tariffs be removed to finalize the deal, while the US would like to phase them out over time subject to China implementing the deal.  A summit between Trump and Xi would likely be held to seal the deal, with some reports suggesting that will be around March 27.  The next round of higher US tariffs has been postponed.

Reserve Bank of Australia meets Tuesday.  After last month’s extremely dovish turn, we don’t expect much to change this month.  However, the bank will likely reinforce that dovish message this week.  Q4 GDP will be reported Wednesday, with growth expected to slow to 2.7% y/y from 2.8% in Q3.  January trade (AUD2.9 bln surplus expected) and retail sales (0.3% m/m expected) will be reported Thursday.

Bank of Canada meets Wednesday and is widely expected to keep rates steady at 1.75%.  Last week, headline inflation slumped to 1.4% y/y in January from 2.0% in December, while Q4 GDP growth slowed to 0.4% annualized from 2.0% in Q3.  Wednesday also sees February Ivey PMI, followed by January building permits Thursday and February jobs data Friday.  Jobs are expected to shrink -2.5k vs. +66.8k in January.

It’s another busy week of EM central bank meetings.  Malaysia’s meets Tuesday, followed by Turkey and Poland Wednesday and Peru Thursday.  None are expected to change rates.  We will also get a slew of CPI reports that show falling EM price pressures, which if sustained will support the notion that several are likely to ease in H2.