Drivers for the Week Ahead

  • The dollar rally has resumed in the wake of the FOMC meeting last week
  • The US reports October budget data, CPI, and retail sales this week
  • Italy must respond to the EU’s request to revise its draft budget proposal by Tuesday; Eurozone reports Q3 GDP Wednesday
  • The UK has a busy data week; Brexit uncertainty has intensified with the resignation of another minister
  • China reports money and new loan data this week, but no date has been scheduled
  • The central banks of Thailand, Indonesia, the Philippines, and Mexico meet this week

The dollar is broadly firmer against the majors as the new week began where the old one left off.  Yen and Loonie are outperforming, while sterling and euro are underperforming.  EM currencies are broadly weaker.  RUB and CNY are outperforming, while IDR and PLN are underperforming.  MSCI Asia Pacific was down 0.4%, with the Nikkei rising 0.1%.  MSCI EM is down 0.7% so far today, with the Shanghai Composite rising 1.2%.  Euro Stoxx 600 is down 0.2% near midday, while US futures are pointing to a lower open.  The US bond market is closed today for the holiday.  Commodity prices are mostly higher, with Brent oil up 0.8%, copper up 0.2%, and gold down 0.3%.

The dollar rally has resumed in the wake of the FOMC meeting last week.  US rates are headed higher, while event risk in the eurozone and the UK remain in place.  A general risk off mood continues to permeate global markets, favoring the haven assets such as the dollar, USTs, the yen, and Swissie at the expense of riskier assets such as equities and EM.  We believe events this week will continue to be dollar-supportive.

The US reports October CPI Wednesday.  Consensus sees headline rising 2.5% y/y and core rising 2.2%.  The larger than expected 2.9% y/y gain in headline PPI reported last week was driven in large part by a 2.7% gain in energy prices.  Still, even core PPI rose a larger than expected 2.6% y/y and near cycle highs.  While PPI and CPI do not always correlate well, we would simply warn of the risk of an upside surprise here.

US October retail sales will be reported Thursday, followed by IP Friday.  Both headline and ex-autos are seen rising 0.5% m/m, while the so-called “control group” used for GDP calculations is seen rising 0.4%.  Given strong auto sales and robust wage gains reported for last month, here too there are upside risks to the numbers.  With a strong start seen so far in Q4, the Atlanta Fed’s GDPNow model is tracking 2.9% SAAR growth while the NY Fed’s Nowcast model is tracking at 2.7% SAAR.

Strong data should keep upward pressure on US yields.  The 10-year tried and failed again to break above 3.25% last week but we think it’s only a matter of time.  For now, US yields are being pushed down by risk off sentiment.

The Fed basically signaled last week that a December hike will be seen.  This week, the end of the FOMC press embargo sees several Fed speakers.  Daly speaks Monday, followed by Kashkari, Brainard, and Harker Tuesday.  Wednesday sees Quarles and Powell speak, followed by Quarles, Powell, Bostic, and Kashkari Thursday.  Evans rounds out the week’s speakers on Friday.

Oil prices continue to sink.  Brent oil is down nearly 20% from its October peak while WTI is down nearly 22% from its peak.  Lower energy prices may lead to some relief for headline inflation in the coming months.  However, we again note that core measures have been rising and are likely to continue rising.  OPEC and its allies held a meeting over the weekend in Abu Dhabi to discuss recent oil market developments.   While some expect OPEC to announce output cuts for next year, Saudi officials said it’s “premature” to discuss this.

Italy must respond to the EU’s request to revise its draft budget proposal by Tuesday.  Italian officials are showing no signs of compromise, even in light of the fact that the economy continues to struggle.  With the unrealistic growth forecasts, the draft budget looks even worse.  Unfortunately, it looks like tensions are likely to get worse and we cannot rule out the possibility of sanctions on Italy.

Eurozone reports Q3 GDP Wednesday.  Headline growth is seen remaining steady at 1.7% y/y.  However, this reading will mask sharp slowdowns in Italy (already reported at 0.8% y/y) and Germany (1.2% y/y expected).  German officials in particular have stressed that the Q3 slowdown is transitory, but that remains to be seen.

Many ECB officials speak this week and will likely be asked about reports of a new TLTRO being considered.  Press reports suggest that the ECB is considering another TLTRO in January, after it has completed QE.  After De Guindos spoke today, he along with Praet and Lautenschlaeger will speak Tuesday.  Coeure, Praet, and de Guindos speak Thursday, followed by Draghi Friday.

Italy concerns and TLTRO chatter should continue to weigh on the euro.  Indeed, it just broke below the August/October lows near $1.13 today.  This sets up a test of the June 2017 low near $1.1120.

The UK has a busy data week.  September labor market data will be reported Tuesday, followed by October CPI Wednesday and retail sales Thursday.  Employment is seen rising 25k in September, whilst the unemployment rate is seen steady at 4.0%.  Headline CPI is seen rising 2.5% y/y and CPIH by 2.3% y/y, both a tick higher than September.  Lastly, headline retail sales are seen rising 0.2% m/m and 2.8% y/y in October.

Elsewhere, Brexit uncertainty has intensified with the resignation last week of Transport Minister Jo Johnson.  He is the sixth minister to resign over Brexit, and he claimed that others are likely to follow him.  What’s noteworthy is that Johnson is one of the pro-European Tories.  As we’ve pointed out before, Prime Minister May faces an impossible task of getting a compromise that’s agreeable to both the EU and her own government.  A cabinet vote on the current Brexit proposal is expected this week, but many observers believe it won’t pass a full parliamentary vote as it stands now.

Sterling should also remain under pressure.  Break of the $1.2880 area today sets up a test of the October 30 low near $1.27 and then the August low near $1.2660.  Looking at the crosses, EUR/GBP made a new cycle low near .8856 last week before bouncing.  It’s a tough call, but we think sterling is likely to underperform near-term and so this cross is likely to move higher.

Japan reports Q3 GDP Wednesday.  Consensus sees a -0.9% SAAR contraction vs. +3.0% SAAR in Q2.  Despite the likely contraction, the economic outlook remains solid.  Still, policymakers are maintaining a cautious outlook with regards to removing stimulus.  The recent rise in USD/JPY will be welcome.  While the 114 area may provide some resistance, charts point to a test of the year’s high near 114.55 from early October.

China reports money and new loan data this week, but no date has been scheduled.  Retail sales and IP will be reported Wednesday, with the former expected to rise 9.2% y/y and the latter by 5.8% y/y.  Both would be steady from September.  We are seeing growing concerns about growth in China, embodied by continued stimulus measures by policymakers.

We caution investors not to get too optimistic that US-China trade tensions will improve.  Over the weekend, White House trade advisor Peter Navarro warned that “globalist billionaires” on Wall Street are pressuring Trump into reaching a fast deal, thereby weakening the US bargaining position.  We note that Trump’s economic team is seen remaining largely intact after the midterms and so see no reason why their tactics should change.

The central banks of Thailand, Indonesia, the Philippines, and Mexico meet this week.  Banco de Mexico is the only one expected to hike (by 25 bp), but we see risks of a hawkish surprise from the Philippines.

Recent events in Mexico provide a timely reminder of how event risk in EM remains high.  We’d add BRL, ZAR, and TRY to the mix of currencies subject to idiosyncratic negative risks.  Lower oil prices are likely to weight on RUB and COP (as well as MXN) near-term, and so we think that the high-beta group is likely to continue underperforming this week.