Drivers for the Week Ahead

  • The market debate turned last week to the growing headwinds on the US economy
  • The Fed Funds futures market has moved significantly
  • The EU has called for a special summit this coming Sunday for leaders to approve the Brexit deal
  • Prime Minister May is fending off two angles of attack by her own countrymen
  • The EC will release its report on all eurozone draft budgets Wednesday; this will likely start excessive deficit procedure against Italy
  • Eurozone flash PMIs for November will be reported Friday

The dollar is mixed against the majors as the new week begins.  Swissie and sterling are outperforming, while the dollar bloc is underperforming.  EM currencies are mixed.  TRY and INR are outperforming, while BRL and PLN are underperforming.  MSCI Asia Pacific is up 0.4%, with the Nikkei rising 0.7%.  MSCI EM is up 0.5% so far today, with the Shanghai Composite rising 0.9%.  Euro Stoxx 600 is up 0.1% at midday, while US futures are pointing to a lower open.  The US 10-year yield is up 2 bp at 3.09%.  Commodity prices are mixed, with Brent oil up 0.4%, copper down 0.5%, and gold down 0.2%.

The market debate turned last week to the growing headwinds on the US economy.  The Atlanta Fed’s GDPNow model is tracking 2.8% SAAR growth, down from 2.9% last week, while the NY Fed’s Nowcast model is tracking at 2.6% SAAR vs. 2.7% last week.  Sequentially speaking, growth has slowed from the 4.2% SAAR peak in Q2 and 3.5% in Q3.

What will further muddy the debate is the fact that Q1 tends to be the slowest quarter of the year.  Faulty seasonal adjustments have been blamed and yet the seasonality has persisted over many years.  If the US posts another weak Q1, then that will feed into the slowdown narrative that has pushed the markets into a more dovish take on the Fed.

The Fed Funds futures market has moved significantly.  Implied yields on the December 2020 contract now suggest barely 50 bp of tightening will be seen.  That includes a 25 bp hike in December, and so markets have basically taken back the second hike next year that had been fully priced in at the beginning of this month.

After a heavy week of Fed speakers last week, Williams is the lone speaker this week and speaks today.  Last week, comments from Powell and Clarida were taken as being dovish and cautious with regards to tightening next year.

US data reports this week are relatively minor and come during a holiday-shortened week.   October housing starts and building permits are out Tuesday, followed by durable goods orders and existing home sales Wednesday.  Markit flash US PMI readings for November will be reported Friday.

DXY peaked on November 12 and is correcting lower.  Looking at the September-November rally, DXY has given up nearly a third of that move.  We would need to see a break of the 95.75 area (50% retracement objective) to suggest that a deeper correction is in store.

The EU has called for a special summit this coming Sunday for leaders to approve the Brexit deal.  That is, unless something game-changing happens.  A lot can happen between now and the weekend to prevent an agreement.   However, we are of the belief that the EU’s patience has run out.  If the UK cannot come to the table next weekend with an agreement approved by Parliament, we do not think the EU will give it another chance.

Prime Minister May is fending off two angles of attack by her own countrymen.  The first comes from within her government, as Tory rebels are calling for a vote of no-confidence.  Press reports suggest 42 lawmakers have sent letters calling for a no-confidence vote, still short of the 48 needed to trigger one.

There are reports that five cabinet ministers will present May with their version of a Brexit deal.  With that will come an ultimatum that if she does not present this to the EU, then that so-called Gang of Five will join the others and quit the government.

The second comes from the opposition Labour.  It seems plausible that Labour may be willing to scuttle the Brexit deal just to bring down May’s Tory government so that snap elections are called and Labour swoops into power.  To us, a no-deal Brexit and a Labour government would be the worst possible outcome for markets.

Bank of England’s Carney, Haldane, Cunliffe, and Saunders testify in London Tuesday.  Of course, they will be quizzed on the bank’s plans in case of a no deal Brexit.  If that is what happens, it seems inconceivable that the BOE would consider hiking rates.

The European Commission (EC) will release its report on all eurozone draft budgets Wednesday.  The EC will likely identify Italy as having violated the budget rules, which would mark the start of excessive deficit procedures.  Italian Prime Minister Conte will meet this week with EC President Claude Juncker to convince him not to start excessive deficit procedures against Italy.  We think the Commission will have no choice but to do so.

Eurozone flash PMIs for November will be reported Friday.  Manufacturing is expected to remain steady at 52.0, but services and composite PMIs are seen falling a tick to 53.6 and 53.0, respectively.  Both German and French composite PMIs are expected to ease from October to 53.1 and 53.9, respectively.

Recent eurozone data have been disappointing for those looking for a Q4 rebound.  Continued weakness will have many beginning to doubt the ECB’s ability to hike rates next year.  QE will undoubtedly end in December but talk of another TLTRO is feeding into a more dovish take on the ECB.  The ECB meeting December 13 will be key, as new staff forecasts will be released then.

Japan reports October national CPI Thursday.  Headline is expected to rise 1.4% y/y vs. 1.2% in September, while ex-fresh food is expected to remain steady at 1.0% y/y.  Note that October Tokyo headline inflation accelerated to 1.5% y/y from 1.3% in September, while ex-fresh food was steady at 1.0% y/y.  Inflation has been accelerating, but the pace remains very slow and so the BOJ will remain patient with regards to removing stimulus.

EM FX caught a bid last week as markets perceived a more dovish Fed.  Markets also turned optimistic on US-China trade relations after some positive comments from President Trump, but Vice President Pence issued some harsh remarks over the weekend that suggest tensions will remain high.  Indeed, APEC failed to issue a joint statement after the summit for the first time ever, highlighting the US-China strains.  Hungary and South Africa central banks meet this week, with the latter likely to deliver a 25 bp rate hike.