- Markets are breathing a sigh of relief after the G20 meeting
- Russia and Saudi Arabia agreed to extend their plan to support the oil market into 2019
- The Trump-Xi dinner yielded a 90-day truce
- The November US jobs report Friday will be the data highlight of the week
- There is a full slate of Fed speakers this week before the pre-FOMC press embargo goes into effect next week
- Ahead of the December 11 UK parliamentary vote on May’s Brexit plan, the bill will be debated
- Reserve Bank of Australia meets Tuesday and Bank of Canada meets Wednesday
The dollar is mostly weaker against the majors in the wake of the G20 meeting. Aussie and Nokkie are outperforming, while sterling and Swissie are underperforming. EM currencies are mostly firmer. ZAR and MXN are outperforming, while INR and TRY are underperforming. MSCI Asia Pacific was up 1.9%, with the Nikkei rising 1%. MSCI EM is up 2% so far today, with the Shanghai Composite rising 2.6%. Euro Stoxx 600 is up 1.7% near midday, while US futures are pointing to a higher open. The US 10-year yield is up 4 bp at 3.03%. Commodity prices are mostly higher, with Brent oil up 3.8%, copper up 2.1%, and gold up 0.7%.
Markets are breathing a sigh of relief after the G20 meeting. Global equity markets are rallying while the dollar remains under pressure. Some firmer PMI readings out of Europe are also helping sentiment. Fed tightening expectations appear to have bottomed, but until markets start pricing in a more hawkish stance, the dollar will have trouble getting much traction.
The G20 communique (unlike APEC, they were able to agree on one) was noteworthy for omitting any reference to the threat of protectionism. Indeed, it noted that the current global trading system is “falling short of its objectives and there is room for improvement.” One could view this as a victory of sorts for Trump and his trade hardliners. However, more important for the markets were the bilateral meetings that took place on the sidelines.
Russia and Saudi Arabia agreed to extend their plan to support the oil market into 2019. The two did not announce any new output cuts. However, Canadian province Alberta did. It will cut output by 325k bbl/day starting in January and will be maintained until excess oil in storage is drawn down. Up next is the two-day OPEC meeting in Vienna that begins Thursday. News that Qatar will leave OPEC starting in January is remarkable.
The Trump-Xi dinner yielded a 90-day truce. There will be no new tariffs imposed during this period while further talks take place to address long-standing issues. To summarize, the current 10% US tariffs on $200 bln of Chinese goods will not rise to 25% on January 1, nor will tariffs be slapped on the remaining $265 bln of goods that had previously been threatened. In return, China agreed to immediately boost purchases of US agricultural and energy exports. Yet big differences remain, and the talks will be difficult.
The November US jobs report Friday will be the data highlight of the week. Consensus sees +200k new jobs vs. +250k in October. Average hourly earnings are expected to remain steady at the cycle high of 3.1% y/y. What’s noteworthy is that expectations of Fed dovishness have shifted despite firm US data in Q4 so far.
Ahead of the jobs data, the US reports November ISM manufacturing PMI today. Headline number is expected at 57.5, while prices paid is expected to fall to a still-high 70 from 71.6 in October. November auto sales will also be reported today. ADP gives its estimate for November private sector jobs Wednesday, followed by October trade data Thursday.
There is a full slate of Fed speakers this week before the pre-FOMC press embargo goes into effect next week. Clarida, Quarles, Williams, Brainard, and Kaplan speak today. Williams speaks again Tuesday, followed by Powell’s testimony before the Joint Economic Committee Wednesday. Quarles speaks, and the Fed releases its Beige Book report for the December 19 FOMC meeting Wednesday also. Bostic, Williams, and Powell speak Thursday and Brainard speaks Friday.
Eurozone final manufacturing PMI readings for November were reported earlier today. The headline eurozone reading rose to 51.8 from 51.5 flash, driven by improvements in Spain, France, and Germany. Of note, Italy worsened to 48.6 and underscores the growing problems it faces. Final services and composite PMIs will be reported Wednesday. Data have been coming in softer than expected in recent months, calling into question the ECB’s intent to hike rates after next summer. The ECB meeting on December 13 will be very important, as new staff forecasts will be released then.
UK PMIs for November will be reported this week. Manufacturing was reported today at 53.1 vs. 51.7 expected. Construction will be reported Tuesday and is expected at 52.5, followed by services and composite PMIs Wednesday. Consensus is 52.4 and 52.1, respectively. The BOE painted a very bad picture for the economy if there is a no-deal Brexit, but we are already seeing the negative impact of continued uncertainty.
Ahead of the December 11 UK parliamentary vote on May’s Brexit plan, the bill will be debated. Expect a lot of dueling headlines this week. However, we think the vote will go right down to the wire and warn that it’s basically a coin-flip between deal or no deal Brexit. This uncertainty should cap sterling gains over the near-term.
Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 1.5%. Australia has a busy data week, with October building approvals Monday, Q3 current account Tuesday, Q3 GDP Wednesday, and October trade and retail sales Thursday. Markets have been pushing out RBA tightening in recent weeks. Bloomberg consensus now sees the first hike in Q1 2020. The US-China truce is likely to benefit AUD near-term.
Bank of Canada meets Wednesday and is expected to keep rates steady at 1.75%. October trade and November Ivey PMI will be reported Thursday, followed by November jobs data Friday. It just hiked 25 bp on October 24 and it seems too soon to hike again. Indeed, Bloomberg consensus sees the next hike in Q1 and then another in Q2. CAD is highly correlated with oil prices, and so this current recovery (if sustained) would be bullish for the Loonie.
Caixin reported China November manufacturing PMI today at 50.2 vs. 50.1 expected. Official PMI sank to 50 in November and so the sector is tottering on the edge of moving below the boom/bust 50. The trade truce with the US helps at the margin, but the existing 10% tariffs will continue to act as a headwind. November trade data will be reported at the end of the week, with exports expected to rise 9.4% y/y and imports by 13.4% y/y.
Important EM events this week include a slew of inflation readings that are expected to show easing price pressures due largely to lower oil prices. The central banks of Chile, India, and Poland meet and are not expected to change policy. We expect choppy trading ahead for EM as markets continue to refine their Fed outlooks. News of a 90-day US-China truce of the weekend will provide some temporary relief, but we view this is a can kick that will come back to haunt markets in 2019.