Drivers for the Week Ahead

  • FOMC meets Wednesday and is widely expected to hike rates 25 bp to a range of 2.25-2.50%
  • There are growing risks of a partial US government shutdown if a deal is not reached by midnight Friday
  • UK reports November CPI Wednesday; Bank of England meets Thursday; UK parliament goes into recess on Thursday
  • BOJ meets Thursday and is expected to keep policy unchanged
  • Sweden’s Riksbank meets Thursday and is expected to keep rates unchanged
  • Global growth concerns are likely to keep EM on its back foot; it’s a very busy week for EM central banks

The dollar is broadly softer against the majors as markets calm as the new week begins.  Sterling and Swissie are outperforming, while Loonie and Nokkie are underperforming.  EM currencies are mostly firmer.  INR and PLN are outperforming, while PHP and TRY are underperforming.  MSCI Asia Pacific was up 0.3%, with the Nikkei rising 0.6%.  MSCI EM is up 0.1% so far today, with the Shanghai Composite rising 0.2%.  Euro Stoxx 600 is down 0.4% near midday, while US equity futures are pointing to a flat open.  The US 10-year yield is down 1 bp at 2.88%.  Commodity prices are mixed, with Brent oil up 1.1%, copper down 0.7%, and gold up 0.1%.

FOMC meets Wednesday and is widely expected to hike rates 25 bp to a range of 2.25-2.50%.  The bond market clearly believes the Fed’s messaging will tilt more dovish.  Indeed, the market has shifted so much that Powell may push back in his press conference against this dovish perception.  Next year, every meeting will be followed by a press conference.

Markets will be very interested in the December Dot Plots.  Looking at the dot clusters from September, it would not take much movement to shift down from the three hikes currently signaled for 2019.  Nor would it be hard to shift down the longer-term neutral rate, which is currently at 3%.

Michelle Bowman was recently confirmed as Governor, and so her contribution to the Dot Plots will be new and unpredictable.  She brings the total number of contributors up to 17.  Governor nominees Goodfriend and Liang still need to be confirmed by the Senate before all 19 contributors are fully represented in the Dot Plots.

The US economy remains relatively strong in Q4.  Stronger than expected November retail sales and IP data boosted the Atlanta Fed’s GDPNow Q4 growth forecast to 3.0% SAAR from 2.4% previously.  Surprisingly, the New York Fed’s Nowcast was steady at 2.4% SAAR despite the strong data Friday.

There will be a fair amount of US data this week, but most of it is minor.  December Empire manufacturing index and October TIC data are out Monday, November housing starts and building permits are out Tuesday, Q3 current account and November existing home sales are out Wednesday, weekly jobless claims for the BLS survey week are out Thursday, and Q3 GDP revision and November durable goods orders and personal income and spending are out Friday.

November core PCE will likely be the most important data point this week for a market looking for inflationary signals.  It is expected to tick up to 1.9% y/y, putting it closer to the Fed’s 2% target.   At 2.88%, we think that the 10-year US yield is too low considering our constructive outlook for the US economy.

There are growing risks of a partial US government shutdown if a deal is not reached by midnight Friday.  Both sides are so far digging in on the one major sticking point:  funding for the wall.  Democrats have reportedly made two offers to Trump.  Both would keep funding for border fencing at the current level of $1.375 bln, while Trump has said he wants $5 bln.

Markets recognize that shutdowns are largely opportunities for political posturing by all parties.  That said, we have seen before that shutdowns can still impact market sentiment negatively.  Going into thin year-end markets that are already nervous about a multitude of risks, there is a good chance that a shutdown would roil markets more than usual.

Earlier today, eurozone final November CPI was reported at 1.9% y/y vs. 2.0% previously.   Core inflation was steady at 1.0%.  Preliminary December PMI readings Friday were horrendous.  This week, French data should be closely watched as the PMIs fell below 50 in December.  November consumer spending and final Q3 GDP data will be reported Friday.  The euro remains heavy and is likely to test the November low near $1.1215 in the coming days.

The UK reports November CPI Wednesday.  Headline inflation is expected to ease a tick to 2.3% y/y, while CPIH is also expected to fall a tick to 2.1% y/y.  November retail sales will be reported Thursday before the BOE decision is announced.  Headline sales are expected to rise 0.3% m/m, ex-auto fuel sales by 0.2% m/m.  On Friday, Q3 current account and final GDP data will be reported.

Bank of England meets Thursday and is expected to keep policy unchanged.  Until Brexit has been cleared up one way or another, the BOE is simply stuck in a wait and see mode.  In the event of a no-deal Brexit, it’s hard for us to see the bank hiking rates.  Yes, there may be inflationary impulses from a plunging pound, but the recessionary impulses are likely to be even stronger.

The UK parliament goes into recess on Thursday and returns January 7.  This further limits Prime Minister May’s time to convince MPs to support her plan.  She certainly couldn’t convince the EU to cut her some slack, as her visit to Brussels last week yielded nothing but tough talk from EU officials, who stressed that the deal “was not open to renegotiation.”  Sterling should remain heavy and we look for a test soon of this month’s low near $1.2480.

Bank of Japan meets Thursday and is expected to keep policy unchanged.  Last week, it tweaked its Yield Curve Control (YCC) policy by reducing the amount of bonds in the 5- to 1-year maturity range from JPY450 bln to JPY430 bln.  The move came as JGB yields were compressing due to scarcity.

Japan reports November trade data Wednesday, with exports expected to rise 1.9% y/y and imports by 12.2%.  On Friday, Japan reports November CPI.  Headline is expected to fall to 0.8% y/y, while ex-fresh food is expected to remain steady at 1.0% y/y.  The yen benefitted Friday from the building risk-off sentiment, but we think broad-based dollar strength should keep USD/JPY from breaking below 113.

Sweden’s Riksbank meets Thursday and is expected to keep rates unchanged.  The market is split, however.  Of the 24 analysts polled by Bloomberg, 14 see no change and 10 see a 25 bp hike to -0.25%.  Headline CPI rose 2.0% y/y and CPIF rose 2.1% y/y in November, and both readings were down 0.3 percentage points from October.  The Riksbank has signaled an intent to hike rates either this week or on February 13.  We lean towards a February hike considering the ongoing market turmoil, as the bank may benefit from a little more time before moving on rates.

Canada reports November CPI Wednesday.  Headline is expected to ease to 1.8% y/y from 2.4% in October, while core common is expected to remain steady at 1.9% y/y.  October retail sales and GDP will be reported Friday, with both expected to pick up from September.

The next Bank of Canada meeting is January 9 and expectations are for another 25 bp hike to 2.0%.  The last 25 bp hike was in October but we see a chance of a dovish surprise next month.  Much will depend on how oil prices are trading then.  CAD is also likely to be impacted by oil prices and we see it weakening beyond 1.34 this week after briefly testing that level Friday.

Global growth concerns are likely to keep EM on its back foot.  China and the eurozone reported weak economic data Friday, and even a much stronger than expected US retail sales report was not enough to turn market sentiment.

President Xi will commemorate the 40th anniversary of Deng Xiaoping’s reform of China’s economy with an address Tuesday.  While no policy prescriptions are likely to be unveiled, the speech may give markets a hint of how he sees the current conflict with the US and where it is going.   For those of us old enough to remember, the jump then from the failed Cultural Revolution in the waning years of Mao to a greater embrace of the free market under Deng was nothing short of remarkable.

It’s a very busy week for EM central banks.  Hungary meets Tuesday, Thailand meets Wednesday, Indonesia, Taiwan, Czech, and Mexico meet Thursday, and Colombia meets Friday.  Of these, Thailand and Mexico are the only ones expected to hike rates and there are risks of dovish surprises from both.