Drivers for the Week Ahead

  • The markets continue to reel from last week’s gut-punch from the Fed
  • Reports emerged ahead of the weekend that President Trump discussed whether he could fire Fed Chairman Powell
  • Mnuchin attempted some damage control
  • NY Fed’s Williams and Cleveland Fed’s Mester somehow drew damage control duty Friday
  • The US economy remains relatively strong in Q4; US reports some minor data this week
  • Germany reports December national CPI Friday
  • Japan reports November retail sales, IP, unemployment, and December Tokyo CPI Friday
  • With the UK Parliament on recess until January 7, we expect a dearth of Brexit news

The markets continue to reel from last week’s gut-punch from the Fed, topped off with a heaping portion of shutdown fears and heightened geopolitical risk. As of this writing, the partial US government shutdown has gone into effect and shows no signs of ending until the new Congress takes over January 3.

As if things weren’t bad enough, reports emerged ahead of the weekend that President Trump discussed whether he could fire Fed Chairman Powell. While this was later denied by Treasury Secretary Mnuchin and other senior officials, sentiment is so negative right now that markets will assume the worst. Such a move to oust Powell would be disastrous, to state the obvious.

Mnuchin attempted some damage control. He reportedly spoke with the top executives of the six largest US banks over the weekend. Mnuchin said afterwards that “they have ample liquidity for lending” and “have not experienced any clearance or margin issues.” He announced that he will also convene the Working Group on Financial Markets Monday.

Yet this could all backfire. After all, this isn’t 2008. Yes, markets have been worried about recession and Fed policy mistakes. Until this weekend, however, markets were not that concerned about liquidity or clearance issues. And with markets on edge, the last thing they needed was another issue to worry about. Markets are left with a couple of possible interpretations. At best, Mnuchin made a rookie policy mistake in trying to reassure markets. At worst, Mnuchin knows something that the markets don’t. Either way, the messaging needs a lot of work.

The dollar has held up relatively well in light of recent developments, but it remains vulnerable to a loss of confidence in US policymakers. Jawboning and possibly firing a central bank head is not something that is typically seen or discussed in the Developed Markets. In fact, even most Emerging Market countries know better than to interfere with the central bank’s policymaking. Markets may not like Fed policy, but they would like a loss of Fed independence even less. To be continued…….

NY Fed’s Williams and Cleveland Fed’s Mester somehow drew damage control duty Friday. Williams was first up, stressing that the Fed does indeed listen to markets. He said that the Fed is ready to reassess and reevaluate its views as needed. Williams also said that the Fed has always been willing to adjust the pace of balance sheet reduction if the economic outlook were to materially change. This is definitely a shift from Powell’s “auto-pilot” comments Wednesday. Mester later made very similar statements but stocks were not able to recover.

There are no Fed speakers scheduled until the New Year. However, neither Williams nor Mester were on the Bloomberg calendar last Friday. We suspect that more Fed officials will be trotted out in the coming days to fill the vacuum if there is continued market angst.

Next FOMC meetings are January 30 and March 20. Market puts very low odds on a move at either meeting, and rightfully so. However, with a press conference after every meeting, perhaps the Fed will be able to get its message across a little better in 2019.

The US economy remains relatively strong in Q4. Softer personal income and spending data cut the Atlanta Fed’s GDPNow Q4 growth forecast to 2.7% SAAR from 2.9% previously. On the other hand, the New York Fed’s Nowcast rose to 2.5% SAAR from 2.4% previously. The NY Fed’s Nowcast also forecasts Q1 2019 growth, which it sees at 2.1% SAAR currently.

As we’ve pointed out before, Q1 is sequentially the weakest quarter of the year in recent years and 2019 may be no different. As a result, markets are likely to continue hyperventilating about US recession risk until we get into Q2 and/or see evidence that the US economy remains on firm footing.

US reports some minor data this week. November new home sales will be reported Thursday, follow by November advance goods trade, inventories, pending home sales, and December Chicago PMI Friday.

Germany reports December national CPI Friday. Headline inflation is expected to ease again to 1.9% y/y from 2.3% in November. If so, it would be the lowest since April and will add to doubts as to whether the ECB can lift rates after the summer. Earlier that day, the state CPI data will trickle out.

Japan reports November retail sales, IP, unemployment, and December Tokyo CPI Friday. BOJ just met last week and underscored its intent to keep stimulus in place for as far as the eye can see. As such, the high frequency data will not have any impact on policy or policy expectations.

With the UK Parliament on recess until January 7, we expect a dearth of Brexit news. And not a moment too soon, as many market participants have quite frankly reached their capacity limit. There is no UK data this week, though the week after brings the December PMI readings.

We cannot see how EM can thrive in this current environment. There may be some knee-jerk buying from time to time, but the global backdrop is simply not supportive for EM. Period.