- Congress did not meet over the weekend and so the partial shutdown continues
- Investors are starting to mark down US growth forecasts for Q4 and Q1
- US reports December PPI Tuesday and then retail sales Wednesday
- This is another week with a heavy speaking schedule for Fed officials
- Weak China December trade data is adding to risk-off sentiment
- UK Parliament is schedule to hold its Brexit vote Tuesday
- UK, Japan, and Canada report CPI data this week
- Central banks of Turkey, South Africa, and Indonesia meet
The dollar is mostly firmer against the majors as the new week begins in risk-off mode. The yen and Swissie are outperforming, while the Antipodeans are underperforming. EM currencies are broadly weaker. RON and SGD are outperforming, while TRY and KRW are underperforming. MSCI Asia Pacific ex-Japan was down 0.9%, with Japan closed for holiday. MSCI EM is down 1% so far today, with the Shanghai Composite falling 0.7%. Euro Stoxx 600 is down 0.9% near midday, while US equity futures are pointing to a lower open. The US 10-year yield is down 4 bp at 2.66%. Commodity prices are mostly lower, with Brent oil down 1.5%, copper down 1.6%, and gold up 0.4%.
Congress did not meet over the weekend and so the partial shutdown continues. On Saturday, it became the longest on record at 22 days. Yet cracks are being seen on the Republican side. Senator Lindsey Graham said that President Trump should temporarily reopen the government while continuing negotiations. If talks don’t yield anything over the next three weeks, then Graham said that is when Trump should declare a state of emergency.
The key Republican senators in this drama are those up for reelection in 2020. These include Collins (Maine), Gardner (Colorado), Ernst (Iowa), Tillis (North Carolina), McSally (Arizona), and Perdue (Georgia). Collins, Gardner, and Murkowski (Alaska) have already called for an immediate end to the shutdown. Will others follow and put greater pressure on Senate majority leader McConnell (Kentucky)? 22 Republican Senators (including McConnell) are up for reelection in 2020 vs. 12 Democrats.
Investors are starting to mark down US growth forecasts for Q4 and Q1. While the number of government workers impacted may seem small (800,000 missed their first paycheck Friday), recall that government contractors are also affected by the shutdown. Furthermore, the potential harm to wider consumer confidence cannot be ignored. And so, the longer the shutdown lasts, the greater the likely negative impact on the economy. Is it enough to throw the US economy into recession? Very unlikely, but the headwinds will grow.
US reports December PPI Tuesday and then retail sales Wednesday. IP will be reported Friday. Other data have been delayed by the partial government shutdown, including trade, inventories, new home sales, construction spending, factory and durable goods orders, and the monthly budget statement.
This is another week with a heavy speaking schedule for Fed officials. Kashkari, George, and Kaplan speak Tuesday. Kashkari speaks again Wednesday, followed by Quarles Thursday. Lastly, Williams and Harker speak Friday. The Fed releases its Beige Book for the January FOMC meeting Wednesday.
No change is expected at either the January 30 or March 20 FOMC meetings. Odds of a hike start to creep up for the May 1 and June 19 meetings, but it will really depend on how the US data come in between now and then.
Weak China December trade data is adding to risk-off sentiment. Exports contracted -4.4% y/y vs. an expected gain of 2.0% y/y, while imports contracted -7.6% y/y vs. an expected gain of 4.5% y/y. Money and loan data will be reported sometime this week, but no date has been scheduled. Reports last week of additional fiscal and monetary stimulus support our view that the economy is still slowing.
UK Parliament is schedule to hold its Brexit vote Tuesday. After reports of a possible delay to the Article 50 Brexit date of March 29, the Prime Minister’s office denied it. Yet all signs point to failure. Markets would welcome a delay, though given the wide gap between the sides, the risks of a no-deal Brexit would remain high. Responding to press reports over the weekend that lawmakers will try to seize control of the legislative agenda after tomorrow, May warned that a no vote tomorrow would likely see Parliament try to scupper Brexit altogether.
UK reports December CPI Wednesday and retail sales Friday. Data have been soft as of late in the runup to Brexit. Because of the heightened uncertainty across many areas, the Bank of England can do nothing except wait and see for now. Next policy meeting is February 7, and no change is expected then.
Eurozone reports final December CPI Thursday. Headline inflation is expected to ease to 1.6% y/y from the preliminary 1.9% reading. If so, it would be the lowest since April and would cast doubt on the ECB’s ability to hike rates after the summer. Mirroring weak country readings, eurozone IP contracted -1.7% m/m in November. This was greater than the -1.5% expected and dragged the y/y rate down to -3.3% y/y from +1.2% in October.
Canada reports December CPI Friday. Headline inflation is expected to remain steady at 1.7% y/y, while common core is expected to remain steady at 1.9% y/y. Bank of Canada just left rates steady, as soft data warranted a further pause. Next policy meeting is March. A lot can happen between now and then, but early readings suggest a 25 bp hike to 2.0% is expected then.
Japan reports December national CPI Friday. Headline inflation is expected to fall to 0.3% y/y from 0.8% in November, while ex-fresh food is expected to fall to 0.8% y/y vs. 0.9% in November. Tokyo CPI readings for December showed a similar drop, and underscores how far the BOJ is from meeting its 2% inflation target. Next policy meeting is January 23, no change is expected then.
In EM, the central banks of Turkey, South Africa, and Indonesia meet. All were forced to tighten last year as their currencies plunged. This year, relative firmness in their currencies will allow them to remain on hold for the time being. No change is expected from all three, though a couple of analysts look for a rate cut by Turkey. This seems very unlikely now that the lira has come under greater pressure.