Drivers for the Week Ahead

  • The ECB meets Thursday and will likely be the highlight of the week
  • The partial US shutdown shows no sign of ending
  • US rates are normalizing and likely helping the greenback
  • UK Prime Minister May will unveil her replacement Brexit plan to Parliament today
  • Bank of Japan meets Wednesday; Norges Bank meets Thursday
  • Australia reports December jobs data Thursday
  • EM FX is still under pressure as the dollar remains resilient

The dollar is mostly firmer against the majors in narrow ranges as the new week begins. The yen and Stockie outperforming, while Loonie and Kiwi are underperforming. EM currencies are mostly weaker. CZK and HUF are outperforming, while PHP and KRW are underperforming. MSCI Asia Pacific was up 0.3%, with the Nikkei rising 0.3%. MSCI EM is flat so far today, with the Shanghai Composite rising 0.6%. Euro Stoxx 600 is down 0.3% near midday, while US equity futures are pointing to a lower open when they reopen tomorrow after the holiday. Commodity prices are mostly lower, with Brent oil down 0.3%, copper down 1%, and gold down 0.3%.

The ECB meets Thursday and will likely be the highlight of the week. Recall at the November meeting, the ECB kept the risks balanced and the forward guidance unchanged. However, the account of that meeting showed that the ECB discussed changing the balance of risks. Draghi’s dovish turn last week was noteworthy and suggests that there is a decent chance that the ECB shifts it risk assessment this week.

Hours before the ECB decision, we will get eurozone flash PMI readings for January. A slight improvement in the composite PMI reading to 51.4 is expected. Q4 data was disappointing and refuted any notions that the Q3 slowdown was temporary. If anything, the slowdown got worse in Q4.

The euro remains heavy and we do not think the ECB will want to say or do anything to change this. It recorded an outside down day Friday and is on track to test the January 3 low near $1.1310 and then the November/December lows near $1.1270. A clean break of the $1.1350 area is needed to set up a test of the November 12 cycle low near $1.1215.

The partial US shutdown shows no sign of ending. Trump offered a compromise over the weekend that entailed temporary protection of three years for so-called “dreamers.” The Democrats said it was a non-starter and so the shutdown has lasted 30 days. Still, some optimists hold out hope after some Democrats on Sunday floated the idea of a broader immigration package, which Trump seemed open to. Stay tuned.

US data reports are basically at a standstill. We will get a few small glimpses this week with December existing home sales Tuesday, January Richmond Fed index Wednesday, and weekly jobless claims and January Markit PMI readings Thursday. Thankfully, the BLS is funded through September and so we will get January jobs data next Friday.

Last week, the Council of Economic Advisors estimated that each week of closure shaves 0.13 percentage points from quarterly growth. This was more than double the previous estimate of 0.1 percentage points for every two weeks of closure. The Atlanta Fed’s GDPNow model is currently tracking 2.8% SAAR growth for Q4. The New York Fed’s Nowcast has Q4 growth at 2.6% and Q1 at 2.2%.   However, we note both are now working with incomplete information due to delays in data reporting.

Due to the media embargo ahead of the January 30 FOMC meeting, there will be no Fed speakers this week. The heavy slate of Fed speakers these past two weeks suggests to us that the Fed is keenly aware of its messaging problem. We would expect the FOMC statement and Powell press conference next week to stay on message.

US rates are normalizing and likely helping the greenback. The implied yield on the January 2020 Fed Funds futures contract is trading around 2.46%. This is up from the post-FOMC trough near 2.22%. This suggests the markets are starting to price in one rate hike this year rather than the one cut that was priced in back in December. UST yields are also creeping higher to levels not seen since late December.

UK Prime Minister May will unveil her replacement Brexit plan to Parliament today. Press reports suggest that May has given up on cross-party talks, which will make passage of her plan entirely dependent on her party and the DUP. There are reports that May will focus on changing the Irish backstop section in order to get a deal passed in Parliament. Elsewhere, reports suggest the EU is split on how long it should delay the Article 50 deadline.

Sterling rallied after May survived her no confidence vote. However, the upside seems limited given all the Brexit uncertainty that remains. Indeed, sterling was turned back quite sharply from the $1.30 area Friday after twice being unable to break above it during the week. A break below $1.28 would set up a test of the January 15 low near $1.2670, while a break that is needed to set up a deeper move to test the January 3 low near $1.2440.

The IMF will release its quarterly update to its World Economic Outlook Monday. This is not typically a market-moving event but expect some rather gloomy headlines to emerge. Simply put, the IMF has to acknowledge the growing downside risks to the global economy since its last update back in October.

The World Economic Forum opens in Davos Tuesday and will run through Friday. This too is hardly market-moving. However, there will be many there for a public relations exercise, including top Brazilian officials. The US delegation cancelled the trip due to the shutdown. Bad optics and all that. UK Prime Minister also cancelled her trip there.

Bank of Japan meets Wednesday. Japan data has been disappointing of late. For instance, headline December national CPI rose 0.3% vs. 0.8% in November and was the lowest since October 2017. As such, we expect the BOJ to commit to stimulus pretty much as far as the eye can see.

Policy makers should be very happy with recent yen weakness. USD/JPY has recouped the entire January 3 flash crash and the pair is on track to test the December 26 high near 111.40. The 200-day moving average comes in near there at 111.20 currently. The 110 area could provide some near-term resistance.

Some Japan data will be released this week. Before the BOJ decision, we will get Japanese December convenience sales data today (1.2% y/y) and trade data Wednesday. After the BOJ decision, we will get January Tokyo CPI data Friday. Headline inflation is expected to tick lower to 0.2% y/y, while ex-fresh food is expected to remain steady at 0.9% y/y.

Australia reports December jobs data Thursday. Market is looking for an 18k gain vs. 37k in November. However, recall the details last month were not good, with a 43.4k gain in par-time jobs masking a -6.4k drop in full-time jobs. The economy remains very vulnerable to the slowdown in China and so the RBA is likely to remain very cautious. Next policy meeting is February 4 and no change is expected. Indeed, the market has pushed out the timing of the first hike into 2020 now.

Norges Bank meets Thursday. It started the tightening cycle in September and signaled a very modest pace of rate hikes. As such, no change is expected this week. The market sees one 25 bp hike in Q1 and so the March 21 meeting is very much live. Another7 hike is seen in Q3, but a lot can still happen between now and then. Oil prices will be a major factor for the economy this year.

China reported data earlier today. December retail sales rose 8.2% y/y vs. 8.1% expected, while IP rose 5.7% y/y vs. 5.3% expected. GDP grew 6.4% y/y, as expected but down from 6.5% in Q3. Policymakers continue to add stimulus, both monetary and fiscal. That tells us that the economic outlook remains worrisome.

EM FX is still under pressure as the dollar remains resilient. While a softer US interest rate outlook benefits EM, we think this is offset by the deteriorating global growth outlook. The central banks of Korea and Malaysia meet Thursday, and neither is expected to lift rates.