Drivers for the Week Ahead

  • The shutdown ended Friday, at least temporarily
  • This Friday sees the most important data point for the US, the jobs report
  • The FOMC meets this week, with the decision due Wednesday afternoon
  • The US Treasury makes its quarterly refunding announcement on Wednesday too
  • Chinese Vice Premier Liu joins trade talks that begin Wednesday; China reports official January PMI Thursday
  • Some key eurozone data will be reported this week
  • UK Parliament will vote Tuesday on amendments to Prime Minister May’s Brexit deal
  • EM remains subject to the whims of global developments

The dollar is narrowly mixed against the majors as an eventful week begins.  Swissie and Kiwi are outperforming, while Stockie and sterling are underperforming.  EM currencies are also mixed.  THB and MYR are outperforming, while TRY and MXN are underperforming.  MSCI Asia Pacific was down 0.2%, with the Nikkei falling 0.6%.  MSCI EM is down 0.1% so far today, with the Shanghai Composite falling 0.2%.  Euro Stoxx 600 is down 0.4% near midday, while US equity futures are pointing to a lower open.  10-year UST yields are flat at 2.75%.  Commodity prices are mostly lower, with Brent oil down 1.5%, copper down 0.5%, and gold down 0.3%.

The shutdown ended Friday, at least temporarily.  All sides have until February 15 to reach a deal on border security.  If an agreement cannot be reached, then funding for the government runs out that day.  Polls suggest that some Republicans will find it very difficult to allow a second shutdown to happen.  Trump has threatened again to declare a state of emergency to build the wall, but that threat seems empty now.

Unfortunately, the agreement came too later for federal workers to get their paychecks and so they have now missed two.  While these workers will get back pay, the government contractors impacted by the shutdown will not.  There are clearly downside risks to consumption and growth in Q1.

The affected agencies have begun reopening but it will take time for many to get back to normal.  For the markets, it will be important for the Commerce Department to clear up its backlog of data releases.  These include (but are not limited to) trade, inventories, retail sales, durable goods orders, and personal income and spending.  We will get ADP jobs data Wednesday, January Chicago PMI Thursday, and ISM PMI Friday.

This Friday also sees the most important data point for the US, the jobs report.  Initial jobless claims for the survey week fell to 213k and suggests a solid number for January.  Consensus is 165k v. 312k in December.  According to guidance from the BLS, federal employees who are furloughed will be counted as employed.  Furthermore, those who are working but not receiving pay will also be counted as employed.  Bottom line:  the shutdown’s impact on the jobs data should be limited.

The FOMC meets this week, with the decision due Wednesday afternoon.  It is about as much of non-event that one can get.  Indeed, no one is expecting a hike in Q1, with WIRP showing odds of 1% for a hike this week and 4% for a hike March 20.  However, markets will be focused on any reference to the Fed’s balance sheet policy.  WSJ reported Friday that some Fed officials are considering an earlier than expected end of its balance sheet runoff.

For the first time ever, there will now be a press conference after every FOMC meeting and that’s good thing.  We expect Powell to again counsel “patience” and “flexibility.”  Because of the FOMC media embargo, there won’t be any Fed speakers until Kaplan gets the ball rolling Friday.

The US Treasury makes its quarterly refunding announcement on Wednesday too.  With the budget deficit expected to continue expanding, the market will have to absorb more and more supply.  Back in October, Treasury announced debt sales of $83 bln vs. $78 bln in July.  We expect another increase this time, which would be the fifth straight quarter of increased auction sizes.

US-China relations will be in focus as Chinese Vice Premier Liu joins talks scheduled to begin Wednesday in Washington.  The talks will include USTR Lighthizer and Treasury Secretary Mnuchin and will run until Thursday.  Note that the last round of talks in Beijing were extended a day due to what was characterized as solid progress.

China reports official January PMI Thursday and it will be the first snapshot of the mainland economy in 2019.  Manufacturing PMI is expected to fall a tick to 49.3, while non-manufacturing is seen steady at 53.8.  Caixin PMI will be reported Friday, which is expected to remain steady at 49.7.  Despite stimulus measures already taken, we believe there are still downside risks to the economy until the trade war with the US has been resolved.

Some key eurozone data will be reported this week.  Q4 GDP data will trickle out, with France coming Wednesday followed by Spain and Italy Thursday.  The latter is expected to see the second straight quarter of q/q contraction.  Later Thursday, eurozone will release its reading and growth is expected to slow to 1.2% y/y from 1.6% in Q3.

Germany reports preliminary January CPI Wednesday followed by the eurozone reading Friday.  Inflation is expected to ease a tick to 1.6% y/y.  Earlier in the day, state CPI will be reported.  Eurozone headline inflation is expected to ease to 1.4% y/y from 1.6% in December.  It’s clear that the Q3 slowdown was not temporary and it has intensified in Q4 and now Q1.

Considering the deteriorating outlook, markets were disappointed that the ECB and Draghi were not as dovish as hoped.  Rather, the ECB is putting off any policy changes until the March 7 meeting, when new staff forecasts could give the ECB cover to tilt more dovish.  Market is becoming increasingly skeptical of the ECB’s ability to lift rates this year.

UK Parliament will vote Tuesday on amendments to Prime Minister May’s Brexit deal.   On Wednesday, the EU will debate the next steps in Brexit.  There are more than a dozen amendments, but there several key ones to watch.  One is to extend the Article 50 deadline beyond March 29 if no deal is reached by February 26.  Another seeks to prevent a no-deal Brexit.  Another puts an expiry date of December 31, 2021 for the Irish backstop.

UK starts reporting the January PMI readings with manufacturing on Friday.  This is expected to drop to 53.5 from 54.2.  Construction, services, and composite PMIs will all be reported next week.  There is a heavy slate of BOE speakers, as Carney, Broadbent, Ramsden, Place, and Woods all speak at the BOE’s Future Forum later today.  Next BOE policy meeting is February 7.  With Brexit uncertainty still in play, the BOE is on hold for the foreseeable future.

Japan has a heavy slate of December data releases this week.  Retail sales will be reported Wednesday (0.4% m/m expected), IP Thursday (-0.5% m/m expected), and labor market data Friday (2.5% unemployment expected).  After the BOJ cut its inflation projections at its meeting this month, it is signaling that stimulus will be kept in place at least until FY2021.  The consumption tax hike in October is a huge hurdle that lies ahead.

Australia reports Q4 CPI Wednesday.  Headline inflation is expected to ease to 1.7% y/y from 1.9% in Q3, while trimmed mean measure is expected to remain steady at 1.8% y/y.  This comes a week ahead of the RBA meeting on February 5.  No change is expected then.  Indeed, markets have started to push out the timing of the likely first hike into 2020.

EM remains subject to the whims of global developments.  While the Fed is likely to remain supportive of risk assets this week, we think markets have gotten too sanguine about US-China trade tensions and global growth risks.  It is unclear how much the shutdown has impacted the US economy, but data this week should underscore the slowdowns under way in Europe and China.