Drivers for the Week Ahead

  • The dollar’s resilience is remarkable; the US economy still looks like a relative star
  • The US data backlog will start to clear up this week
  • President Trump will give his delayed State of the Union address Tuesday
  • Eurozone data this week should show continued weakness
  • Bank of England meets Thursday
  • Canada reports key January data this week; Reserve Bank of Australia meets Tuesday
  • In EM, the central banks of the Philippines, Czech Republic, Thailand, Poland, Brazil, India, Mexico, Peru, and Russia all meet

The dollar is broadly firmer against the majors as the new week begins.  Loonie and euro are outperforming, while the yen and Aussie are underperforming.  EM currencies are broadly weaker.  PLN and MYR are outperforming, while INR and BRL are underperforming.  MSCI Asia Pacific was up 0.1%, with the Nikkei rising 0.5%.  MSCI EM is down 0.3% so far today, with China markets closed all week for the Lunar New Year holiday.  Euro Stoxx 600 is down 0.1% near midday, while US equity futures are pointing to a lower open.  10-year UST yields are up 1 bp at 2.69%.  Commodity prices are mixed, with Brent oil up 0.4%, copper down 0.5%, and gold down 0.5%.

The dollar’s resilience is remarkable.  Fed Chair Powell couldn’t have come up with a more dollar-negative script, and yet the greenback has seen limited losses.  The greatest post-FOMC losses have come against the dollar bloc and EM.  On the other hand, the dollar is basically flat against the yen, Swissie, sterling, and euro.

Within the context of weak China, eurozone, and Japan data, the US economy still looks like a relative star.  Atlanta Fed’s GDPNow model is now tracking 2.5% SAAR growth for Q4, down from 2.7% previously.  Elsewhere, the New York Fed’s Nowcast model is tracking 2.6% SAAR growth in Q4 and 2.4% for Q1.

Strong January jobs and ISM manufacturing data reported Friday may help set the table for a dollar rebound.  US rates took notice and staged a reversal from last Thursday’s lows.  Yet Fed tightening expectations for this year remain virtually non-existent.  The implied yield on the January 2020 Fed Funds futures contract stands at 2.38%, which still suggest small odds of a cut this year.  Until US rates rise more, it will likely take some time for the dollar to stage a deeper turnaround.  That said, the rest of the world looks even worse and so that should help limit the dollar’s losses near-term.

The US data backlog will start to clear up this week.  November factory orders will be reported Monday and trade Wednesday.  January non-manufacturing ISM PMI will be reported Tuesday.  Weekly jobless claims Thursday warrant a look, as the spike last week to 253k was a distortion and should revert to 223k this week.

President Trump will give his delayed State of the Union address Tuesday.  This is usually a PR exercise, and we would expect Trump to tout recent strength in the jobs numbers.  Internationally, we would expect him to focus on US-China relations, as well as the geopolitical hotspots in Iran, Syria, and North Korea.

Press reports suggest that Trump will use the opportunity to lay out plans to declare a state of emergency over border wall funding.  This could upend ongoing negotiations to keep the government open and so would not be taken well by markets.  While the government is temporarily funded until February 15, Speaker Pelosi said that the House-Senate conference committee needs to get a deal done by Friday to leave time for votes.

With the FOMC out of the way, the Fed’s media embargo has ended.  Mester (non-voter) speaks today, followed by Quarles (voter) and Powell (voter) Wednesday, Kaplan (non-voter), Clarida (voter) and Bullard (voter) Thursday, and finally Daly Friday (non-voter).

The European Commission releases its updated economic forecasts Thursday.  It will have to follow the IMF’s lead and mark down its eurozone forecasts.  While China has grabbed the market’s attention, it’s clear that the latest hit to the global growth outlook is coming from Europe.  The IMF’s most recent downgraded forecasts were driven by weakness in Germany and Italy.

Eurozone data this week should show continued weakness.  It reports December retail sales Tuesday, which are expected to contract -1.6% m/m.  Germany reports December factory orders Wednesday, which are expected to contract -6.7% y/y.  Germany reports December IP Thursday, which is expected to contract -3.3% y/y.  Trade and current account data will be reported by Germany Friday.

UK reported weak construction PMI today.  It came in at 50.6 vs. 52.5 expected.  It will be followed by services (51.0 expected) and composite (51.4 expected) PMIs Tuesday.  Manufacturing PMI was reported Friday at a weaker than expected 52.8, and so the Brexit uncertainty continues to take a toll on the economy.  Sterling remains heavy and is likely to trade back below $1.30 in the coming days.

Bank of England meets Thursday and is expected to keep rates steady at 1.50%.  With Brexit uncertainty likely to continue right up until the Article 50 deadline of March 29 (perhaps longer), the BOE remains in wait and see mode.  We expect Governor Carney to warn of the risks posed by Brexit and to reiterate the bank stands ready to take whatever actions are needed to deal with the fallout.

After this week’s meeting, the next ones scheduled are March 21, May 2, June 20, and August 1.  We suspect that Brexit uncertainty will remain in play at the March meeting, as talks are likely to go right down to the wire.  And our base case remains that the two sides will eventually kick the can into the autumn.  In that case, all the meetings through the summer are likely to be non-events.  Stay tuned.

Canada reports key January data this week.  Ivey PMI will be reported Wednesday, and Friday will see January jobs data.  Consensus sees 5k jobs added.  Details of last month’s +7.8k gain were not good, as -19.3k full-time jobs were offset by a 27.1k gain in part-time jobs.  Bank of Canada next meets March 6 and a 25 bp hike to 3.0% is widely expected.  USD/CAD just broke below the key 1.3120 area Friday.  This sets up a test of the October low near 1.2785.

Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 1.50%.  Just ahead of the decision, Australia reports December trade and retail sales.  Inflation remains low and the economy faces downside risks.  As such, we see steady rates from the RBA through 2019 and into 2020.  AUD is having trouble breaking above the 200-day moving average near .7300.  An eventual break would set up a test of the December high near .7400.

We remain skeptical of the EM rally despite the Fed capitulating to the market and tilting more dovish.  Economic data reported last week show a deepening malaise in much of EM.  Some of it is driven by the US-China trade war, but we believe much of it is being driven by slowing global growth.  EM PMI readings seen so far for January have been awful, with most lower, many moving further below 50, and some joining the sub-50 club.

In EM, the central banks of the Philippines, Czech Republic, Thailand, Poland, Brazil, India, Mexico, Peru, and Russia all meet.  In light of firmer currencies and building global headwinds, none are expected to change rates.  Much of emerging Asia will be on holiday for part or all of this week due to the Chinese New Year.