Drivers for the Week Ahead

  • The greenback should see consolidative trade early this week
  • FOMC minutes will be released Wednesday; there are many Fed speakers this week
  • The US growth outlook for Q4 just got a whole lot worse
  • Eurozone flash PMI readings for February and the ECB record of its January 24 meeting will be released Thursday
  • Brexit talks continue in Brussels; UK reports December labor market data Tuesday
  • Japan reports January trade Wednesday and CPI Friday
  • US-China trade talks will resume this week in Washington

The dollar is mostly weaker against the majors in narrow ranges as the new week begins. Stockie and sterling are outperforming, while yen and Loonie are underperforming. EM currencies are mostly firmer. IDR and HUF are outperforming, while INR and TRY are underperforming. MSCI Asia Pacific was up 1.1%, with the Nikkei rising 1.8%. MSCI EM is up 0.8% so far today, with the Shanghai Composite rising 2.7%. Euro Stoxx 600 is up 0.1% near midday, while US equity markets are closed for the holiday. Commodity prices are mixed, with Brent oil down 0.2%, copper up 1.1%, and gold up 0.2%.

The greenback should see consolidative trade early this week. DXY posted an outside down day Friday after making a marginal new high for the move. Yet it’s worth noting that due to the vagaries of indexing, none of the specific currencies within DXY posted any such reversal patterns themselves. With the US holiday today and a dearth of key economic data until later in the week, it seems likely that the dollar will consolidate over the next couple of days.

FOMC minutes will be released Wednesday. In hindsight, recent data clearly justify its patient approach. But what made the Fed so worried back in January? Will the minutes help explain the Fed’s extremely dovish 180 turn last month? Hopefully, we shall get further clarity. Next FOMC meeting is March 20. No change in policy is expected then, but it seems likely that the Dot Plots will shift down.

There are many Fed speakers this week. Mester speaks Tuesday, Kaplan speaks Wednesday, and Bostic speaks both Thursday and Friday. All three are non-voters. Friday then sees the heaviest slate of speakers. Williams (voter), Clarida (voter), Bullard (voter), Harker (non-voter), and Quarles (voter) all speak. The Fed messaging of late has been consistent – “patience” and “flexibility” – and we see no change anytime soon, especially in light of the weak retail sales data.

The US retail sales report was a shocker, to put it mildly. While we cannot ignore the potential signal it sends, we can’t help but think that it was a distorted number. Sales data are often revised and so we a decent chance of an upward revision to the December readings when January sales data are reported sometime between February 25-28 (according to Bloomberg).

The data will keep the notion of a Fed rate cut alive. Yet just as the Fed won’t overreact on the hawkish side, neither should it overreact on the dovish side. If nothing else, the data supports the idea that the Fed is right to take a pause until the US outlook becomes clearer. Interestingly, the implied yield on the January 2020 Fed Funds futures contract has barely budged and supports our view that markets may also be a bit skeptical of the extremely weak retail sales reading.

There’s no denying that the US growth outlook for Q4 just got a whole lot worse. The Atlanta Fed’s GDPNow model is now tracking 1.5% SAAR growth vs. 2.7% previously. The New York Fed’s Nowcast model is now tracking 2.2% SAAR for Q4 vs. 2.4% previously. More surprising is that Q1 has been cut to 1.1% SAAR from 2.2% previously.

It’s still early but BBG consensus for February NFP is currently 220k vs. 304k in January. The next piece of the labor market puzzle comes out Thursday, as the weekly initial jobless claims (230k expected) are for the BLS survey week (the week that contains the 12th of the month). Also, on Thursday, the US reports December durable goods orders (1.8% m/m expected), February Philly Fed survey (14.7 expected) and Markit PMIs, and January leading index (0.2% m/m expected) and existing home sales (0.2% m/m expected).

Eurozone flash PMI readings for February will be reported Thursday. Headline manufacturing PMI is expected at 50.3 vs. 50.5 in January, but an expected rise in the services PMI to 51.3 is seen boosting the composite PMI to 51.1 from 51.0 in January. Looking at the country breakdown, Germany manufacturing PMI is seen rebounding to 49.9 from 49.7 in January, but a weaker services PMI is seen dragging its composite reading down a tick to 52.0. France is expected to do the opposite, with a weaker manufacturing and stronger services PMI pushing its composite higher to 48.8 from 48.2 previously.

That same day, the ECB will release the record of its January 24 meeting. Then, Draghi acknowledged that risks had shifted to the downside yet still maintained the forward guidance for a rate hike after this summer. Next policy meeting is March 7 and updated staff forecasts will be released. Things have gotten worse since the last update in December. Will the ECB acknowledge this?

Recent ECB comments have already started to set the table for a chance. Coeure sounded a dovish note last week, acknowledging that a new TLTRO is being discussed that the slowdown is “clearly stronger and broader” than the ECB expected. Villeroy echoed those sentiments over the weekend, noting that the ECB could change its forward guidance if the situation is not temporary.

UK Prime Minister will head back to Brussels this week for last-ditch talks with the EU. It appears she has two weeks left to save her deal before parliament takes control in a vote scheduled for February 27. Some Tory lawmakers have said they could live with a 5-year limit on the Irish backstop. However, the EU has been clear that the backstop is non-negotiable.

UK reports December labor market data Tuesday. Readings are expected to show that the labor market remains tight (unemployment seen steady at 4.0%), leading to upward pressure on wages (average weekly earnings seen up a tick at 3.5% y/y). Employment is seen rising 165k. Yet it’s clear that the BOE has no choice but to stand pat until Brexit uncertainty has ended. Next policy meeting is March 21, no change is expected then.

US-China trade talks will resume this week in Washington as market optimism is running high. Both President Xi and Treasury Secretary Mnuchin made positive comments after last week’s meeting in Beijing, but press reports suggest the two sides remain far apart regarding structural reforms in China. Reports have emerged of a possible 60-day extension of the March 1 deadline, suggesting some progress has indeed been made.

Japan reports January trade Wednesday. Exports are expected to contract -5.7% y/y and imports by -3.2% y/y. January national CPI will be reported Friday. Headline inflation is expected to drop a tick to 0.2% y/y, while ex-fresh food is expected to rise a tick to 0.8% y/y. Tokyo readings already reported came in at 0.4% y/y and 1.1% y/y, respectively. For the BOJ, it’s steady as she goes. Next policy meeting is March 15, no change is expected then.

RBA will release minutes from this month’s meeting Tuesday. Recall that it delivered what was first seen as a hawkish hold, only to reverse course later that week as Governor Lowe gave a dovish speech followed by an equally dovish Statement of Monetary Policy. Australia reports January jobs data Thursday. Governor Lowe will give his semi-annual testimony to parliament Friday and should continue with his dovish shift. Next RBA meeting is March 5, no change is expected then.

Since their post-FOMC peak on January 31, both MSCI EM and MSCI EM FX have fallen. Within EM, only MYR (+0.2%) is up since then, while the worst performers are ZAR (-6%), ARS (-3.3%), and TRY (-2.5%). This supports our belief that the liquidity and low US rates story is not enough to sustain the EM rally on its own. What’s still missing is an improved global outlook and we certainly didn’t get that with the US retail sales data.

Korea reports trade data for the first 20 days of February Thursday. Korea offers the earliest and arguably cleanest reads for regional trade and so this report will be closely watched. Taiwan reports January export orders Friday and are expected to contract -8.5% y/y vs. -10.5% in December. These two reports will be very important signals for the wider EM outlook.