Drivers for the Week Ahead

  • President Trump said that the March 1 deadline for trade talks will be extended
  • The most important US data points this week will be February Chicago PMI reported Thursday, followed by ISM PMI Friday
  • There is another full slate of Fed speakers this week
  • UK parliament is scheduled to vote on a potential Brexit delay Wednesday
  • Canada reports January CPI Wednesday and Q4 GDP Friday
  • Japan reports January IP and retail sales Thursday; BOJ Governor Kuroda is clearly concerned and leaning more dovish

The dollar is mostly softer against the majors as trade optimism dominates market sentiment as the new week begins.  The Antipodeans are outperforming, while Loonie and yen are underperforming.  EM currencies are mostly firmer.  ZAR and MXN are outperforming, while THB and TWD are underperforming.  MSCI Asia Pacific was up 0.8%, with the Nikkei rising 0.5%.  MSCI EM is up 0.8% so far today, with the Shanghai Composite rising 5.6%.  Euro Stoxx 600 is up 0.3% near midday, while US equity futures are pointing to a higher open.  10-year UST yields are up 2 bp at 2.68%.  Commodity prices are mixed, with Brent oil flat, copper up 0.6%, and gold flat.

President Trump said that the March 1 deadline for trade talks will be extended.  No new date was set but he cited “substantial progress” as the reason for the extension.  Treasury Secretary Mnuchin said that Trump and Xi are likely to meet in late March, ostensibly to sign off on a final deal.  Yet some caution is warranted, as China press warned of “new uncertainties.”  Markets liked the delay, with global equity markets rallying and EM currencies firming.  This is the expected knee-jerk reaction.

The most important US data points this week will be February Chicago PMI reported Thursday, followed by ISM PMI Friday.  These will be the most timely and forward-looking reads on the US economy.  Chicago PMI is expected to rise to 57.5 from 56.7 in January, while ISM manufacturing is expected to fall to 55.6 from 56.6 in January.

The data backlog continues to be cleared out.  December factory orders will be reported Wednesday.  December personal income and spending will also come out Friday, though markets will likely focus on the core PCE component of this report.  It is expected to remain steady at 1.9% y/y, just below the Fed’s 2% target.  February auto sales will also be reported Friday.

Lastly, Q4 GDP will be reported Thursday.  Growth is seen slowing to 2.4% SAAR from 3.4% in Q3.  The Atlanta Fed’s GDPNow model is now tracking 1.4% SAAR growth vs. 1.5% previously.  The New York Fed’s Nowcast model is now tracking 2.3% SAAR for Q4 vs. 2.2% previously, while Q1 growth is tracking 1.2% SAAR from 1.1% previously.

More Fed regional surveys for February will roll out this week.  Last week, the Philly Fed survey came in at -4.  Dallas Fed reports Monday (5.4 expected) followed by Richmond Tuesday (8 expected) and Kansas City Thursday.  These are secondary to the Chicago and ISM readings but should help round out a fuller picture of the US economy here in Q1.

There is another full slate of Fed speakers this week.  Clarida (voter) speaks Monday and again on Thursday.  However, the main event will be Powell’s semi-annual Humphrey-Hawkins testimony before the Senate Tuesday and the House Wednesday.  Bostic (non-voter), Harker (non-voter), Kaplan (non-voter), Mester (non-voter), and Powell (voter) also speak Thursday, followed by Bostic on Friday.  The next FOMC meeting is March 20 and a pause then is a foregone conclusion.

The suspension of the US debt ceiling expires Friday.  When the ceiling is reached, the Treasury cannot issue any more debt.  However, as we’ve seen in the past, that doesn’t mean that the government no longer has any funding.  Through various accounting tricks, Treasury can continue making payments by so-called extraordinary measures.  Most estimate that these extraordinary measures could keep the government operational through the summer.  As those measures become exhausted, there is rising risk of a technical default.

Germany reports preliminary February CPI Thursday.  Inflation is expected to pick up a tick to 1.5% y/y.  Earlier that day, German state CPI readings will trickle out.  Germany reports January retail sales and February unemployment data Friday.  Final eurozone February PMI readings will be reported Friday.

Next ECB policy meeting is March 7.  We know from recent official comments that the ECB is contemplating another TLTRO, and so more details about possible size and timing are likely to emerge at next month’s meeting.  The market continues to doubt the ECB’s ability to start lifting rates this year.

UK parliament is scheduled to vote on a potential Brexit delay Wednesday.  Prime Minister May is trying to derail this vote, instead pledging to put her plan to a vote March 12.  As the March 29 Article 50 deadline approaches, the odds of a no-deal Brexit are not insignificant.  Yet our base case remains that some sort of delay is agreed upon soon.

The UK reports manufacturing PMI for February Friday.  It is expected to ease to 52.0 from 52.8 in January.  Construction, services, and composite PMI readings will be seen the week after.  Next BOE policy meeting is March 21 and no change is expected then.  With Brexit uncertainty continuing, the central bank remains in wait-and-see mode for now.

Canada reports January CPI Wednesday and Q4 GDP Friday.  Headline inflation is expected to drop sharply to 1.4% y/y, while common core is seen steady at 1.9% y/y.  Annualized GDP growth is expected to slow to 1.0% from 2.0% in Q3.  Recent data have largely come in softer.  The next BOC meeting is March 6 and consensus sees no change then.

Japan reports January IP and retail sales Thursday.  The former is expected to fall -2.5% m/m while the latter is expected to fall -0.8% m/m.  January labor market data and February Tokyo CPI will be reported Friday.  Headline inflation is expected at 0.4% y/y and ex-fresh food at 1.0% y/y, both down a tick from January.

BOJ Governor Kuroda is clearly concerned and leaning more dovish.  Over the weekend, he noted that the BOJ will consider four options for further easing if movement towards its inflation target wasn’t sustained.  These included lowering the already negative short-term policy rate, lowering the long-term yield target below zero, buying more assets such as government bonds, and increasing the monetary base.

Next BOJ policy meeting is March 15 and no change is expected then.  We presume that Kuroda is looking ahead in making his comments, perhaps to after the consumption tax hike is enacted this fall.  That is where the biggest risks lie ahead.  Before that, we do not see any compelling reason for the BOJ to inject further stimulus.