Drivers for the Week Ahead

  • The dollar is seeing some profit-taking after the jobs report
  • The US data schedule is jam-packed this week
  • The UK parliament is scheduled to vote on May’s Brexit plan Tuesday
  • Bank of Japan meets Friday and is expected to keep policy on hold
  • Norway and Sweden both report February CPI this week
  • China reports February IP and retail sales Thursday

The dollar is consolidating against the majors after last week’s big gains.  The Scandies are outperforming, while Swissie and sterling are underperforming.  EM currencies are mostly firmer.  ZAR and RUB are outperforming, while RON and CNY are underperforming.  MSCI Asia Pacific was up 0.5%, with the Nikkei rising 0.5%.  MSCI EM is up 0.5% so far today, with the Shanghai Composite rising 1.9%.  Euro Stoxx 600 is up 0.4% near midday, while DJIA futures are pointing to a lower open.  10-year UST yields are up 2 bp at 2.65%.  Commodity prices are mostly higher, with Brent oil up 0.8%, copper up 0.2%, and gold down 0.2%.

The dollar is seeing some profit-taking after the jobs report.  Last week was a good one for the greenback but jobs data and Powell comments (see below) are giving the market an excuse to take profits.  It’s worth repeating that the details of the February jobs report were very positive, and the weak headline number was simply payback for the strong January one.  As such, we remain bullish on the dollar.

The US data schedule is jam-packed this week.  Due to the delays from the shutdown, January retail sales will be reported today, followed by February CPI Tuesday and February PPI Wednesday.  We cannot recall ever having all four top-tier monthly US economic reports coming out in succession like this.

Let’s start off with retail sales.  Most observers were skeptical of the December readings and expect some upward revisions.  Consensus for January sees a flat reading for headline sales and a 0.3% m/m gain in sales ex-autos.  This would not be much payback from the huge declines seen in December and so we see some upside risks.  The so-called control group used for GDP calculations is seen rising 0.6% vs. -1.7% in December.

Next come the inflation readings.  Headline and core CPI are both seen steady at 1.6% y/y and 2.2% y/y, respectively.  Headline PPI is seen dropping a tick to 1.9% y/y, while core PPI is seen steady at 2.6% y/y.   Given the upside surprise to average hourly earnings, we expect to start seeing some upside surprises to US inflation as well.

There are some other minor US data reports this week.  January durable goods orders will also be reported Wednesday.  Believe it or not, the first of the regional Fed manufacturing surveys will be seen Friday with the release of the Empire State.  Friday also brings the January JOLTS report.  This series has been showing further tightness in the US labor market, which helps explain the upside risks for average hourly earnings.

The US growth outlook has weakened.  The Atlanta Fed’s GDPNow model is tracking 0.5% SAAR growth for Q1, while the New York Fed’s Nowcast model is tracking 1.4% SAAR for Q1 and 1.5% for Q2.   This compares to the initial reading for Q4 of 2.6% SAAR.

Fed Chairman Powell gave an unusual interview last night on the show 60 Minutes.  As one might expect, he sent a very dovish signal by saying the Fed is in no hurry to change rates.  He said that the Fed won’t “overreact” to inflation moving modestly above the 2% target.  He stressed that Trump pressure had no impact on policy and that he plans to serve out his full term.   

Powell also speaks today while Brainard speaks Tuesday.  After that, there are no more Fed speakers as the media embargo goes into effect ahead of the March 20 FOMC meeting.  We find recent dollar gains all the more remarkable given the recent dovish Fed messaging.  At this point, the market sees zero chance of a Fed hike this year and rising odds of a cut next year.

The UK parliament is scheduled to vote on May’s Brexit plan Tuesday.  Press is reporting that her senior aides fear a defeat worse than the vote in January.  If so, parliament will take control of the process and will vote for either a hard Brexit or another delay beyond March 29.

The Brexit outlook has become even more unclear.  Press reports suggest that May’s Brexit minister Barclay has held talks with opposite Labour about what the next steps should be if the vote fails.  We continue to view a delay as the base case.  However, recent developments suggest tail risk at both ends have risen.  Expect sterling volatility to remain high this week.

UK has a big slate of data coming out on Tuesday.  January trade, IP, GDP, and construction output will be reported that day.  IP is expected to contract -1.3% y/y, while GDP is expected to rise 0.2% m/m and the trade deficit is expected at -GBP3.5 bln.  Overall, the economic outlook remains cloudy due to Brexit and so the Bank of England is on hold for now.  Next policy meeting is March 21, no change is expected then.

Bank of Japan meets Friday and is expected to keep policy on hold.  We think the bank will keep its powder dry until this fall’s consumption tax hike.  Ahead of the decision, Japan reported February machine tool orders today and will report January core machine orders Wednesday.

Norway and Sweden both report February CPI this week.  Norway reported earlier today, with headline CPI rising 3.0% y/y vs. 2.8% expected and underlying rising 2.6% y/y vs. 2.1% expected.  Sweden reports tomorrow, with headline CPI seen rising 2.0% y/y and underlying CPIF seen rising 2.0% y/y.

Both central banks have started a modest easing cycle (25 bp each so far).  At its February 13 meeting, the Riksbank reaffirmed its intent to hike again in H2 of this year.  At its January 24 meeting, Norges Bank reaffirmed its intent to hike again perhaps as soon as March.  Both cited rising uncertainties, however.  Norges Bank next meets March 21 and Riksbank next meets April 25.  Norges Bank is likely to hike after these CPI readings, while Riksbank is seen on hold.

China reports February IP and retail sales Thursday.  The former is expected to rise 5.5% y/y and the latter by 8.1% y/y.  Both would be slower readings.  Money and loan data came out over the weekend and were weaker than expected.  The data so far for February has been mixed but we believe the economy faces strong headwinds.  More stimulus measures are likely this year.

EM FX came under great pressure last week despite the ECB’s dovish hold.  Markets instead focused on the grim eurozone economic outlook, which comes within the context of a broader global slowdown.  It’s clear that EM needs more than just the liquidity story, though that may be tested too with the spate of US data releases (retail sales, CPI, and PPI) out this week.  Despite the current bounce, we remain negative on EM.