Drivers for the Week Ahead

  • Last week was one of the worst ones for the dollar since early December, but let’s put things in perspective
  • The FOMC meets Wednesday and is the highlight of the week
  • There is a fair amount of US data to be reported this week
  • Eurozone flash PMI readings for March will be reported Friday
  • UK Parliament is scheduled to hold a third vote on Prime Minister May’s Brexit deal; The Bank of England meets Thursday
  • Swiss National Bank and Norges Bank also meet Thursday
  • It’s another busy week for EM central banks

The dollar is mixed against the majors after last week’s big losses.  The Antipodeans are outperforming, while yen and sterling are underperforming.  EM currencies are mostly firmer. INR and KRW are outperforming, while TRY and ZAR are underperforming.  MSCI Asia Pacific was up 0.8%, with the Nikkei rising 0.6%.  MSCI EM is up 0.8% so far today, with the Shanghai Composite rising 2.5%.  Euro Stoxx 600 is up 0.2% near midday, while US futures are pointing to a higher open.  10-year UST yields are flat at 2.59%.  Commodity prices are mostly higher, with Brent oil up 0.3%, copper flat, and gold up 0.1%.

Last week was one of the worst ones for the dollar since early December.  Of the majors, only the yen lost ground last week while the Scandies did the best.  The US data have conspired against the greenback, underscoring the Fed’s resolve to remain on hold for now.  Still, we remain dollar bullish since central banks everywhere are also taking a more dovish stance.

Let’s put things in perspective.  The euro has only clawed back about a third of its losses this year against the greenback, the Swiss franc barely a quarter.  Elsewhere, the yen is trading near its weakest level of the year against the dollar.  DXY has not even surrendered half its gains this year.  Until we see deeper corrections against these major currencies, we believe the dollar rally remains intact.

The FOMC meets Wednesday and is the highlight of the week.  While it is widely expected to keep rates steady, the accompanying messaging and forecasts will be very important.  The Dot Plots are likely to shift significantly downward, with the perhaps signaling either none or one more hike this cycle.  In December, it saw two hikes this year and one next year.  The long-term neutral rate may also fall from the 2.75% seen back in December.

The Atlanta Fed’s GDPNow model is now tracking 0.4% SAAR, up slightly from 0.2% previously.  Elsewhere, the New York Fed’s Nowcast model is still tracking 1.4% SAAR for Q1 and 1.5% for Q2.  We think the Atlanta Fed’s forecast is overstating Q1 weakness and tend to side more with the New York Fed’s estimate.  That said, the new FOMC staff forecasts for growth may be marked down slightly to reflect Q1 weakness.

The Fed media embargo is in place for that meeting.  The next scheduled Fed speaker won’t be until March 24, when Evans speaks.  Virtually every Fed official has been singing of the same dovish song sheet since the January 30 FOMC meeting, which is why the Dot Plots could shift so much.

There is a fair amount of US data to be reported this week.  January factory goods orders will be reported Tuesday and are expected to rise 0.3% m/m.  On Thursday, the Philly Fed outlook for March will be reported (5.0 expected).  Weekly jobless claims for the BLS survey week will also be reported Thursday and are expected at 225k vs. 229k the previous week.  Friday will be a very busy US data day, with Markit preliminary PMI readings for March, February existing home sales and budget statement, January wholesale inventories and sales all being reported.

Eurozone flash PMI readings for March will be reported Friday.  Headline composite is expected to rise a tick to 52.0, with the manufacturing PMI seen rising a couple of ticks to 49.5 but services PMI seen falling a tick to 52.7.  After the precipitous drop in the PMI readings last year, the readings appear to be stabilizing.

Looking at the country breakdown, German composite PMI is expected to fall a tick to 52.7.  Here, the manufacturing PMI is expected to rise a few ticks to 48.0 but this will be offset by a half point drop in the services PMI to 54.8.  French composite is expected to rise to 50.7, as an expected drop in the manufacturing PMI to 51.4 will be offset by a larger rise in the services PMI to 50.6.  Other country breakdowns will be released with the final eurozone PMI readings in early April.

UK Parliament is scheduled to hold a third vote on Prime Minister May’s Brexit deal, most likely on Tuesday.  She lost the last vote by 149 votes.  While some officials are expressing optimism about passing the deal, it is hard to imagine such a big turnaround in barely a week.  Some reports suggest that May will have to set a timetable for her departure to win support for her deal.  May has already said she will step down before the next elections due in 2020, but the timetable may have been sped up.

The Bank of England meets Thursday and is expected to keep rates steady.  With Brexit uncertainty likely to persist past the March 29 Article 50 deadline, the central bank can do nothing but wait.  The data have been coming in on the weak side lately, and so there is no compelling reason for the central bank to hike anyway.

Earlier that day, UK retail sales for February will be reported.  Both headline and ex-auto fuel sales are expected to fall -0.4% m/m.  Ahead of the BOE, the UK reports January labor market data Tuesday and February CPI Wednesday.  Employment is expected to have risen 120k, but the unemployment rate is seen steady at 4.0%.  On the inflation front, both headline and CPIF are expected to remain steady at 1.8% y/y.

Swiss National Bank also meets Thursday.  CPI rose 0.6% y/y in February, well below the 2% target.  The SNB recently cut its growth forecast for this year to 1.1% from 1.5% previously, citing slower global and German growth.  The Swiss franc has been trending softer lately, but we see no reason for the SNB to change its dovish stance anytime soon.

Japan reported February trade data earlier today.  Exports contracted -1.2% y/y and imports by -6.7% y/y.  February supermarket and department store sales will be reported Wednesday.  February national CPI and preliminary March manufacturing PMI will be reported Friday.  Headline inflation is expected to rise a tick to 0.3% y/y, while ex-fresh food is expected to remain steady at 0.8% y/y.

The BOJ just left rates steady last week and downgraded its economic assessment.  Like other central banks around the world, the BOJ cited weaker exports and slowing growth abroad as the main factors.  This was no surprise given Kuroda’s signals that the BOJ is ready to add more stimulus as needed.  We still think they wait until impact of October consumption tax hike is felt but it’s clear that the likely direction of policy is looser, not tighter.

Canada reports January retail sales and February CPI Friday.  Headline sales are expected to rise 0.4% m/m, while ex-auto sales are expected to rise 0.1% m/m.  Headline inflation is expected to remain steady at 1.4% y/y, while common core CPI is expected to drop a tick to 1.8% y/y.  Bank of Canada next meets April 24 and is expected to keep rates steady at 1.75%.

RBA minutes will be released Tuesday.  We expect the bank to maintain a very dovish tone here.  Q4 house prices will also be reported on Tuesday and are expected to contract -5% y/y vs. -1.9% in Q3.  RBA has flagged falling home prices as the main risk to domestic spending.  Australia reports February jobs data Thursday, where a 15k gain is expected vs. 39.1k in January.  Markets are now pricing in potential rate cuts this year after the RBA’s dovish shift.

Norges Bank meets Thursday and is expected to hike rates 25 bp to 1.0%.  The bank had flagged a hike as likely, and the higher than expected February CPI reported last week cemented the move.  Still, the tightening cycle is likely to remain shallow.  This would only be the second hike since it started with a 25 bp hike back in September.  Consensus sees another hike late this year, but a lot can happen between now and then.

It’s another busy week for EM central banks.  Thailand and Brazil meet Wednesday, Taiwan, Indonesia, and Philippines meet Thursday, and Russia and Colombia meet Friday.  None are expected to move, though Indonesia and Philippines are likely to start easing cycles later this year.  Meanwhile, low inflation and sluggish growth are likely to keep the others on hold.