Drivers for the Week Ahead

  • The dollar has finally gotten some traction; the media embargo has ended and Fed speaking engagements pick up this week
  • CFNAI remains the single best indicator to gauge US recession risks; the US economy remains in solid shape
  • Markit reports eurozone flash PMI readings Monday; Brexit talks will continue this week at the technical level
  • RBNZ meets Wednesday and is expected to keep rates steady at 1.0%; the central banks of Colombia, Mexico, Hungary, Czech Republic, Thailand, and Philippines meet this week

The dollar has finally gotten some traction.  Risk-off haven flows got the ball rolling, and that gave way to a less dovish than expected FOMC and better than expected US data.  We see these drivers remaining in play this week and so the dollar should build on its recent gains.  DXY has traded largely in the 98-99 range for much of this month but we look for an upside breakout in the coming weeks.

WIRP suggests 43% odds of a cut October 30, while the CME model suggests 45%.  We believe both are too high in light of less dovish than expected signals last week from Fed officials.  Unless there is a sharper drop-off in the US growth outlook, we do not think the Fed is in any hurry to cut again.

The media embargo has ended and Fed speaking engagements pick up this week.  Williams (voter), Daly (non-voter), and Bullard (voter) speak Monday.  Evans (voter), George (voter), and Kaplan (non-voter) speak Wednesday.  Thursday is the heaviest slate, with Kaplan, Bullard, Clarida (voter), Daly, Kashkari (non-voter), and Barkin (non-voter) scheduled.  Friday brings Quarles (voter) and Harker (non-voter).

The Chicago Fed National Activity Index remains the single best indicator to gauge US recession risks.  The 3-month average was -0.14 in July, the best since January and still well above the recessionary threshold of -0.7.  The August reading will be reported September 23 and is expected at 0.0.  If so, the 3-month average would rise to -0.11.  Note that a value of zero shows an economy growing at trend.  Positive values represent above trend growth, while negative values represent below trend growth.

The US economy remains in solid shape.  The Atlanta Fed’s GDPNow model is tracking 1.9% SAAR growth in Q3, up from 1.8% previously.  This is near trend (~2%) as well as the revised 2.0% SAAR in Q2.  Elsewhere, the NY Fed’s Nowcast model is tracking 2.2% SAAR growth in Q3, up from 1.6% previously.  Its forecast for Q4 growth is now 2.0% SAAR, up from 1.1% previously.

The regional Fed manufacturing surveys continue with Richmond reporting Tuesday (1 expected).  This will be followed by Kansas City Thursday.  Markit preliminary September PMI readings will be reported Monday and are expected to improve from August.  Consumption remains strong and housing appears to be recovering from earlier weakness.  Manufacturing may be starting to stabilize but is unlikely to rebound robustly until trade tensions ease.

There will be a lot of other minor US data reported this week.  S&P CoreLogic house prices for July and Conference Board September consumer confidence will be reported Tuesday.  August new home sales (3.3% m/m expected) will be reported Wednesday, followed by revised Q2 GDP (2.0% SAAR expected), advance August goods trade (-$73.5 bln expected), August retail (0.2% m/m expected) and wholesale (0.1% m/m expected) inventories, weekly jobless claims, and pending home sales (0.9% m/m expected) Thursday.

August personal income and spending, durable goods orders, and final University of Michigan sentiment will be reported Friday.  The core PCE reading will be of particular interest and is expected to rise 1.8% y/y vs. 1.6% in July.  If so, this would be the highest rate since January and nearing the Fed’s 2% target.  With core CPI at cycle highs, markets really have to start accepting that the bar to further Fed rate cuts is high.

US-China trade talks appear to be going nowhere.  The Chinese delegation canceled its planned visits to Montana and Nebraska farms this week and instead headed home early.  Reports suggest the decision was unrelated to trade talks, however, and both sides issues vaguely optimistic statements.  Meanwhile, President Trump said he wouldn’t settle for a partial deal and added that he doesn’t need anything before the 2020 election.  We do not think a deal is imminent.

Markit reports eurozone flash PMI readings Monday.  Expected improvement in both manufacturing and services is seen pushing the composite up a tick to 52.0.  IFO reports September business climate for Germany Tuesday, while GfK reports October confidence for Germany Wednesday.

The euro remains heavy in the wake of the ECB meeting.  The response last week to the ECB TLTRO was tepid, with only EUR3.4 bln taken up vs. expectations for something between EUR20-100 bln.  This supports our view that ECB measures taken this month are unlikely to jumpstart lending activity or economic growth.

Brexit talks will continue this week at the technical level.  After a burst of optimism last week, Irish Foreign Minister Coveney gave markets a dose of reality and warned that a deal is “not close.”  UK Supreme Court may rule this week whether Johnson’s suspension of Parliament was lawful.  We do not think sterling can push above the $1.26 area without tangible signs of progress on Brexit.

Japan preliminary September PMI readings will be reported Monday.  Tokyo September CPI will be reported Friday, with headline and ex-fresh food both expected to slow a tick to 0.5% y/y and 0.6% y/y, respectively.  Inflation is slowing and the economy remains weak ahead of the October 1 consumption tax hike.  The BOJ left policy steady last week but then tweaked its bond-buying amounts to help steepen the curve.  WIRP suggests 47% odds of a cut October 31, rising to 100% December 19.

RBNZ meets Wednesday and is expected to keep rates steady at 1.0%.  The economic outlook remains soft and so further easing is likely.  WIRP suggests 23% odds of a cut this week, rising to 75% for the November 13 meeting.  NZD is making new cycle lows and is on track to test the August 2015 low near .6130.

In EM, the central banks of Colombia, Mexico, Hungary, Czech Republic, Thailand, and the Philippines all meet this week.  Mexico and Philippines are expected to cut 25 bp each, while the rest are likely to remain on hold.  Between the less dovish than expected Fed, lower EM interest rates, and ongoing global trade tensions, we remain very negative on EM.