Drivers for the Week Ahead

  • There are no major US data releases this week, which means that the dollar is likely to remain on its back foot
  • US-China trade talks are progressing
  • The US economy remains solid; Canada has a heavy data week; eurozone reports final PMIs for October
  • The Brexit Plot thickens; UK PMI readings continue; BOE meets Thursday
  • Japan has a light data week; RBA meets Tuesday

There are no major US data releases this week, which means that the dollar is likely to remain on its back foot.  This follows a rough week for the greenback, as a hawkish hold by the Fed was offset by weakness in some US data.  The greenback lost ground against every major currency except the Loonie.  It fared slightly better against EM currencies but was still mostly softer.  The real action starts next week, with CPI November 13, PPI November 14, and retail sales and IP November 15.  We believe the US economy remains in solid shape and this should ultimately support the dollar.

US-China trade talks are progressing, with President Trump reportedly considering Iowa as the location for Phase One of the deal to be signed.  After discussions were held by phone Friday, White House advisor Kudlow warned that tariff hikes are still on the table until Phase One is completed.  The WTO threw a curve ball Friday by allowing China to impose $3.6 bln of tariffs on the US.  The case is related to anti-dumping duties imposed on China by the US and began well before the current trade war.

 

AMERICAS

In our view, the US economy remains solid.  Jobs growth of 128k would have been even higher without the impact of the GM autoworkers strike (-41.6k) and the census (-20k).  We think the PMI readings were also distorted downward by the strike.  Now that the strike has ended, we should see some improvement as we move through Q4.  The NY Fed Nowcast model is tracking 0.8% SAAR for Q4, whilst the Atlanta Fed GDPNow model is tracking 1.1% SAAR.  Yes, this is a slowdown from the 1.9% SAAR posted in Q3 but we suspect this will get revised upwards as we move past the GM strike distortions.

US data this week is mostly minor.  September factory orders will be reported Monday (-0.4% m/m expected), followed by trade (-$52.5 bln expected), JOLTS job openings (7088 expected), and October ISM non-manufacturing PMI (53.4 expected) Tuesday.  Q3 nonfarm productivity and unit labor costs will be reported Wednesday, followed by weekly jobless claims (215k expected) and September consumer credit Thursday.  Friday sees September wholesale trade sales (0.2% m/m expected) and November University of Michigan consumer sentiment (95.5 expected).

With the FOMC out of the way, the media embargo has ended and officials are fanning out to speak.  Daly speaks Monday, Barkin, Kaplan and Kashkari speak Tuesday, Evans, Williams, and Harker speak Wednesday, Kaplan and Bostic speak Thursday, and Daly and Brainard speak Friday.  Next FOMC meeting is December 11 and WIRP suggests 17% odds of another cut then.

Canada has a heavy data week.  September trade will be reported Tuesday (-CAD600 mln expected), followed by October Ivey PMI Wednesday.  Friday brings housing starts and building permits, along with the important jobs data (15.0k expected).  Bank of Canada just delivered a dovish hold last week, which pushed forward easing expectations.  WIRP suggests 27% odds of a cut December 4, up from 1% at the start of last week.

 

EUROPE/MIDDLE EAST/AFRICA

Final eurozone manufacturing PMI for October will be reported Monday.  Final services and composite PMIs will be reported Wednesday, along with September retail sales.  Germany reports September factory orders Wednesday (0.1% m/m expected).  German IP will be reported Thursday (-0.3% m/m expected), followed by trade and current account Friday.  Whilst there have been some indications that the eurozone economy is stabilizing, we are still far from seeing significant improvement in the outlook.

The Brexit Plot thickens.  Reports of some cooperation deal between the Tories and Brexit Party appear to have been overstated.  Now, it seems Farage is demanding that Johnson abandon his Brexit deal or else his party will run candidates for every seat in Parliament.  Another hung parliament after the December 12 election would be disastrous and would call into question the likelihood of getting this Brexit deal passed.  The current Parliament will be dissolved Wednesday, meaning five weeks of campaigning and no legislative work whatsoever.

The parade of UK PMI readings continues this week.  Construction PMI will be reported Monday and is expected at 44.1.  This will be followed by services and composite readings Tuesday, expected at 49.7 and 49.4, respectively.  Last Friday, manufacturing PMI came in at 49.6 vs. 48.2 expected.

Bank of England meets Thursday and is expected to keep rates steady at 0.75%.  With Brexit now delayed until January 31, Carney has no reason to move either way until then.  Recent strength in sterling will tighten monetary conditions somewhat.  We suspect that the $1.30 area will continue to cap sterling until we get further clarification on Brexit.

 

ASIA

Japan has a light data week.  Final October PMI readings come out Wednesday, followed by September cash earnings and household spending Friday.  Real cash earnings are expected to fall -0.4% y/y, while household spending is expected to rise 7.0% y/y.  The BOJ just left policy on hold next week, but expectations for easing have risen.  WIRP suggests 53% odds of a cut December 19, rising to 80% in March.  USD/JPY remains largely within the 108-109 range but we continue to look for an upside breakout.

Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 0.75%.  Ahead of that, September retail sales will be reported Monday.  Trade will be reported Thursday, followed by the RBA’s Statement on Monetary Policy Friday.  Solid data and a less dovish than expected RBA stance have helped push out market expectations for easing.  WIRP suggests 22% odds of a cut December 3, rising to 45% in March and 56% in June.  AUD rose nearly 4% last month but is coming up on a key retracement level near .6925.  After that is the 200-day moving average near .6955.