Drivers for the Week Ahead

  • Higher US rates continue to support the greenback
  • With a heavy data week, the most important reading will be US retail sales Friday
  • This is also a big week for UK data; Japan has a fairly heavy data week too
  • RBNZ meets Wednesday and is expected to cut rates 25 bp to 0.75%; Australia reports October jobs data Thursday

Despite the lack of any significant data or events last week, the dollar still managed to post some impressive gains.  Indeed, the greenback was up against every major currency last week.  DXY has retraced about half of its October-November drop and a break of the 98.689 area is needed to set up a test of the October 1 high near 99.665.  The euro and sterling are trading at multi-week lows and Brexit uncertainty is likely to continue weighing on these two currencies.

Higher US rates continue to support the greenback.  The 10-year yield is flirting with 2%, while the 3-month to 10-year curve is at a cycle high 40 bp.  Lastly, Fed Funds futures are now pricing in less than one cut next year.  WIRP suggests only 6% odds of a cut December 11, a new low.  US data this week should help determine whether US rates will continue to go higher.  We remain constructive on the US economy and believe that this will ultimately support our strong dollar call.

President Trump said Friday that the US has not yet agreed to tariff rollbacks.  This comes after reports that the Phase One deal might not be completed until December, rather than November.  We see this as posturing amidst the negotiations.  Eventually, Phase One will be agreed to and that will include tariff rollbacks.



This is a big week for US data.  October CPI will be reported Wednesday, with headline inflation expected to remain steady at 1.7% y/y and core inflation expected to remain steady at 2.4% y/y.  October PPI will be reported Thursday, with headline inflation expected to fall to 0.9% y/y from 1.4% in September and core inflation expected to fall to 1.5% y/y from 2.0% in September.

The most important reading will be retail sales Friday.  Headline sales are expected to rise 0.2% m/m vs. -0.3% in September, while sales ex-autos are expected to rise 0.4% m/m vs. -0.1% in September.  Lastly, the so-called control group used for GDP calculations is expected to rise 0.3% m/m vs. a flat reading in September.  We believe that the US consumer will continue to drive solid growth in the US.  The December round of tariff increases poses the biggest risk to consumption, but we believe those tariffs will be taken off the table with a Phase One deal.

There are loads of minor US data too.  October real earnings are out Wednesday along with the monthly budget statement (-$130 bln expected).  Weekly jobless claims (215k expected) are out Thursday, followed by November Empire manufacturing index (5.9 expected), October export/import prices, IP (-0.4% m/m expected), and September business inventories (0.1% m/m expected) Friday.

The US economy has slowed in Q4.  The Atlanta Fed’s GDPNow model currently estimates Q4 GDP growth at 1.0% SAAR, steady from the previous reading.  Elsewhere, the NY Fed’s Nowcast model now has Q4 growth slightly worse at 0.73% SAAR, down from 0.80% the previous week.  As we’ve written before, we believe that this year’s yield curve inversion will result in a slowdown but not a recession, especially if trade tensions ease as we expect.

There is a full slate of Fed speakers this week.  Rosengren speaks Monday, followed by Clarida, Harker, and Kashkari Tuesday.  Powell addresses the Joint Economic Committee of Congress Wednesday and the House Budget Committee Thursday, where he is apparently the first Fed Chair to appear since 2012.  Kashkari and Harker also speak Wednesday.  On Thursday, Quarles, Clarida, Evans, Daly, Williams, Bullard, and Kaplan all speak.



This is also a big week for UK data.  Q3 GDP (1.1% y/y expected), September industrial (-0.1% m/m expected) and construction (-0.5% m/m expected) output, and trade (-GBP2 bln) will all be reported Monday.  Labor market data will be reported Tuesday (-102k in employment expected), followed by October CPI data Wednesday.  Headline and CPIH inflation are both expected to drop a tick to 1.6% y/y.  Retail sales will be reported Friday, with headline expected to rise 0.2% m/m.

The BOE just delivered a dovish hold last week.  The vote was 7-2, with two dissents in favor of a cut.  While the bank is on hold until Brexit uncertainty has cleared up, we think rates are more likely to fall than to rise afterwards.  Next policy meeting is December 19 and no change is expected then.

UK politics is in limbo until the December 12 elections.  Until then, markets will be watching the polls closely.  One danger of the upcoming vote is that the major parties are unveiling aggressive spending plans.  GBP continues to slip, trading at the lowest level since October 17.  $1.27 should offer some support as it coincides with the 200-day moving average as well as the 38% retracement objective of the October rise.

Spanish elections Sunday did not clear up political uncertainty.  The Socialists won the most seats with 120 (-3 from April) while main opposition PP won 88 (+22).  Nationalist Vox party won 52 (+28), while Podemos won 35 (-7).  This leaves the Socialists with no clear path to a majority in the 350-seat lower house.  Turnout was 69.9%, down form 71.8% in April.

Eurozone reports preliminary Q3 GDP data Thursday.  September trade and final October CPI will be reported Friday.  The euro remains heavy and is trading at the lowest level since October 15.  A break of the $1.0995 area would set up a test of the October 1 low near $1.0880.



Japan has a fairly heavy data week.  September core machine orders will be reported Monday and are expected to rise 0.9% m/m vs. -2.4% in August.  Trade and current account data will also be reported Monday.  October machine tool orders will be reported Tuesday, followed by October PPI Wednesday (-0.2% y/y expected).  Q3 GDP will be reported Thursday, with growth expected at 0.9% SAAR vs. 1.3% in Q2.  WIRP suggests 19% odds of a cut at the next BOJ meeting December 19.  USD/JPY continues to edge higher but is having trouble breaking above the 109.50 area.  We look for an upside breakout that targets the May 21 high near 110.65.

Reserve Bank of New Zealand meets Wednesday and is expected to cut rates 25 bp to 0.75%.  NZD came under pressure last week as labor market data came in on the weak side, feeding into notions of RBNZ easing.  It is on track to test the October 16 low near .6240 and a break below the .6305 area would set up a test of the October 1 low near .6205.

Australia reports October jobs data Thursday.  Consensus sees a 16k rise in employment.  RBA delivered a hawkish hold last week, giving a fairly upbeat view for the economy.  We know the bank puts a lot of weight on the labor market outlook and so this data will be important.  AUD has held up better than NZD and so the AUD/NZD cross is trading near multi-month highs around 1.0840.