Drivers for the Week Ahead

  • The dollar had a stellar November after a shaky October, and gains should continue in December
  • This is a big data week for the US; the highlight will be November jobs data Friday
  • BOC meets Wednesday and is expected to keep rates steady at 1.75%
  • Germany is struggling with greater political uncertainty; UK polls suggest a tightening race ahead of the December 12 elections
  • Press reports suggest Japan is planning on a supplemental budget worth at least JPY12 trln ($110 bln); RBA meets Tuesday and is expected to keep rates steady at 0.75%

The dollar had a stellar November after a shaky October, and gains should continue in December.  For the month, it was up against every major currency except the Swedish krona.  In the EM space, the greenback was up against every currency except ZAR and CNY.  This performance is all the more remarkable given signs of weakness in the US economy in the early readings for Q4.  That narrative is shifting, however, as the US economy is doing better than expected (see below).  This makes further dollar gains more likely as 2019 winds down and we move into 2020.

Press reports suggest the Phase One trade deal has stalled due to Hong Kong legislation passed by the US Congress.  Until a deal is wrapped up, we remain cautious on EM.  Over the weekend, Asia reported mixed data for November.  China reported stronger than expected November manufacturing PMIs.  Official manufacturing came in at 50.2 vs. 49.3 in October and topped the 50 boom/bust line for the first since April, while Caixin manufacturing PMI came in at 51.8 vs. 51.7 in October.  However, Korea reported weaker than expected November trade data.  Exports contracted -14.3% y/y and imports by -13.0% y/y, both readings near the worst of the cycle.  While the China data is welcome, we put more weight on Korea trade numbers, which typically serve as a good bellwether for the entire region.



The US economy has not slowed as sharply as anticipated in Q4.  The Atlanta Fed’s GDPNow model currently estimates Q4 GDP growth at 1.7% SAAR, up from 0.4% previously.  Elsewhere, the NY Fed’s Nowcast model now has Q4 growth at 0.77% SAAR, up from 0.71% previously.  The Atlanta Fed may be overstating growth a bit and the NY Fed understating it, but we suspect the truth is somewhere in between.  Either way, we are far from recession and the Fed is right to pause this month to assess the landscape.

This is a big data week for the US.  November ISM manufacturing PMI will be reported Monday and is expected at 49.2 vs. 48.3 in October.  October construction spending will also be reported Monday (0.3% m/m expected).  November auto sales will be reported Tuesday and are expected to come in at an annualized 16.80 mln pace.  ADP reports private sector jobs and consensus sees 140k.  ISM non-manufacturing PMI will also be reported Wednesday and is expected at 54.5 vs. 54.7 in October.  Thursday sees November Challenger job cuts, weekly jobless claims, and October trade and factory orders.

The highlight will be November jobs data Friday.  Consensus sees 188k jobs added vs. 128k in October, with the unemployment rate seen steady at 3.6% and average hourly earnings steady at 3.0% y/y.  Initial jobless claims for the survey week containing the 12th of the month rose to 228k, the highest reading since mid-June.  As such, there may be some downside risks to the jobs reading.  However, we believe the labor market remains in solid shape overall and this should continue to support consumption.  Friday also sees October wholesale trade sales, preliminary University of Michigan consumer sentiment (97.0 expected), and October consumer credit ($16.0 bln expected).

Ahead of the upcoming December 11 FOMC meeting, the media embargo will kick in this week.  Governor Quarles testifies to Congress Wednesday and Thursday.  After that, there are no Fed speakers until Powell’s post-decision press conference.  As we expected, the Fed’s Beige Book report released last Wednesday for the upcoming meeting was fairly upbeat.  It noted that the economy expanded “modestly” through mid-November, highlighting steady consumer spending and some signs of improvement in manufacturing.  Employment continue to rise slightly, while wage pressures intensified in low-skill jobs.  Lastly, noted that “firms generally expected higher prices going forward.”

Bank of Canada meets Wednesday and is expected to keep rates steady at 1.75%.  Canada then reports October trade and November Ivey PMI Thursday, followed by November jobs data Friday.  Data have been coming in on the soft side but messaging from the BOC has been inconsistent.  The economy is clearly slowing, however, and so the market bias for interest rates is to the downside.  USD/CAD has been trading on both sides of 1.33 in recent weeks but we look for an upside breakout to test the September high near 1.3385.



Eurozone final November manufacturing PMI readings will be reported Monday.  Final services and composite PMI readings will then be reported Wednesday.  German October factory orders (0.5% m/m expected) will be reported Thursday, along with eurozone retail sales (-0.4% m/m expected) and final Q3 GDP data.  German IP will be reported Friday (0.2% m/m expected).  Whilst there have been some signs of stabilization in the German economy, we are far from seeing any sort of significant recovery.  The euro traded Friday at its lowest level since October 10 near $1.0980 but then recovered to end the week back above $1.10.  We look for further losses ahead with a near-term target of the October 1 low near $1.0880.

Germany is struggling with greater political uncertainty.  Over the weekend, the Social Democrats elected new leaders rather than a pro-Merkel ticket led by Vice Chancellor Olaf Scholz.  New SPD head Norbert Walter-Borjans said his party wants to improve the coalition rather than break it up but demanded that Chancellor Merkel’s CDU review its balanced budget policy in order to boost the economy via fiscal stimulus.  CDU officials said they still expect the SPD to honor the coalition agreement from last year, but the political calculus has clearly changed.

UK polls suggest a tightening race ahead of the December 12 elections.  Labour is shown gaining ground in four of the five major polls released over the weekend.  BMG poll showed the closest race, with the Tories up only 6 percentage points over Labour.  The others had margins of victory of 9, 10, 13, and 15 percentage points.  Sterling remains in its familiar $1.28-1.30 range, with the direction of breakout to be determined by the election results.

Oil prices remain under pressure ahead of the OPEC+ meeting in Vienna Thursday.  The group sees a global oil surplus in 2020 but has signaled that it doesn’t plan deeper output cuts.  To underscore the challenges facing OPEC+, we note that the US became a net oil exporter in September for the first time since records began in 1949.



Press reports suggest Japan is planning on a supplemental budget worth at least JPY12 trln ($110 bln).  Discussions will be held early this week before a final decision is made.  There is some minor data this week, including final November PMI readings and October cash earnings and household spending Friday.  So far, the October data have been terrible and so the calls for fiscal stimulus have grown louder.  USD/JPY continues to edge higher and should soon break above 110 to test the May highs near 110.65.

Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 0.75%.  There has growing talk about potential QE after RBA Governor Lowe laid out a potential roadmap, whereby it might be considered when the case rate is at 0.25%.  Lowe stressed that negative rates were “extraordinarily unlikely” and that any QE would only consist of government bond purchases.  AUD continues to edge lower, trading Friday at levels not seen since October 16.  It is on track to test the October 2 low near .6670.  Q3 GDP will be reported Wednesday, with growth expected at 1.6% y/y vs. 1.4% in Q2.  This will be followed by October trade (AUD6.5 bln surplus expected) and retail sales (0.3% m/m expected) Thursday.