Drivers for the Week Ahead

  • While the two biggest tail risks for global markets have been addressed, uncertainty will remain in 2020
  • The first December readings for the US manufacturing sector kick off this week; Canada has a major data week
  • BOE meets Thursday and is expected to keep rates steady at 0.75%; ahead of the decision, there is a raft of UK data
  • Norges Bank, Riksbank, and BOJ also meet Thursday

While the two biggest tail risks for global markets have been addressed, uncertainty will remain in 2020.  Phase One was supposed to be the easy one.  Yet with all the low-hanging fruit, a deal almost didn’t happen.  Furthermore, Phase Two talks will start immediately, and so low level trade tensions are likely to persist.  With regards to Brexit, the type of Brexit (negotiated) has likely been determined by the UK elections.  However, the actual form of the new trading arrangement has yet to be determined and so some degree of uncertainty here is likely to continue through much of 2020.  As a result, the dollar may be able to build on its gains from late last week.

After some initial confusion and false starts, the broad outline of the Phase One trade deal has emerged.  The US agreed to suspend the December tariffs and to cut the existing 15% tariff on about $120 bl of Chinese imports in half.  USTR LIghthizer said any further tariff reductions will be linked to the conclusion of future phases of trade talks.  In return, China agreed to increase its purchases of US goods by at least $200 bln over the next two years.  This includes a commitment to buy $40-50 bln of UA agricultural good in each of the next two years.  China will also end forced technology transfers and improve its IP protections.  Reports suggest the deal will be signed in the first week of January.



The first December readings for the US manufacturing sector kick off this week.  Flash Markit PMI readings will come out Monday, with manufacturing expected to remain steady at 52.6 and services to rise a few ticks to 52.0.  Regional Fed manufacturing surveys for December start to trickle out, with Empire reading to be reported Monday (4.0 expected).  Philly Fed survey then comes out Thursday (8.0 expected), followed by Kansas City Fed index Friday (-3 expected).  We would expect the US manufacturing sector to show some improvement in early 2020 as trade tensions ratchet down.

There is a lot of other minor US data this week.  October TIC and JOLTS job openings will be reported Monday.  This will be followed by November IP (0.8% m/m expected), housing starts (2.2% m/m expected), and building permits (-3.2% m/m expected) Tuesday.  November leading index (0.1% m/m expected) and existing home sales (-0.4% m/m expected) as well as Q3 current account data (-$122 bln expected) will be reported Thursday.  Friday brings final Q3 GDP revision (2.1% SAAR expected), November personal income and spending, and final December University of Michigan consumer sentiment.

The FOMC media embargo has ended.  Kashkari speaks Monday, followed by Kaplan and Rosengren Tuesday.  Brainard and Evans speak Wednesday.  After that, the holiday season kicks in and there are no more Fed speakers until January.

Despite the weak November retail sales data, the US economy is still doing better than anticipated in Q4.  The Atlanta Fed’s GDPNow model currently estimates Q4 GDP growth at 2.0% SAAR, steady from the previous reading.  Elsewhere, the NY Fed’s Nowcast model now has Q4 growth at 0.69% SAAR, up from 0.58% previously.  It also raised its estimate for Q1 growth to 0.82% SAAR from 0.66% previously.  The Atlanta Fed is likely overstating growth a bit and the NY Fed understating it, and we suspect the truth is somewhere in between.  Either way, we are far from recession and the Fed is right to pause for now to assess the landscape.  Because we are upbeat on the US outlook, we do not see further easing in 2020.

Canada has a major data week.  November CPI will be reported Wednesday, with headline inflation expected to pick up to 2.2% y/y and common core to 2.0% y/y.  This will be followed by October retail sales (0.5% m/m expected) Friday.  Canada also reports November existing home sales Monday, October manufacturing sales (0.1% mm expected) Tuesday, and October wholesale trade sales (-0.4% m/m expected) Thursday.



Bank of England meets Thursday and is expected to keep rates steady at 0.75%.  This will be the penultimate meeting under Governor Carney, who steps down January 31.  The economy continues to struggle under Brexit uncertainty, and we see little scope for improvement near-term.  We see no justification for the BOE to hike rates anytime soon.  If anything, a case can be made for cutting rates in 2020.

Ahead of the decision, there is a raft of UK data.  Preliminary December PMI readings will come out Monday.  Manufacturing is seen rising to 49.2 and services to 49.5, bringing the composite up to 49.5.  November jobs data will be reported Tuesday, followed by November CPI data Wednesday.  Headline and CPIH inflation are both expected to fall a tick to 1.4%.  November retail sales will be reported (0.2% m/m expected) Thursday, followed by final Q3 GDP (1.0% y/y expected) and current account data (-GBP15.5 bln expected) Friday.

Norges Bank meets Thursday and is expected to keep rates steady at 1.5%.  November CPI was reported last week, with both headline and underlying inflation slowing a couple of ticks to 1.6% y/y and 2.0% y/y, respectively.  The central bank just hiked rates 25 bp to 1.5% in September, signaling that it would likely keep rates steady going forward.  Norge Bank is thus likely to deliver a dovish hold this week in light of the weakening economy.

Riksbank meets Thursday and is expected to hike rates 25 bp to 0%.  Sweden reported higher than expected November CPI.  Both headline and underlying CPIF inflation picked up a couple of ticks to 1.8% y/y and 1.7% y/y, respectively.  Whilst inflation is still below the 2% target, the acceleration has fed into notions of a Riksbank hike.  At its last meeting October 24, the central bank kept rates steady at -0.25% but flagged a December hike that would take the policy rates to zero.  It then signaled that any more hikes were unlikely into 2022.  Despite the CPI reading, WIRP suggests odds of a hike next week have fallen to nearly 10% from over 85% last week.



Bank of Japan meets Thursday and is expected to keep rates steady at -0.10%.  Bank of Japan officials see a “sizable” impact from the government’s proposed fiscal stimulus package.  If so, expect the bank to upgrade its quarterly economic projections in the January update.  This in turn would seem to lower the odds that the BOJ will add further stimulus for the time being, electing instead to allow fiscal policy to carry the load.  The government has said that its fiscal measures will boost growth by 1.4 ppts over time but has not specified the impact by each fiscal year.  WIRP suggests 45% odds of a cut this week, which we think overstates the case.

Australia reports preliminary December PMI readings Monday.  RBA minutes will be released Tuesday.  November jobs data will be reported Thursday, where a 15k gain is expected vs. -19k in October.  The labor market is an important indicator for the RBA, which is counting on strong jobs growth to underpin consumption.  At its last meeting, the RBA gave a fairly upbeat outlook for the economy but stands ready to ease again if needed.  Next policy meeting is February 4 and WIRP suggests 45% odds of a cut then.

New Zealand reports Q3 current account data Wednesday.  The current account gap is expected to widen to -NZD6.3 bln from -NZD1.1 bln in Q2.  Q3 GDP and November trade will be reported Thursday.  Growth is expected to pick up a couple ticks to 2.3% y/y.  At its last meeting, the RBNZ surprised markets by holding rates when a 25 bp cut was expected.  It was fairly upbeat but officials said a cut at the next policy meeting February 12 was possible if needed.  WIRP suggests only 10% odds of a cut then.