Drivers for the Week Ahead

  • The dollar remains resilient; the US economy is still doing better than anticipated in Q4
  • Canada reports October GDP Monday
  • The UK is moving full speed ahead towards Brexit
  • Japan has a heavy data week

The dollar remains resilient.  DXY traded last week at its highest level since December 6 and is challenging the 200-day moving average near 97.687.  It has recouped nearly two thirds of the early December swoon, and a break above the 97.797 area would set up a test of the November 29 high near 98.544.  The euro is trading back below $1.11 and a break below the $1.1065 area would set up a test of the November 29 low near $1.0980.  Sterling remains heavy and threatens to break below $1.30.

With the US-China trade tensions and Brexit now on the back burner, the greenback is benefitting from the rise in US rates.  The US 10-year yield continues to flirt with the 1.95% area, while the US 3-month to 10-year curve has climbed to cycle highs near 40 bp.  These rate movements suggest falling US recession risks and rising US inflation risks, and that is positive for the dollar.  This week will be holiday-shortened but we expect the dollar will continue its recent gains.

 

AMERICAS

The US economy is still doing better than anticipated in Q4.  The Atlanta Fed’s GDPNow model now estimates Q4 GDP growth at 2.1% SAAR, down from 2.3% previously.  Elsewhere, the NY Fed’s Nowcast model now has Q4 growth at 1.32% SAAR, up from 0.69% previously.  It also raised its estimate for Q1 growth to 1.64% SAAR from 0.82% 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.

November Chicago Fed National Activity Index will be reported Monday.  It remains the best indicator of US recession risk and it is expected at -0.13 vs.  the worse than expected -0.71 reading for October.  If so, the 3-month average would fall to -0.43 from -0.31 in October and -0.21 in September and would be the worst reading since April.  It is not yet at the -0.7 recession threshold but it’s worth watching.  A value of zero shows an economy growing at trend.  Positive values represent above trend growth, while negative values represent below trend growth.

Readings for the US manufacturing sector continue this week.  November durable goods orders will be reported Monday and expected to rise 1.5% m/m vs. 0.5% in October.  Regional Fed manufacturing surveys for December resume Tuesday with the Richmond Fed index (1 expected).  Last week, the Empire reading came in at 3.5 vs. 4.0 expected, Philly Fed survey came in at 0.3 vs. 8.0 expected, and Kansas City Fed index came in at -8 vs. -3 expected.  We expect the US manufacturing sector to show some improvement in early 2020 as trade tensions with China ratchet down.

Other US data will be reported during the holiday-shortened week.  November new home sales will be reported Monday (-0.4% m/m expected), followed by weekly jobless claims Thursday (220k expected).  Last week, claims for the BLS survey week came in at 234k, the highest for a survey week (containing the 12th of the month) since December 2017, when it was 244k.  This is the first clue that December jobs data might come in on the soft side, but certainly not the final word.

Canada reports October GDP Monday, with growth expected to slow to 1.4% y/y from 1.6% in September.  Real sector data last week were mostly weaker than expected.  While headline inflation picked up slightly, recent developments argue for a more dovish stance ahead from the BOC.  Next policy meeting is January 22 and no change is expected then.

 

EUROPE/MIDDLE EAST/AFRICA

The UK is moving full speed ahead towards Brexit.  Parliament passed Prime Minister Johnson’s withdrawal bill by a 358-234 vote Friday.  In addition, Andrew Bailey was chosen to succeed Mark Carney as Governor of the Bank of England.  Bailey will be navigating tricky waters and it must be pointed out that he has very little monetary policy experience.  That said, we expect a cautious, pragmatic approach to policy that we think favors rate cuts over rate hikes.  Next BOE meeting January 30 will be Carney’s last and no change is expected then.

Sterling tried to mount a comeback Friday but the rally quickly ran out of steam.  Cable ended the week near $1.30, and recent price action favors a test of the November 22 low near $1.2825 followed by the November 8 low near $1.2770.

 

ASIA

Japan has a heavy data week.  November supermarket sales will be reported Tuesday.  November housing starts and construction orders will be reported Thursday, but Friday holds the most important data.  Then, November labor market data, retail sales, IP, and December Tokyo CPI will all be reported.  Bank of Japan just kept rates steady last week and signaled no urgency to ease further after the government announced a fiscal stimulus package.

USD/JPY remains bid and has its sights set on the December 2 high near 109.75.  After that is the May 30 high near 110 followed by the May 21 high near 110.65.