Drivers for the Week Ahead

  • The foreign currencies were broadly firmer last week; the US economy is still doing better than anticipated in Q4
  • Despite the holiday, the US has a fairly heavy data week that contains the first major snapshots of December
  • Eurozone final December manufacturing PMI readings will be reported Thursday
  • Japan Prime Minister Abe has seen his popularity sag due to a series of scandals

The foreign currencies were broadly firmer last week, taking advantage of the turn in dollar sentiment as well as another wave of risk-on sentiment.  Bullishness on the global economy is quite strong, whilst we are perhaps a bit more skeptical given ongoing weakness in the UK, Japan, and the eurozone.  Dollar bearishness may also be overdone given our more constructive outlook on the US economy, but technical damage has been done that must now be repaired.

Indeed, DXY traded Friday at its lowest level since December 13 and is on track to test the December 12 low near 96.588.  The euro is on track to test the December 13 high near $1.12, and break above that area would set up a test of the June 25 high near $1.1410.  Sterling has recouped nearly a third of its post-election sell-off.  Major retracement objectives from that drop come in near $1.3140, $1.3210, and $1.3280.  Despite all the movement in other currencies, USD/JPY remains stuck near the 109.50 area.

 

AMERICAS

The US economy is still doing better than anticipated in Q4.  The Atlanta Fed’s GDPNow model now estimates Q4 GDP growth at 2.3% SAAR, up from 2.1% previously.  Elsewhere, the NY Fed’s Nowcast model now has Q4 growth at 1.19% SAAR, down from 1.32% previously.  It also raised its estimate for Q1 growth to 1.51% SAAR from 1.64% 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.

Despite the holiday, the US has a fairly heavy data week that contains the first major snapshots of December.  December Chicago PMI kicks things off on Monday and is expected to rise to 48.0 from 46.3 in November.  Dallas Fed manufacturing index will also be reported Monday and is expected to rise to 0.0 from -1.3 in November.  The most important reading is the December ISM manufacturing on Friday, which is expected to rise to 49.0 from 48.1 in November.

There will be a lot of other US data too.  November advance goods trade balance (-$68.8 bln), retail (0.1% m/m expected) and wholesale (0.2% m/m expected) inventories, and pending home sales (1.3% m/m expected) will all come out Monday.  Tuesday brings October S&P CoreLogic house prices and December conference board consumer confidence (128.2 expected).  Weekly jobless claims (222k expected) and final Markit December manufacturing PMI will be reported Thursday, followed by November construction spending (0.3% m/m expected) and December auto sales (17.0 mln annualized pace expected) Friday.

After the New Year’s holiday Wednesday, Fed speakers will hit the road.  On Friday, Barkin speaks to bankers in Baltimore.  Brainard, Daly, and Evans also speak on a panel Friday at the annual American Economic Association meeting in San Diego, followed by Kaplan speaking there later that day.  FOMC minutes will also be released Friday.   Next FOMC meeting is January 29 and no one expects any change then.

 

EUROPE/MIDDLE EAST/AFRICA

Eurozone final December manufacturing PMI readings will be reported Thursday.  Headline manufacturing PMI is expected to remain steady at 45.9, but the country breakdown is unlikely to bring much cheer.  Germany is expected to remain stuck at 43.4, while Italy is seen falling to 47.2 from 47.6 in November, Spain is seen falling to 46.8 from 47.5 in November, and the Netherlands is seen falling to 49.4 form 49.6 in November.

Recent data may suggest a stabilizing outlook for the eurozone economy.  However, we are far from recovery.  Elsewhere, Germany reports December CPI and unemployment data Friday.  Headline inflation is expected to accelerate to 1.4% y/y from 1.1% in November.  Next ECB meeting is January 23 and no change is expected then.

The UK economy is likely to remain under pressure now that Brexit uncertainty has been reintroduced by Johnson’s hard deadline of December 31.  Markit reports final UK December manufacturing PMI Thursday and construction PMI Friday and should serve as reminders that the economy continues to slow.  Next BOE meeting is January 30 and no change is expected at Carney’s final meeting.

 

ASIA

Japan Prime Minister Abe has seen his popularity sag due to a series of scandals.  His approval rating fell to 38% in a late December poll, falling below 40% for the first time in more than a year.  Abe’s term as LCP leader ends in less than two years, and other polls show former Defense Minister Shigeru Ishiba as the most popular candidate to succeed Abe.  The weak economy is also taking a toll on Abe.  For now, policymakers appear to have shifted to relying on fiscal stimulus.  Next BOJ meeting is January 21 and no change is expected then.