- Geopolitical concerns are roiling global markets
- Recent price action in the dollar has been confounding, to put it mildly
- The US has a busy data week, capped off with December jobs data Friday; the US economy is still doing better than anticipated in Q4
- Canada has a busy data week; final eurozone and UK services and composite PMI readings will be seen Monday
Geopolitical concerns are roiling global markets. The US drone attack on a senior Iranian official threatens to inflame an already volatile region. Iran has already threatened retaliation but it’s not clear how or when. Markets have reacted as one would suspect, with safe haven assets rallying at the expense of risk assets. Oil prices have surged, with Brent oil trading Friday at the highest level since September 16, when it spiked from the attacks on Saudi oil facilities.
Recent price action in the dollar has been confounding, to put it mildly. After staging a solid recovery in November, the dollar looked poised to add to those gains in December. Instead, DXY peaked on November 29 and then sank to a new low on December 31. The greenback has staged a comeback of sorts in early January, helped in large part by the risk-off impulses coming from Iran tensions. We think market movements were distorted by thin markets and year-end positioning. Is this a sustainable recovery in the dollar or a dead cat bounce?
We favor the former. Besides the dollar’s obvious safe haven status, the US economy continues to hum along near 2% growth and is likely to outperform within the developed world. The Fed is through cutting rates. The eurozone, UK, and Japan all enter 2020 facing economic headwinds and will struggle to obtain growth of even half the US. Loose or even looser monetary policy is expected to continue globally, allowing the US dollar to maintain its relative yield advantage despite this recent drop in rates from the flight to safety. Being a safe haven asset with significant positive yield has its advantages!
The US has a busy data week, capped off with December jobs data Friday. Consensus sees 162k jobs added vs. 266k in November, unemployment steady at 3.5%, and average hourly earnings also steady at 3.1% y/y. Ahead of this, ADP will provide the final clue for nonfarm payrolls Wednesday and consensus sees 160k private sector jobs added. Weekly jobless claims for the BLS survey week rose to 235k, the highest for a survey week since December 2017 (244k), whilst the employment component for ISM manufacturing PMI fell to 45.1 from 46.6 in November. So far, the clues warn of a downside surprise to nonfarm payrolls.
Other US data will filter out during the week. November trade (-$43.7 bln expected), factory orders (-0.7% m/m expected), and December ISM non-manufacturing PMI (54.5 expected) will be reported Tuesday. Along with ADP jobs, weekly mortgage applications and November consumer credit will be reported Wednesday. Weekly jobless claims (220k expected) will be reported Thursday. Friday brings November wholesale inventories (0.1% m/m expected) and trade sales (0.2% m/m expected).
The US economy is still doing better than anticipated in Q4. The Atlanta Fed’s GDPNow model estimates Q4 GDP growth at 2.3% SAAR, steady from the previous reading. Elsewhere, the NY Fed’s Nowcast model now has Q4 growth at 1.1% SAAR, down from 1.2% previously. It also cut its estimate for Q1 growth to 1.1% SAAR from 1.5% 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.
FOMC minutes out last Friday are worth discussing. The major points we stress are: 1) the Fed still sees risks tilted to the downside, but less so in recent months due to easing US-China trade tensions and less risk of a hard Brexit, 2) rates are likely to be kept at current levels for the time being, 3) some concerns that keeping rates low would lead to excessive risk-taking, and 4) the further strengthening of the labor market was possible without creating undesirable wage and price pressures. We will have a couple of weeks of Fed speakers before the media embargo for the January 29 FOMC meetings kicks in. Brainard speaks Wednesday, while Thursday sees Clarida, Williams, Evans, and Bullard all speak.
Canada has a busy data week. November trade (-CAD1.2 bln expected) and December Ivey PMI will be reported Tuesday, followed by December housing starts and November building permits (1.0% m/m expected) Thursday. December jobs data will reported Friday. Consensus sees a 25k increase in total employment vs. -71.2k in November, along with unemployment falling a tick to 5.8%. Next Bank of Canada meeting is January 22 and rates are expected to remain steady at 1.75%. However, odds of a cut increase as the year progresses and a 25 bp move is nearly priced in by year-end.
Markit reports final December eurozone services and composite PMI readings Monday. Eurozone November retail sales (0.6% m/m expected) and preliminary December CPI will be reported (1.3% y/y expected) Tuesday. If consensus is correct, inflation would be the highest since April. Germany reports November retail sales (1.0% m/m expected) Monday and factory orders (0.2% m/m expected) Wednesday, followed by trade, current account, and IP (0.8% m/m expected) Thursday.
Markit reports final December UK services and composite PMI readings Monday. Other than that, it will be a quiet week data-wise. Instead, politics will take center stage as Labour’s National Executive Committee is set to outline its timetable this week for the leadership election. There is a clear struggle within the party between the Corbyn and moderate wings. Elsewhere, the UK Parliament will start debate Tuesday and ultimately pass Johnson’s Brexit deal Thursday.
Despite persistent Q4 weakness in their economies, neither the ECB nor BOE are expected to change policy this month. At least the UK has the luxury of some upcoming fiscal stimulus, if Johnson’s election pledges are to be believed. In the eurozone, the surplus nations are showing no softening of their anti-spending stances.
Markit reports final December Japan manufacturing PMI Monday, followed by final services and composite PMI readings Tuesday. November real cash earnings (-0.8% y/y expected) will be reported Wednesday, followed by household spending (-2.0% y/y expected) and leading index Friday. The economy slowed sharply in Q4 due to a combination of the typhoon and consumption tax hike. The supplementary budget is meant to address this slowdown, and so the Bank of Japan is sidelined for now. Next policy meeting is January 21 and no change is expected then. USD/JPY is trading at lows not seen since October 10 and is likely to remain under pressure if risk-off sentiment continues. Break of the 107.70 area would set up a test of the October 3 low near 106.50.