Drivers for the Week Ahead

  • US-Iran tensions have eased.  Or have they?
  • Trade tensions are likely to remain on the back burner
  • This week sees a 1-2-3-4 punch of December US data with CPI Tuesday, PPI Wednesday, retail sales Thursday, and IP Friday
  • The Fed releases its Beige Book report for the upcoming January 29 FOMC meeting on Wednesday
  • The UK has a big data week; Japan has a fairly heavy data week

US-Iran tensions have eased.  Or have they?  In Friday, the US announced sanctions on 17 specific steel manufacturers and 8 senior officials in Iran.  Treasury Secretary Mnuchin said the sanctions ware meant to stop Iran’s terrorist activities.  To us, this could be seen by Iran as another hostile act that will lead to further retaliatory actions beyond last week’s attacks on two US-Iraqi air bases.

Trade tensions are likely to remain on the back burner.  A Chinese delegation goes to Washington to sign the Phase One deal Wednesday.  President Trump has said that Phase Two talks will begin immediately, but we do not expect much progress this year.  That said, we think both sides have stepped back from the brink and will be hesitant to restart the trade war.

The dollar gave up some of last week’s gains after the weak jobs report, but we do not think it will fall very far.  We remains bullish on the dollar.  DXY is on track to test the December 23 peak near 97.817, and a break above the 97.71 area would set up a test of the November 29 high near 98.544.  The euro remains heavy above the $1.11 area, as does sterling above the $1.30 area.  Meanwhile, USD/JPY looks likely to break above the 110 area soon.



This week sees a 1-2-3-4 punch of December US data with CPI Tuesday, PPI Wednesday, retail sales Thursday, and IP Friday.  The jobs data last week were disappointing but does not change our relatively upbeat view of the US economy.   Headline CPI is seen rising 2.4% y/y, which would be the highest since October 2018.  While this is largely energy-driven, note that core CPI is seen steady at 2.3% y/y and is just below the 2.4% cycle high.  A similar dynamic is seen for PPI, with both headline and core expected to rise 1.3% y/y.

We think the most important readings will come from the real sector.  Headline retail sales are expected to rise 0.3% m/m, ex-autos by 0.5%, and the so-called control group by 0.3%.  All would represent acceleration from November and would support the notion that the US consumer remains alive and well.  On the other hand, IP Friday is expected to fall -0.1% m/m vs. a 1.1% gain in November.

There is a lot of other minor US data out too.  December budget statement comes out Monday (-$15.0 expected).  December real average earnings will be reported Tuesday.  December export/import prices will be reported Thursday, along with weekly jobless claims (217k expected), November business inventories (-0.1% m/m expected), and November TIC data.  Friday brings December housing starts (1.1% m/m expected) and building permits (-1.5% m/m expected) as well as preliminary January University of Michigan consumer sentiment (99.3 expected) and November JOLTS jobs openings (7267 expected).

Fed manufacturing surveys for January kick off with Empire manufacturing on Wednesday.  A 3.6 reading is expected, up from 3.5 in December.  Philly Fed is next on Thursday, which is expected to improve to 3.1 from a revised 2.4 (was 0.3) in December.  Manufacturing may remain under pressure in early 2020 due to the impact of the Boeing 737 Max.

The Fed releases its Beige Book report for the upcoming January 29 FOMC meeting on Wednesday.  We have a full slate of Fed speakers before the media embargo kicks in.  Rosengren and Bostic speak Monday, followed by Williams and George Tuesday.  Harker and Kaplan speak Wednesday and then Harker speaks again on Friday.  Last week, virtually every Fed speaker was on the same page, highlighting a solid 2020 outlook for the US that supports steady monetary policy.

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 has Q4 growth at 1.1% SAAR, down from 1.2% previously, while its estimate for Q1 growth was steady at 1.2% SAAR.  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.



Germany reports 2019 GDP and budget data Wednesday.  Final German December CPI readings will be reported Thursday, followed by final eurozone CPI readings Friday.  Data have been stabilizing ahead of the next ECB meeting January 23, but there is no cause to pop the champagne.  Whilst ECB President Lagarde offered a mildly upbeat outlook at her first meeting last month, we do not think much has really changed overall.

The UK has a big data week.  November GDP, IP, trade, and constriction output will all be reported Monday.  December CPI will be reported Wednesday.  December retail sales will be reported Friday.  The UK data takes on greater importance after outgoing Governor Carney’s dovish comments last week.  While we do not expect any move at his last meeting January 30, we suspect he will deliver a dovish hold that gives his successor cover to cut rates if needed.



Japan has a fairly heavy data week.  It reports November current account data Tuesday.  December machine tool orders will be reported Wednesday, followed by December PPI Thursday.  Q4 data so far have been weak.  While government officials are putting more blame on the typhoon, we do think that the consumption tax hike is also playing a large role.  Next BOJ meeting is January 21 and no change is expected.  With fiscal stimulus in the pipeline, we suspect monetary policy will be sidelined for now.