Drivers for the Week Ahead

  • The dollar continues to climb; after last week’s huge US data dump, releases this week are fairly light; the US economy is still doing well
  • BOC meets Wednesday and is expected to keep rates steady at 1.75%
  • ECB meets Thursday and is expected to keep policy steady; UK reports jobs data Tuesday
  • Norges Bank meets Thursday and is expected to keep rates steady at 1.5%
  • BOJ meets Tuesday and is expected to keep policy steady; Australia reports December jobs data Thursday

The dollar continues to climb.  DXY is trading at the highest level since December 26 and is on track to test the December 23 high near 97.817.  The 97.71 area is key as a break above would set up a test of the November 29 high near 98.544.  The euro remains heavy and a break below the $1.1080 area would set up a test of the November 29 low near $1.0980.  Elsewhere, sterling is struggling to remain above the $1.30 area, while USD/JPY is trying to make further headway above the 110 level.  We remain bullish on the dollar and look for further gains.

 

AMERICAS

After last week’s huge US data dump, releases this week are fairly light.  The most important one is the Chicago Fed National Activity Index for December that will be reported Wednesday.  It remains the best indicator of US recession risk and it rose to 0.56 in November from -0.76 in October.  It is expected at 0.15 in December.  If so, the 3-month average would fall to -0.02 from -0.25 in November and would be the best reading since August.  It remains far from the -0.7 recession threshold.  A value of zero shows an economy growing at trend.  Positive values represent above trend growth, while negative values represent below trend growth.

The US economy is still doing well.  The Atlanta Fed’s GDPNow model estimates Q4 GDP growth at 1.8% SAAR, steady from the previous reading.  Elsewhere, the NY Fed’s Nowcast model has Q4 growth at 1.2% SAAR, up from 1.1% previously, while its estimate for Q1 growth rose to 1.7% SAAR from 1.2% previously.  We are clearly far from recession and the Fed is right to pause for now to assess the landscape.

Other data is limited.  December existing home sales (1.5% m/m expected) will be reported Wednesday and leading index (-0.2% m/m expected) Friday.  Last week, housing starts jumped 16.9% m/m to the highest level in 13 years.

Weekly jobless claims Thursday will be of interest.  Note this reading will be for the BLS survey week containing the 12th of the month and is expected at 214k.  Claims fell last week to 204k for the week ended January 11.  This is just above the cycle low of 203k in late January.  If sustained, this drop supports our view that the US labor market remains strong.

Regional Fed manufacturing surveys continue to roll out this week with Kansas City Thursday.  A reading of -6 is expected vs. -8 in December.  So far, the readings suggest some recovery in 2020.  Empire manufacturing came in at 4.8 vs. 3.6 expected and a revised 3.3 (was 3.5) in December.  Philly Fed was next and came in at 17.0 vs. 3.8 expected and a revised 2.4 (was 0.3) in December.  Markit reports its preliminary January PMI readings Friday.  The media embargo has gone into effect ahead of the January 29 FOMC meeting.  As such, there will be no speakers until Powell’s post-decision press conference.

Bank of Canada meets Wednesday and is expected to keep rates steady at 1.75%.  Please see our recent BOC preview for an in-depth look at the Canadian outlook.  Hours ahead of the decision, Canada reports December CPI and November wholesale trade sales.  Inflation is expected to tick higher to 2.3% y/y.  If so, inflation would be the highest since October 2018 and will likely keep the central bank on hold near-term.  On Tuesday, Canada reports November manufacturing sales (-0.5% m/m expected), followed by wholesale trade sales Wednesday (-0.5% m/m expected).  November retail sales will be reported Friday, which are expected to rise 0.6% m/m vs. -1.2% in October.

 

EUROPE/MIDDLE EAST/AFRICA

The ECB meets Thursday and is expected to keep policy steady.  The account of the last meeting was released last week.  At Madame Lagarde’s first meeting, some ECB officials expressed concern about the possible side effects of its easy money policy, particularly the impact of negative rates on household.  This is really no surprise, as this was probably the same bunch that resisted Draghi at every turn.  That said, it’s clear that Lagarde will have a hard time pushing for further monetary stimulus as the eurozone outlook stabilized.  For now, the ECB is on hold.

After the ECB decision, Markit reports preliminary January eurozone PMI readings Friday.  Modest improvement from December is expected, with the composite PMI seen at 51.2 vs. 50.9 in December.  Yet this does not portend a significant improvement in 2020.  Rather, it would suggest that the situation is not getting much worse.

The UK reports jobs data Tuesday.  UK CBI reports January industrial trends Wednesday.  Markit reports preliminary January UK PMI readings Friday.  Here too, modest improvement is expected, with the composite PMI seen rising back above the 50 boom/bust level to 50.7 vs. 49.3 in December.  Yet soft data last week now has markets looking for a BOE cut next week.  WIRP suggests 70% odds of a cut January 30.

Norges Bank meets Thursday and is expected to keep rates steady at 1.5%.  We do not expect any changes to the bank’s expected rate path.  The bank has been on hold since the last 25 bp hike back in September.  Governor Olsen said after the December 19 meeting that “The most likely path, as we see it, is that the policy rate will stay at the present level going forward.”  We concur.

 

ASIA

Bank of Japan meets Tuesday and is expected to keep policy steady.  However, WIRP suggests 28% odds for a cut.  The bank is expected to upgrade its economic outlook for the first time in a year whilst acknowledging ongoing downside risks.  This despite expectations for a weak Q4 due to the headwinds coming from the typhoon and consumption tax hike.  With fiscal stimulus boosting near-term growth prospects, it’s clear that further monetary stimulus is unlikely this year.

Ahead of the decision, Japan reports December convenience store sales Monday.  After the decision, Japan reports December department store sales Wednesday.  December trade will be reported Thursday, with exports expected to contract -4.2% y/y and imports by -2.7% y/y.  December national CPI and preliminary January PMI readings will be reported Friday.  Both headline inflation and ex-fresh food are seen rising to 0.7% y/y from 0.5.% in November.

Australia reports December jobs data Thursday.  Total employment is expected to rise 10k vs. 39.9k in November, but much (35.7k) of last month’s gain was in part-time jobs.  This will be followed by preliminary January PMI readings Friday.  The RBA puts a lot of weight on the labor market and it next meets February 3.  WIRP suggests 55% odds that it cuts rates 25 bp to 0.50%, up from below 40% at the end of 2019.