Drivers for the Week Ahead

  • The spread of the coronavirus continues and is likely to weigh on risk assets and EM; the dollar continues to climb
  • The FOMC meeting Wednesday is the highlight of the week and yet it’s likely to be a non-event
  • Risk-off sentiment has derailed the US curve steepening trade
  • The Bank of England meets Thursday and no change is expected; Germany has a heavy data week
  • Japan has a heavy data week, with most reports coming on Friday; Australia reports Q4 CPI Wednesday

The spread of the coronavirus continues and is likely to weigh on risk assets and EM.  Most markets in Emerging Asia are closed for all or part of this week due to the Lunar New Year holiday.  China has extended the holiday until February 2 as it struggles to contain the virus.  The Asian region is just starting to recover from the global trade tensions, and now it must cope with what is likely to be a sharp drop-off in tourism.  Policymakers in the region may have to tilt more dovish this year if the economic impact becomes significant.

The dollar continues to climb.  DXY traded Friday at the highest level since December 3 and is on track to test the November 29 high near 98.544.  After that is the October 8 high near 99.249.  The euro remains heavy and the break below the $1.1080 area sets up a test of the November 29 low near $1.0980 and then the October 8 low near $1.0940.  Elsewhere, sterling is struggling to remain above the $1.30 area, while USD/JPY is getting pushed lower by risk-off impulses.  We remain bullish on the dollar and look for further broad-based gains as risk-off sentiment deepens.



The FOMC meeting Wednesday is the highlight of the week and yet it’s likely to be a non-event.  The Fed just released updated staff forecasts and Dot Plots at the December meeting and signaled that the bar to any change in rates is high.  With the situation little changed, we see no change to the Fed’s stance.  Perhaps the Fed will provide some more clues to how its Framework Review is progressing.  The media embargo has gone into effect ahead of the January 29 FOMC meeting.  As such, there will be no Fed speakers until Powell’s post-decision press conference.

US advance Q4 GDP will be reported Thursday.  Growth is expected at 2.2% SAAR, up from 2.1% in Q3.  Note that the Atlanta Fed’s GDPNow model estimates Q4 GDP growth at 1.8% SAAR.  Elsewhere, the NY Fed’s Nowcast model has Q4 growth at 1.2% SAAR while its estimate for Q1 growth stands at 1.7% SAAR.  We are clearly far from recession and the Fed is right to pause for now to assess the landscape.

Risk-off sentiment has derailed the US curve steepening trade.  At 16 bp, the 3-month to 10-year curve is the flattest since December 3.  For now, we do not think the US economy will be significantly impacted by the coronavirus and so the curve flattening is due more to the flight to safety than true recession fears for the US.  The Fed may make note of the unknown nature of the virus but notions that the Fed might react to it seem far-fetched, at least for now.

Regional Fed manufacturing surveys continue to roll out this week with Dallas Monday and Richmond Tuesday.  For Dallas, a reading of -1.6 is expected vs. -3.2 in December while for Richmond, a reading of -3 is expected vs. -5 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 came in at 17.0 vs. 3.8 expected and a revised 2.4 (was 0.3) in December, and Kansas City came in at -1 vs. -6 expected and -8 in December.  It’s clear that the manufacturing sector is still struggling in some areas.  January Chicago PMI will be reported Friday and it is expected at 48.9 vs. a revised 48.2 (was 48.9) in December.

Other minor US data will be reported this week.  December new home sales come out Monday (1.6% m/m expected), followed by durable goods orders Tuesday (0.9% m/m expected).  Tuesday also sees November S&P CoreLogic home prices and January Conference Board consumer confidence (128.0 expected).  December advance good trade data will be reported Wednesday (-$65.5 bln expected), along with December wholesale and retail inventories and pending home sales (0.7% m/m expected).  December personal income and spending will be reported Friday (both expected 0.3% m/m), along with final Michigan consumer sentiment (99.1 expected).



The Bank of England meets Thursday and no change is expected.  However, it will be a very close call and the market is somewhat split.  Of the 57 analysts polled by Bloomberg, 41 see no change and 16 see a 25 bp cut to 0.5%.  Elsewhere, WIRP suggests around 55% odds of a cut.  Last week’s UK data came in on the firm side and helped push out expectations for imminent BOE easing.  At the beginning of the week, WIRP suggested nearly 70% odds of a cut.  Yet a cut is still nearly priced in by mid-year.

Germany has a heavy data week.  January IFO business climate will be reported Monday (97.0 expected), followed by January GfK consumer confidence Wednesday (9.6 expected).  January CPI and unemployment will be reported Thursday, followed by retail sales Friday (-0.5% m/m expected).  Eurozone CPI readings will be reported Friday.  With German inflation expected to rise a couple of ticks to 1.7% y/y, the eurozone reading is expected to rise a tick to 1.4% y/y.  German flash PMI readings for January reported last week came in on the firm side but were offset by weak French readings, leaving the composite eurozone reading steady at 50.9.  Data suggest some stabilization but a significant recovery seems far off still.

Last week, Madame Lagarde and the ECB seemed to focus more on the strategy review and less on policy at its meeting.  Yet she warned markets not to assume that monetary policy is on autopilot just because the bank is undergoing its review all year.  The bank also emphasized ongoing downside risks, albeit less pronounced.  The fact that the euro is trading at its lowest level since December 2 suggests markets are also not convinced that the eurozone recovery is upon us yet.



Japan has a heavy data week, with most reports coming on Friday.  That day, January Tokyo CPI, December labor market data, retail sales, IP, and housing starts will all be reported.  Data are expected to paint a somewhat mixed picture of the economy.  Headline Tokyo inflation is expected to drop a couple of ticks to 0.7% y/y, while ex-fresh food is seen steady at 0.8% y/y.  Unemployment is seen up a tick to 2.3%, while retail sales are expected to rise 1.2% m/m.  IP is expected to fall -3.6% m/m, while housing starts are expected to fall -11.8% y/y.

Australia reports Q4 CPI Wednesday.  Headline is expected to remain steady at 1.7% y/y, while trimmed mean is expected to fall a tick to 1.5% y/y.  The data come just ahead of the RBA meeting February 3, where a 25 bp cut to 0.5% is expected.  Yet jobs data last week was much stronger than expected, pushing out those rate cut expectations a bit.  WIRP suggests 21% odds of a cut then, whilst the analysts polled by Bloomberg lean overwhelmingly towards a cut.  We think the unknown impact of the coronavirus on the region will likely push the RBA into cutting sooner rather than later.