Drivers for the Week Ahead

  • The coronavirus continues to spread, leading Chinese policymakers to announce emergency support measures for the financial system
  • The dollar rally is taking a breather after weaker than expected Chicago PMI report last week
  • This is a big data week for the US; the US 3-month to 10-year curve inverted last week for the first time since October 9
  • US and Canada report January jobs data Friday; final eurozone and UK January PMIs will be reported this week
  • Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 0.75%

The coronavirus continues to spread, leading Chinese policymakers to announce emergency support measures for the financial system.  The PBOC will add CNY150 bln ($21.7 bln) to money markets Monday and pledged ample liquidity to the system whilst asking banks to lend more and not call in any loans from Hubei companies.  These are meant to help markets function normally as they reopen after the extended holiday.  Explicit stimulus likely to be announced later.

Growth concerns continue to reverberate across global markets.  Oil has been hit particularly hard and reports suggest OPEC+ is mulling an emergency meeting to discuss a possible response.  Potential dates are February 8-9 and February 14-15, while the next regular meeting is scheduled for March 5-6.

The dollar rally is taking a breather after weaker than expected Chicago PMI report last week.  DXY has retraced nearly half of its January rally and a break of the 97.05 area is needed to set up a test of the December 31 low near 96.355.  The euro is struggling to break above the $1.11 area, as is sterling and the $1.32 area.  This week’s data should confirm our view that the US economy remains in strong shape and that any notions of Fed easing are overdone.

 

AMERICAS

This is a big data week for the US.  January ISM manufacturing PMI and auto sales start the ball rolling Monday.  After the big miss for Chicago last week (42.9 vs. 48.9 expected), the ISM reading will be of great interest.  ISM manufacturing PMI is expected to rise to 48.5 from a revised 47.8 (was 47.2) in December.  Auto sales are expected to rise to a 16.8 mln annualized rate from 16.7 mln in December.  December factory orders will be reported Tuesday and are expected to rise 1.1% m/m.

The January jobs data Friday is the highlight.  Consensus sees 160k vs. 145k in December, with unemployment seen steady at 3.5% and hourly average earnings seen picking up a tick to 3.0% y/y.  Ahead of that, ADP reports its private sector jobs estimate Wednesday, where a 158k gain is expected.  December trade and January ISM non-manufacturing PMI will also be reported Wednesday, followed by January Challenger job cuts and weekly jobless claims Thursday.

The US economy remains strong.  Advance Q4 GDP came in at 2.1% SAAR and that strength appears to be carrying over into 2020.  The Atlanta Fed’s GDPNow model estimates Q1 GDP growth at 2.7% SAAR, while the NY Fed’s Nowcast model estimates Q1 GDP growth at 1.6% SAAR.  While these early reads are subject to significant revisions, we are clearly far from recession and the Fed is right to maintain steady rates and to assess how the outlook unfolds in 2020.

The US 3-month to 10-year curve inverted last week for the first time since October 9.  It has since inverted further to -3 bp, the worst since October 9.  We often say that the market is always right but in this case, it’s wrong.  The US economy is nowhere near recession and we think the bond market is misguided if it thinks the Fed should have signaled a more dovish stance last week.  Of all the major economies, the US is probably the best-positioned in terms of impact from the coronavirus.  Yet implied rates now suggest a much higher chance of the Fed easing this year which, in our view, has gone too far.  Bloomberg WIRP now shows a full cut priced in by the July 29 meeting and a second full cut priced in by the December 16 meeting.

Fed officials this week will face a lot of questions about the economic outlook.  Bostic speaks Monday, followed by Brainard Wednesday.  Kaplan and Quarles speak Thursday.  The Fed then releases its semiannual Monetary Policy Report to Congress Friday.

Canada also reports January jobs data Friday.  Total jobs are expected to rise 17.5k vs. a revised 27.3k (was 35.2k) in December.  January Ivey PMI will also be reported that day.  Ahead of that, December trade will be reported Wednesday.  Lower oil prices have really taken a toll on the Loonie, with USD/CAD trading Friday at the highest since December 9.  The December 3 high near 1.3320 is the next near-term target.

 

EUROPE/MIDDLE EAST/AFRICA

Final eurozone January manufacturing PMIs will be reported Monday.  Spain and Italy are expected to pick up significantly from December.  Final services and composite readings will be reported Wednesday, along with December retail sales (-1.1% m/m expected).  Germany reports December factory orders (0.7% m/m expected) Thursday, followed by trade, current account, and IP (-0.2% m/m expected) Friday.  Eurozone data out last Friday were unequivocally weak and call into question the dubious assertion that growth will pick up significantly in 2020.

The UK reports final January PMI readings this week.  Manufacturing comes out Monday, followed by construction Tuesday and services and composite Wednesday.  Brexit has come and gone, but uncertainty will remain as both sides try to negotiate a new trade deal before the transition period ends December 31.  UK Prime Minister Johnson over the weekend threatened to quit talks without a formal deal in place, but we view this as bluster and brinksmanship.  Still, we see continued softness in the data, along with an eventual BOE rate cut this year.

 

ASIA

Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 0.75%.  However, a small handful of analysts look for a 25 bp cut to 0.50%.  WIRP suggests around 25% odds of a cut this week, but one cut is fully priced in by May.  December trade (AUD5.6 bln expected) and retail sales (-0.2% m/m expected) will be reported Thursday.  The RBA then issues its Statement on Monetary Policy Friday, while Governor Lowe gives his semi-annual testimony to Parliament that same day.  AUD is nearing the October 2 low near .6670.  After that, there aren’t too many major chart points until the February 2009 low near .6250 and then the October 2008 low near .6000.