Drivers for the Week Ahead

  • Risk-off sentiment intensified last week; the dollar continues to climb
  • This is another big data week for the US; the US economy remains strong
  • Fed Chair Powell testifies before the House Tuesday and the Senate Wednesday; the Senate holds confirmation hearings for Fed nominees Shelton and Waller Thursday
  • President Trump will unveil his budget proposal for FY2021 beginning October 1 this Monday
  • Eurozone and UK have heavy data weeks
  • Riksbank meets Wednesday and is expected to keep rates steady at 0.0%; RBNZ meets Wednesday and is expected to keep rates steady at 1.0%

Risk-off sentiment intensified last week.  Near-term, we think “risk” assets are likely to remain under pressure until the full impact of the coronavirus is better known.  Broad-based dollar strength is likely to continue.  Besides the safe haven flows, the US outlook remains very strong.  Taken in conjunction with the recent weak data out of Germany, France, and Japan, it’s clear that the US economy continues to outperform.

The dollar continues to climb.  DXY has broken above the November 29 high near 98.544.  More importantly, it has also broken above the 62% retracement objective of the October-December drop near 98.402.  This sets up a test of the October 1 cycle high near 99.667.  Elsewhere, the euro is trading at a new low for this move near $1.0940 and the next target is the October 1 low near $1.0880.  USD/JPY is lagging, however, as the pair was turned back from the 110 area again by the latest risk-off impulses.

 

AMERICAS

This is another big data week for the US.  January CPI and retail sales come out towards the end of the week but ahead of that, there will be a lot of important secondary data reported.  December JOLTS job openings will be reported Tuesday (6850 expected), followed by the January budget statement Wednesday ($10.0 bln expected) and weekly jobless claims Thursday (211k expected).  Preliminary February University of Michigan will be reported Friday (99.3 expected).

January CPI will be reported Tuesday.  Headline inflation is expected at 2.4% y/y vs. 2.3% in December, while core inflation is expected at 2.2% y/y vs. 2.3% in December.  PPI will be reported next week, yet we feel that the inflation data is pretty much inconsequential as policymakers face deflationary risks from the coronavirus.

Markets are much more interested in the real sector, with January retail sales and IP coming out Friday.  Both headline and ex-auto sales are expected to rise 0.3% m/m.  The so-called control group used for GDP calculations is also expected to rise 0.3% m/m.  The strong jobs report last week supports our view that consumption will remain robust in 2020.  Elsewhere, IP is expected to fall -0.2% m/m.

The US economy remains strong.  Advance Q4 GDP came in at 2.1% SAAR and that strength appears to be carrying over into 2020.  Indeed, the US data last week for largely stronger than expected.  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 1.7% 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 in order to assess how the outlook unfolds in 2020.

There is a full slate of Fed speakers this week.  Bowman, Daly, and Harker speak Monday, followed by Daly, Quarles, Bullard, and Kashkari Tuesday.  Harker speaks Wednesday, followed by Williams Thursday and Mester Friday.

Fed Chair Powell testifies before the House Tuesday and the Senate Wednesday.  Last week, the Fed submitted its semiannual Monetary Policy Report to Congress.  In it, the Fed warned that the coronavirus poses “new risks” to global growth and markets.  These events are part of the Humphrey-Hawkins process.  Despite being on hold, it seems that the bias for the Fed is one of easing but we still haven’t seen a “material reassessment” yet that justifies cutting rates again.  We’re sure Powell will be asked to clarify.

The Senate holds confirmation hearings for Fed nominees Judy Shelton and Christopher Waller Thursday.  The former is an unorthodox choice, while the latter is very orthodox.  Given her past statements on Fed independence and a return to the gold standard, we suspect that Shelton’s path to the Board will not be as smooth as Waller’s.  Each will have only one vote on the FOMC, but some believe that President Trump is maneuvering Shelton to be a potential replacement for current Fed Chair Powell.

President Trump will unveil his budget proposal for FY2021 beginning October 1 this Monday.  Some details have been leaked, including plans to balance the budget by 2035 as well as a planned deficit of -$966 bln for FY2021.  Cuts to food stamps and Medicaid are seen saving $292 bln over the next ten years.  The budget also assumes that the Trump tax cuts expiring in 2025 will be extended.  There will be lots of horse-trading to come, but the broad outlines contained in this draft suggest it’s “steady as she goes” in terms of budget priorities for the Trump administration.

 

EUROPE/MIDDLE EAST/AFRICA

Eurozone has a busy data week.  It reports Q4 GDP Friday, with growth expected to remain steady at 1.0% y/y.  Ahead of that, Italy reports December IP Monday (-0.6% m/m expected), followed by eurozone IP Wednesday (-1.7% m/m expected).  Earlier Friday, Germany reports its Q4 GDP data (0.2% y/y expected).  Data last week from the eurozone were unequivocally weak and supports our belief that markets had gotten too optimistic about the green shoots there.

This is a big data week for the UK.  Q4 GDP, December IP, trade, and construction output will all be reported Tuesday.  Growth is expected to slow to 0.8% y/y from 1.1% in Q3, while IP is expected to rise 0.3% m/m vs. -1.2% in November.  The trade balance is expected at -GBP350mln vs. GBP4.03 bln in November, while construction output is expected to fall -0.5% m/m vs. 1.9% in November.  WIRP suggests 14% odds of a cut at the next meeting March 26, but rising steadily over time to around 90% by year-end.

Swedish Riksbank meets Wednesday and is expected to keep rates steady at 0.0%.  At its last meeting in December, it hiked rates by 25 bp.  That move ended nearly five years of negative rates, and it said then that rates would remain at the current level “in the coming years.”  Yet two out of the six MPC members dissented in favor of steady rates, as economic indicators remain weak with few signs of a recovery in sight.

 

ASIA

Japan reports December current account data Monday, where an adjusted JPY1.7 trln surplus is expected.  January machine tool orders will be reported Wednesday, followed by PPI Thursday.  Data last week were disappointing as the economy was already weakening before the coronavirus impact was felt.  This has led some analysts to raise their estimates for recession risk in 2020 despite the fiscal stimulus that’s in the pipeline.

Reserve Bank of New Zealand meets Wednesday and is expected to keep rates steady at 1.0%.  At the last policy meeting November 13, the bank unexpectedly kept rates steady.  Most were looking for a 25 bp cut to 0.75%.  It wrote that “Economic developments since the August Statement do not warrant a change to the already stimulatory monetary setting at this time,” adding that “We will add further monetary stimulus if needed.” Since that meeting, both growth and inflation have picked up slightly, while the labor market has been mixed.