Drivers for the Week Ahead

  • Pressure on the dollar is likely to continue; stimulus talks really are dead now; US 10-year yield traded at 0.87% last week
  • US manufacturing surveys for October will continue to roll out; US Q3 GDP data Thursday will be of interest; BOC meets Wednesday and is expected to keep policy steady
  • ECB meets Thursday and is expected to keep policy steady; eurozone data schedule is fairly heavy; Brexit talks are likely to intensify
  • BOJ meets Thursday and is expected to keep policy steady; Japan also reports some key data; Australia reports Q3 CPI Wednesday

Pressure on the dollar is likely to continue.  DXY was unable to sustain a move Friday back into the 93-94 range that held for most of October and was softer as the week drew to a close.  We still target the low for the cycle near 91.746 from September 1.  Both the euro and sterling have been boosted by growing Brexit optimism (see below). For the euro, a break above $1.1860 sets up a test of its cycle high near $1.2010.  Sterling should challenge last week’s high near $1.3175. USD/JPY remains heavy after being unable to break above 105 and appears to be on track to test its cycle low near 104 from September 21.

 

AMERICAS

We think stimulus talks really are dead now. The finger-pointing has begun, with Treasury Secretary Mnuchin saying Friday that “We’ve offered compromises. The speaker, on a number of issues, is still dug in. If she wants to compromise, there will be a deal.” House Speaker Pelosi later said, “We could do that before the election, if the president wants to.” Both have accused the other of moving the goalposts. With talks stalled, it appears that Senate Republicans are feeling no need to compromise right now.

The 10-year yield traded at 0.87% last week, the highest since June 9 and on track to test that month’s high near .96%. We don’t think the Fed is happy with this and is likely to push back at the November 4-5 FOMC meeting. Why? A steeper yield curve tightens monetary conditions and we know that the Fed doesn’t want that for several more years. Rather, the Fed (like most central banks) wants a flat yield curve with long rates remaining low and stimulative. The media embargo went into effect this weekend and so there won’t be any verbal Fed pushback until the FOMC meeting.

The dollar was down against every major currency last week and it’s noteworthy that the greenback softened even as UST yields rose. This seems to be a continuation of the Blue Wave trade, in which a likely scenario of aggressive fiscal stimulus next year leads to massive UST issuance that has to be mopped up by the Fed. The likely expansion of the Fed’s balance sheet would be dollar negative. Equities did not cooperate with the Blue Wave trade, with all major US indices down last week.

Manufacturing surveys for October will continue to roll out.  Dallas Fed reports Monday and is expected at 13.3 vs. 13.6 in September. Richmond Fed reports Tuesday and is expected at 18 vs. 21 in September. So far, the regional Fed surveys have come in relatively firm. Kansas City came in at 13 vs. 11 in September, Empire survey came in at 14.0 vs. 17.0 in September, and the Philly Fed came in at 14.8 vs. 15.0 in September.  Chicago PMI will be reported Friday and is expected at 58.0 vs. 62.4 in September. Last week, Markit preliminary October PMI readings were reported, with manufacturing at 53.3, services at 56.0, and composite at 55.5.

US Q3 GDP data Thursday will be of interest. Consensus sees GDP growth of 31.8% SAAR vs. -31.4% SAAR in Q2. Of note, the Atlanta Fed’s GDPNow model suggests Q3 growth of 35.3% SAAR while the NY Fed’s Nowcast model suggests 13.79% SAAR. The truth is likely somewhere in between but in truth, this is old news. Looking ahead, the NY Fed’s Nowcast model suggests Q4 growth is tracking around 3.55% SAAR while Bloomberg consensus sees 4.0% SAAR. It’s worth noting that if we plug in Bloomberg consensus numbers for the next year or so, real GDP in absolute terms will not reach its Q4 2019 pre-pandemic peak until Q4 2021.

Weekly jobless claims will be reported Thursday. Regular initial claims are expected at 780k vs. 787k the previous week, while continuing claims are expected at 7.8 mln vs. 8.373 mln the previous week. The drop in weekly claims last week reflected the revisions and cleared backlog in California, which resumed reporting actual unemployment claims data. PUA initial claims rose slightly to 345k and the two together total around 1.1 mln, which remains elevated. Regular continuing claims have fallen by around 1 mln per week for the past three weeks but PUA continuing claims remain stuck above 10 mln. Still, the labor market overall appears to be improving again after a stall in much of Q3. The only negative is that extended claims are rising, meaning that many unemployed workers cannot find a job and have exhausted normal unemployment benefits. There’s no consensus yet for the October jobs report out November 6.

The US will report quite a bit of minor data. September Chicago Fed National Activity Index (0.60 expected) and new homes sales (1.3% m/m expected) will be reported Monday. This will be followed by September durable goods (0.5% m/m expected) and October Conference Board consumer confidence (101.9 expected) Tuesday. September advance goods balance (-$85.0 bln expected) and wholesale (0.4% m/m expected) and retail inventories will be reported Wednesday. September pending home sales (3.0% m/m expected) will be reported Thursday, followed by personal income (0.3% m/m expected) and spending (1.0% m/m expected), core PCE (1.7% y/y expected), and final October University of Michigan consumer sentiment (81.2 expected) Friday.

The Bank of Canada meets Wednesday and is expected to keep policy steady. At its September 9 meeting, he bank kept all policy settings the same but removed language that it is prepared to add more stimulus if needed.  While promising to continue QE at its current pace, the bank said it would be “calibrated.”  That suggests the bank is considering some sort of tapering as the economy improves.  The Loonie tends to strengthen on BOC decision days. In the last 12 meetings dating back to last July, the currency has weakened on only 3 of those days. USD/CAD is finding solid support this month near the 1.31 area but if USD weakness persists, we expect a test of the September 1 low near 1.30 followed by the December 31 low near 1.2950.  August GDP will be reported Friday.

 

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank meets Thursday and is expected to keep policy steady.   New macro projections won’t come until the December meeting. However, we do expect the ECB and Madame Lagarde to acknowledge that the economic outlook has worsened since the September meeting. We would also expect stronger jawboning about the exchange rate this time, as Lagarde’s laissez faire attitude at her press conference last time did not go over very well with many ECB policymakers. She has since adjusted her commentary to reflect slightly heightened concern about the exchange rate.

Eurozone data schedule is fairly heavy. At the headline level, eurozone reports September M3 data Tuesday, which is expected to accelerate a tick to 9.6% y/y. Q3 GDP, preliminary October CPI, and September unemployment will all be reported Friday. Growth is expected at 9.5% q/q vs. -11.8% in Q2, with the y/y rate improving to -7.0% from -14.7% in Q2. On the inflation front, headline CPI is expected to remain steady at -0.3% y/y while core is expected to remain steady at 0.2% y/y.

Germany also has a heavy data schedule. It reports October IFO business climate Monday, which is expected to fall to 93.0 from 93.45 in September. October CPI will be reported Thursday and is expected to remain steady at -0.4% y/y (EU Harmonized), followed by September retail sales (-0.5% m/m expected) and Q3 GDP (7.3% q/q expected) Friday. Eurozone retail sales won’t be reported until November 5 but the German reading will provide some clues. Spain reports its retail sales (-3.4% y/y expected) Wednesday, while France reports consumer spending (-1.4% m/m expected) Friday.

Brexit talks are likely to intensify. Barnier and his EU team arrived in London last Thursday and held talks all weekend. Both sides agreed informally to shut down their media operations for these weekend talks in an effort to remain focused with no posturing. UK press reports that if enough progress is made over the weekend, the talks could move into the so-called “tunnel” as early as Monday. We remain cautiously optimistic that some sort of skinny deal will be agreed upon that allows both sides to claim victory.

 

ASIA

The Bank of Japan meets Thursday and is expected to keep policy steady. However, its updated macro forecasts in its Outlook Report will be of great interest.  According to its July forecasts, the 2% target for inflation ex-fresh food won’t be reached until well after FY2022 (where it sees inflation at 0.7%).  At the September meeting, the bank upgraded its economic assessment slightly to “severe” vs. “extremely sever” previously.  We not expect any change in assessment this week as the recovery remains uneven and relatively weak.  Note that the Cabinet Office maintained its monthly assessment last week, saying conditions remain “severe” despite signs of some improvement.

Japan also reports some key data. September retail sales will be reported Thursday, which is expected to rise 1.1% m/m vs. 4.6% in August. However, high base effects will see the y/y rate plunge to -7.6% from -1.9% in August. October Tokyo CPI, September unemployment, IP, housing starts, and construction orders will all be reported Friday. Headline CPI is expected to fall -0.1% y/y vs. +0.2% in September, while ex-fresh food is expected to fall -0.5% y/y vs. -0.2% in September. IP is expected to rise 3.0% m/m vs. 1.0% in August, while unemployment is expected to rise a tick to 3.1% even as the job-to-applicant ratio drops a tick to 1.03.

Australia reports Q3 CPI Wednesday. Headline inflation is expected to rise to 0.7% y/y from -0.3% in Q2, while trimmed mean inflation is expected remain steady at 1.2% y/y. At its last meeting, the RBA “agreed to maintain highly accommodative policy settings as long as required and to continue to consider how additional monetary easing could support jobs as the economy opens up further.”  A cut at the November 3 seems very likely at this point, with the futures market implying nearly an 85% chance, according to the Bloomberg WIRP model.