Drivers for the Week Ahead

  • US virus numbers continue to rise; for now, the weak dollar trend remains intact
  • The election uncertainty has cleared up, at least partially; two Georgia Senate seats go to a runoff January 5; the Georgia races are key given their implications for the Blue Wave
  • We think chances of a stimulus package during the lame duck session are low; October inflation data will be the highlight for the US
  • Brexit talks continue in London this week; UK has a heavy data week; eurozone has a limited data week
  • Japan has a heavy data week; RBNZ meets Wednesday and is expected to keep rates steady at 0.25%

US virus numbers continue to rise. We were hoping that the virus would be under control in Q4 and the dollar could start carving out a bottom. But with daily infections at a record high 130k and rising, that’s not happening yet. hat President-elect Biden is announcing a COVID task force this week suggests it will be a priority and so perhaps the dollar bottoming has just been pushed into Q1, if we’re lucky.

For now, the weak dollar trend remains intact. The next obvious target for DXY is the September 1 low near 91.746. But given our bearish US outlook, weakness should persist beyond that and so we are left looking at the February 2018 low near 88.253. There’s really not much in the way of significant chart points in between. That said, we will refrain from making any longer-term calls for the demise of the dollar. We still think this is cyclical dollar weakness, not structural, and believe that President-elect Biden’s efforts to rein in the virus will be key to improving the dollar’s medium-term outlook.

 

AMERICAS

The election uncertainty has cleared up, at least partially. By winning Pennsylvania and later Nevada over the weekend, Joe Biden now has more than the 270 electoral college votes needed to become the 46th President of the United States of America.   Yes, there will be recounts and legal challenges ahead, but most observers believe that they will ultimately have no impact on this outcome. Biden is already forming a transition team.

On the other hand, two Georgia Senate seats go to a runoff January 5. Betting markets only give a 25% chance that the Democrats win the Senate too (a tie would count as a win of Harris is Vice President). If GA turns blue for Biden, it’s not that far-fetched that the Democrats win both seats. GA has not gone for a Democratic president since 1992, when Bill Clinton won with 43.47% vs. 42.88% for Bush, margin of only 14k votes. Ross Perot was the spoiler, winning 13.34% of the vote in Georgia. Bottom line: this means two more months of uncertainty, with no one trusting the polls anymore.

The Georgia races are key given their implications for the Blue Wave. This trade has proven to be truly market-moving, as was its reversal last week. Now, markets have to wait to see if the Blue Wave has been resurrected or not. Half-jokingly, we note that equity markets rallied when the Blue Wave looked likely and then rallied more when it looked unlikely. There are rotational aspects to think about (oil vs. renewable energy, etc.) but the direction seems clear as central banks continue to add liquidity. For foreign exchange markets, we think a weaker dollar near-term is baked in the cake on either outcome. Fixed income markets arguably have the toughest task in reading the tea leaves. Simply put, the outcome will be a huge determinant of US Treasury issuance. For now, we expect US yields to trade within recent ranges.

We think chances of a stimulus package during the lame duck session are low. White House economic adviser Kudlow said the administration opposes a large-scale fiscal stimulus package in light of stronger-than-expected economic data. He stressed that “We’re not interested in you know two or three trillion. It would still be a targeted package to specific areas.” Senate Majority Leader McConnell is also taking the same tack, noting that signs of the recovery reinforce his arguments for a smaller stimulus package. House Speaker Pelosi again rejected the notion of a scaled back relief package and so we are back to square one and likely to be left waiting until the new Congress sits in late January.

Fed Chair Powell would disagree with the Republican position. He was quite clear in this press conference that further fiscal (and monetary) stimulus is needed. Last week’s jobs data (+638k) came in a bit stronger than expected but still continued the sequential slowing that we’ve seen across virtually all indicators in the US. With the viral infections reaching record highs, the headwinds will continue to intensify in Q4. As Powell noted, downside risks prevail right now and this is not the time to be cautious in terms of stimulus.

October inflation data will be the highlight for the US. CPI will be reported Thursday, with headline inflation expected to drop a tick to 1.3% y/y and core expected to remain steady at 1.7% y/y. PPI will be reported Friday, with headline inflation expected to remain steady at 0.4% y/y and core expected to remain steady at 1.2% y/y.

The monthly budget statement for October Thursday will hold some interest. A deficit of -$274 bln is expected. If so, the 12-month total would rise to a record -$3.27 trln. Receipts are down and expenditures are up, and this trend is likely to remain in place for the foreseeable future. US Treasury yields were all over the place last week, first up on the notion of a Blue Wave, then down on the notion of a split government. Now, the Georgia Senate runoffs in January have reintroduced risks that a Blue Wave may happen after all.

Other minor data round out the week. September JOLTS job openings will be reported Tuesday and is expected at 6500 vs. 6493 in August. Preliminary November University of Michigan consumer sentiment will be reported Friday and is expected at 82.0 vs. 81.8 in October.

 

EUROPE/MIDDLE EAST/AFRICA

Brexit talks continue in London this week. UK Prime Minister Johnson and European Commission President von der Leyen talked over the weekend. Both sides played down the significance of the call, with officials saying there had been no breakthrough in talks so far. The call was meant to help set the agenda for the coming days. That said, all involved insist that there remain big differences, especially on the level playing field and fisheries. Both sides have pegged November 15 as the very latest date a deal can be struck in order to have time to be ratified by all the respective parliaments in time for the December 31 deadline.

UK has a heavy data week. October labor market data will be reported Tuesday. 3-month employment through September is expected at -160k vs. -153k the previous month, while the 3-month unemployment rate is expected to rise to 4.8% from 4.5% previously. Extension of the job furlough scheme until the end of March is welcome news but one cannot sound the all clear while the virus continues to spread. The bulk of the data comes Thursday, when Q3 GDP, September IP, services, construction output, and trade are all reported. QDP is expected to grow 15.7% q/q vs. -19.8% in Q2, while industrial and services output are expected 0.9% m/m and 1.1% m/m, respectively.

Eurozone has a limited data week. September IP will be reported Thursday and is expected to rise 0.7% m/m, same as August. Ahead of that, France and Italy report IP Tuesday and are expected at 0.7% m/m and -2.0% m/m, respectively. Germany reports September trade Monday, with exports expected to rise 2.0% m/m and imports by 1.5% m/m. ZEW survey for November will be reported Tuesday.

 

ASIA

Japan has a heavy data week. September current account data will be reported Tuesday. October machine tool orders will be reported Wednesday, followed by September core machine orders and October PPI Thursday. Policymakers will not be happy with the strong yen, with USD/JPY trading at the lowest level since March and on track to test that month’s low near 101.20. Expect official jawboning to pick up but that is unlikely to have much lasting impact.

Reserve Bank of New Zealand meets Wednesday and is expected to keep rates steady at 0.25%. At its last meeting September23, the bank said it may introduce the so-called Funding for Lending  Program (FLP) at this meeting.  It noted then that “Providing term funding at rates near the OCR via an FLP would lower the financial system’s funding costs, and therefore borrowing costs for firms and households.”  The RBNZ  has said it is actively considering taking rates negative in combination with term funding for banks and so speculation is growing that the RBNZ will eventually take rates negative.  WIRP is pricing in chances of a negative policy rate by April, and this has helped push down the Kiwi curve so that the 2- to 5-year portion is currently negative.