Drivers for the Week Ahead

  • The dollar has stabilized but weakness is likely to resume
  • Treasury Secretary Mnuchin is trying to revive stalled stimulus talks; President-elect Biden will reportedly name his first cabinet picks Tuesday; FOMC minutes will be released Wednesday; it’s a quiet week in the US due to the Thanksgiving holiday
  • Brexit talks continue this week; eurozone reports some key data this week; ECB publishes the account of the October 29 meeting Thursday
  • UK preliminary November PMI readings will be reported Monday; UK Chancellor Sunak will lay out his fiscal plans for next year Wednesday; Riksbank meets Thursday and is expected to keep policy unchanged; Japan has a pretty quiet week

The dollar has stabilized but weakness is likely to resume.  DXY was up modestly Friday after six straight down days.  This limited dollar bounce is unlikely to last given the worsening US economic outlook, and so we still look for a break below the November 9  low near 92.13 when weakness resumes.  Likewise, the euro should break above its recent high near $1.1920 and sterling should break above its recent high near $1.3310.  USD/JPY has been unable to get much traction above 104 and we look for an eventual test of the November 6 low near 103.20.

 

AMERICAS

Treasury Secretary Mnuchin is trying to revive stalled stimulus talks. Mnuchin talked with Senate Majority Leader McConnell and House Minority Leader McCarthy last Friday to devise a strategy for approaching House Speaker Pelosi and Senate Minority Leader Schumer. Pelosi and Schumer last week wrote to McConnell asking to restart stimulus talks. Further complicating things, aides to Pelosi, McConnell, Schumer, and McCarthy met last week to discuss the separate issue of the $1.4 trln government funding bill needed to keep the government open after December 11. Some have suggested that the next stimulus package be added to that bill as time is running out. Congress is on recess this week and returns to work November 30 and is then expected to adjourn no later than December 18.

President-elect Biden will reportedly name his first cabinet picks Tuesday. Chief of Staff Klain would not say which posts will be named, but Biden said last week that he has already picked the important Treasury post. Reports suggest Yellen’s stock has risen while Brainard’s has fallen, but either choice would be an excellent one. The relationship between Treasury and the Fed has been damaged and both choices would help mend fences and improve coordination.

FOMC minutes will be released Wednesday. At that meeting, the Fed remained on autopilot but minutes may give some clues about the December 16 meeting. New staff forecasts will be released then and we believe the Fed is growing increasingly concerned with the lack of fiscal stimulus. It’s becoming more likely that QE composition will be tweaked next month to help push long yields lower. Ahead of the minutes, Barkin, Daly, and Evans speak Monday, followed by Bullard and Williams Tuesday.

It’s a quiet week in the US due to the Thanksgiving holiday. Mostly minor data will be reported early in the week, with October Chicago Fed National Activity Index and Markit preliminary November PMIs kicking things off Monday. PMI readings are expected to soften, with manufacturing expected to fall to 53.0 from 53.4 and services to 55.0 from 56.9. Chicago Fed NAI is expected to remain steady at 0.27, confirming that momentum in the US economy has yet to be regained as Q4 starts off.

Fed manufacturing surveys for November will continue to roll out.  Richmond Fed reports Tuesday and is expected at 21 vs. 29 in October. Last week, Empire survey came in at 6.3 vs. 13.5 expected and 10.5 in October, Philly Fed came in at 26.3 vs. 22.5 expected and 32.3 in October, and Kansas City Fed came in as expected at 11 vs. 13 in October.  These are the first snapshots for November and suggest some softening of other manufacturing data yet to come.

Weekly jobless claims data will be released a day early on Wednesday and will be of interest.  Regular weekly initial jobless claims are expected at 733k vs. 742k the previous week.  Last week saw the first rise in regular initial claims since early October and it was for the BLS survey week and so suggests a soft NFP reading. With lockdowns widening, we think this is just the start of renewed stress in the labor market. PUA weekly initial jobless claims have been running around 300k and so the two together have been running around 1 mln since early October.  Regular continuing claims are expected at 6.01 mln vs. 6.372 mln the previous week.  Adding in the combined 13.5 mln PUA and PEUC continuing claims means that nearly 20 mln are currently receiving some form of unemployment benefits. 

In related news, October personal income and spending will be reported Wednesday. Income is expected to be flat m/m vs. 0.9% in September, while spending is expected to rise 0.4% vs. 1.4% in September. With so many likely to lose emergency unemployment benefits at year-end (barring a new stimulus package that extends them), we are looking at a severe loss of income then and there is no way that consumption and spending can hold up. Please see our recent piece “Benefits Cliff” Warns of Downside US Risks for a deeper look at the US labor market.

Other minor data will be seen. September S&P CoreLogic house price data will be reported Tuesday along with November Conference Board consumer confidence (97.9 expected). Wednesday sees October advance goods trade (-$80.0 bln expected), wholesale and retail inventories, durable goods orders (0.9% m/m expected), new homes sales (1.5% m/m expected), and a Q3 GDP revision (33.1% SAAR expected).

 

EUROPE/MIDDLE EAST/AFRICA

Brexit talks continue this week. Reports suggest UL Prime Minister Johnson will make a “significant intervention” in talks with EC President von der Leyen in an effort to break the deadlock. While the deadline is a moving target, sources suggest next Tuesday December 1 is what both sides are working with. Face to face talks are expected to restart Thursday. Officials from both sides sound optimistic whilst acknowledging that differences remain in the key areas.

Eurozone reports some key data this week. Preliminary November PMI readings will be reported Monday and are expected to fall sharply from October. Headline manufacturing is expected to fall to 53.3 from 54.8, services is expected to fall to 42.0 from 46.9, and the composite PMI is expected to fall to 45.6 from 50.0. Looking at the country breakdown, France will likely be hit the hardest as its composite PMI is expected to fall to 39.5 from 47.5 in October, while the German composite is expected to fall to 50.5 from 55.0.

Other key eurozone data will be reported. German IFO Business Climate survey for November will be reported Tuesday, with the headline reading expected to fall to 90.3 from 92.7 in October. This will be followed by December GfK consumer confidence Thursday, which is expected to fall to -5.0 from -3.1 in November. France reports October consumer spending (3.5% m/m expected) and November CPI (EU Harmonized flat y/y expected) Friday. Both will be the first snapshots of these key eurozone indicators. Germany reports both of its readings next week.

The ECB publishes the account of the October 29 meeting Thursday. It delivered a dovish hold at that meeting, warning that the eurozone economy is losing momentum faster than expected and that risks are clearly tilted to the downside.  Lagarde said then that all bank officials agreed that it was necessary to take action and she added that there is little doubt that the ECB will act in December.  In addition, she said that the bank will look at all instruments for the December meeting.  Our base case is for a EUR500-750 bln increase in its PEPP along with some possible tweaks to its TLTRO and PELTRO programs.  Despite her comments that everything is on the table, we remain confident that the ECB will not go more negative  in its policy rates.

UK preliminary November PMI readings will be reported Monday. PMI readings are expected to fall sharply from October, with manufacturing expected to fall to 50.5 from 53.4, services to 42.8 from 51.4, and the composite to 42.5 from 52.1. The CBI reports its distributive trades survey Tuesday, with retailing expected to fall to -35 from -23 in October as the lockdowns start to bite. Last week, CBI November industrial trends survey came in weak.  Total orders fell as expected to -40 vs. -34 in October, while export orders plunged to -51 from -46 in October.  Expectations of the next three months for output and average selling prices both moved back into negative territory at -10 and -8, respectively.

UK Chancellor Sunak will lay out his fiscal plans for next year Wednesday. He said over the weekend that “You will not see austerity next week” and pledged spending increases to ease “enormous stress and strain” on the economy. His plans will be based on new forecasts from the Office for Budget Responsibility.  Last week, October public sector net borrowing (ex-banking) came in at GBP22.3 bln vs. GBP30 bln expected, bringing the total for the first seven months of the fiscal year rose to a whopping GBP214.9 bln. Sunak’s presentation will likely show that it’s going to get even worse.

Riksbank meets Thursday and is expected to keep policy unchanged. At its last meeting September 22, the bank delivered a slightly dovish hold by leaving the door open for further easing.  The bank said the repo rate could be cut again but stressed that “QE remains the prime policy tool if things would turn out worse.”  Now that the Riksbank got rates out of negative territory, we believe it has no appetite to go negative again.  The bank’s flat rate path may be extended out past the current horizon through at least Q3 2023.

 

ASIA

Japan has a pretty quiet week. October department store sales will be reported Tuesday, followed by supermarket sales Thursday. November Tokyo CPI will be reported Friday, with headline CPI expected to fall two ticks to -0.5% y/y and core (ex-fresh food) expected to fall a tick to -0.6% y/y. Deflationary pressures are getting worse, implying that stimulus measures will remain in place for as far as the eye can see. Next BOJ policy meeting is December 18 and no change is expected.