Drivers for the Week Ahead

  • As of this writing, the fate of the spending bill remains unclear; President Trump has put his fellow Republicans in an uncomfortable position; t’s not known yet whether President Trump will veto the legislation that was passed by both houses of Congress last week
  • Weekly jobless claims Thursday will be closely watched; the PUA and PEUC programs expired over the weekend because President Trump did not sign the spending bill; US data releases are limited this week
  • We can finally move on from the Brexit drama; the fact that sterling has yet to take out this month’s high near $1.3625 suggests a deal had been largely priced in; eurozone and Japan data releases are limited; SNB will release Q3 data on its currency interventions Thursday

Our weak dollar call remains intact as we move into 2021. That said, this week is likely to be a bit tricky. Thin markets and year-end pressures could lead to some outsized movements across all markets. That said, nothing fundamental has changed in our view. DXY is likely to eventually break below this month’s cycle low near 89.73 to set up a test of the February 2018 low near 88.25. What happens to the greenback after that will largely depend on how well the US controls the virus in 2021 as well as the outlook for further fiscal stimulus. Stay tuned.

 

AMERICAS

As of this writing, the fate of the spending bill remains unclear. After President Trump reinserted himself into the debate with a call for $2000 per person stimulus checks last week, the Democrats called his bluff and submitted a motion of unanimous consent. Republicans rejected it but Democrats will push for a full floor vote on a similar bill Monday.

President Trump has put his fellow Republicans in an uncomfortable position. He has allowed the Democrats to frame the matter quite simply: they are for greater relief for Americans and the Republicans are not. This is not the position Republican lawmakers want to be in ahead of the key January 5 Georgia Senate runoffs. Senator Blunt said there are not enough Republican votes to pass the $2000 payments, adding “I hope the president looks at this again and reaches that conclusion that the best thing to do is to sign the bill.”

Further complicating matters, it’s not known yet whether President Trump will veto the legislation that was passed by both houses of Congress last week. The bill was flown to him in Florida and he has until Monday night to sign the bill into law. If he does not sign, then this so-called “pocket veto” would cause the government would go into partial shutdown Tuesday. Congress would have to pass another temporary spending bill to keep the government funded until another deal has been reached.

Weekly jobless claims Thursday will be closely watched.  Regular initial jobless claims are expected at 830k vs. 803k the previous week.  Last week’s reading was the highest since the first week of September.  PUA initial claims fell to 398k last week but together, initial claims total 1.2 mln.  Meanwhile, regular continuing claims stood at 5.337 mln last week.  Both PUA and PEUC continuing claims rose to a total of 14.06 mln, the highest since late August and so the signs all point to a weakening labor market.  Early consensus sees +75k (and falling) for December NFP vs. +245k in November but we see downside risks.

Of note, the PUA and PEUC programs expired over the weekend because President Trump did not sign the spending bill. That means over 14 mln have lost these emergency benefits until the politicians work out a deal. Even if the losses are temporary, this is the last thing the economy needs right now. Reports suggest a lapse in these benefits would require weeks to restart. Please see our piece on the so-called “benefits cliff” here.

US data releases are limited this week. December manufacturing data will get the most attention, with Dallas Fed manufacturing activity Monday expected at 10.2 vs. 12.0 in November. Chicago PMI will be reported Wednesday and is expected at 56.5 vs. 58.2 in November. Other data are minor. S&P CoreLogic house price index for November will be reported Tuesday, followed by November wholesale and retail inventories, advanced goods trade, and pending home sales Wednesday. There are no Fed speakers until the new year.

 

EUROPE/MIDDLE EAST/AFRICA

We can finally move on from the Brexit drama. After the last minute deal was struck last week, the UK Parliament will vote on the deal Wednesday. With Labour promising its support, it should pass handily. EU government leaders unanimously endorsed the deal on a provisional basis, with formal ratification by the European Parliament to take place in early 2021. So as of Friday, the UK will officially leave the EU.

The fact that sterling has yet to take out this month’s high near $1.3625 suggests a deal had been largely priced in. That said, our weak dollar call stands and so sterling should eventually take out that high to set up a test of the April 2018 high near $1.4375. We believe the Brexit deal will also alleviate some downside pressure on the euro. With a deal now out of the way, we expect the euro to take out its recent high near $1.2275 to set up a test of the February 2018 high near $1.2555.

Let’s look at the three most contentious areas of negotiation. 1) In terms of the level playing field, both sides agreed to uphold their environmental, social, labor, and tax standards to ensure fair competition. 2) Disputes will be settled between the two sides, with no role for the EU courts. 3) Lastly, UK fishing fleets will take 25% of the current EU catch in UK waters, phased in over five years, while the EU would be able to impose tariffs on fish if access to UK waters was limited.

We are not the first (nor will we be the last) to note that this is the first free trade agreement that leads to more barriers to trade, not less. Yes, under the terms of the deal, most goods won’t face new tariffs or quotas. However, UK exporters will face regulatory hurdles that will make it more costly to trade with the EU. These include rules of origin, testing, and certification of certain goods. While these are not obvious barriers to trade, they nonetheless lead to frictions at the border.

Of note, the more important services trade largely left out of the agreement. There was no decision on so-called “equivalence” that would allow UK financial companies to sell their services unfettered in the EU. The two sides will continue talks, but it’s clear that other financial centers across Europe are stepping into the vacuum. Services account for around 80% of UK GDP, with financial services making up the lion’s share.

Eurozone data releases are limited. Germany reports November retail sales and they are expected to fall -2.0% m/m vs. +2.6% in October. Spain reports retail sales Monday and they are expected to contract -5.3% y/y vs. -2.4% in October. These readings clearly reflects the impact of the widening lockdowns. Spain also reports December CPI Wednesday, one of the first snapshots for the month. Headline (EU Harmonized) is expected to fall -0.7% y/y vs. -0.8% in November.

Swiss National Bank will release Q3 data on its currency interventions Thursday. Despite being named as a currency manipulator this month, SNB was clear in stating that it would continue to intervene as needed in order to meet its domestic policy objectives. As a small open economy, the exchange rate has become the major policy tool here, joining Singapore, Israel, and many other nations. We also believe Swiss policymakers are counting on the incoming Biden administration to take a softer line against US allies.

 

ASIA

Japan has a very quiet week. Only November IP will be reported Monday and it is expected to rise 1.1% m/m vs. 4.05 in October. The yen is trading right in the middle of the 103-104 range that has held for most of this month. Given our weak dollar call, we look for a downside breakout that targets the March low near 101.20.