Drivers for the Week Ahead

  • The new US Congress was sworn in over the weekend; two Georgia Senate runoff votes will be held Tuesday; FOMC minutes will be released Wednesday
  • December Jobs reports Friday will be this week’s data highlight; Canada also reports December jobs data Friday
  • The ECB remains concerned about the strong euro; eurozone final PMI readings will come out; Germany has a heavy data week; Japan has a light week

Our weak dollar call remains intact as we move into 2021.   DXY is likely to eventually break below last week’s cycle low near 89.516 to set up a test of the February 2018 low near 88.25.  With Brexit finally out of the way, sterling should eventually test the April 2018 high near $1.4375.  We believe the Brexit deal will also alleviate some downside pressure on the euro, allowing it to take out its recent high near $1.2310 to set up a test of the February 2018 high near $1.2555.  The yen is trading near the bottom of the 103-104 range that has held for most of the past month.  Given our weak dollar call, we look for a downside breakout that targets the March low near 101.20.  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

The new US Congress was sworn in over the weekend. Nancy Pelosi was re-elected Speaker of the House but presides over a narrow 222-211 Democratic majority. This is the smallest majority for either party in 20 years. There was no challenger from her own party. One of While Congress has a lot of work to do, it is really in limbo until the final makeup of the Senate has been determined (see below).

The US government did not shut down and stimulus checks are on their way. However, efforts to increase the checks from $600 to $2000 have been stymied by the Republican Senate. Senate Majority Leader McConnell said that the House bill “has no realistic path” to passage in the Senate. He added that it falls short of the demands of President Trump, and said the Senate instead will work on combining the stimulus payments with measures on preventing election fraud and rolling back social media liability protections. The House is unlikely to pass that and so a stalemate is in effect for now.

That may change after the two Georgia Senate runoff votes Tuesday. If the Democrats win both seats, markets can expect another big slug of fiscal stimulus in 2021. The polls say the races are both too close to call. With another record number of early votes and the likely legal challenges ahead, we may not know the Georgia results for days, if not weeks. Messaging from President Trump has been a mixed bag for the two Republican candidates, to put it mildly.

FOMC minutes will be released Wednesday. The Fed delivered a dovish hold then as it changed its forward guidance  slightly to say that the current pace of asset purchases would continue until “substantial” progress seen on meeting its dual mandate.  Previously, it said the pace would be maintain for “the coming months.”  Chair Powell drove that point home in the press conference.  He declined to specify what was meant by “substantial” progress while warning that it won’t be easy to have inflation move higher, especially given significant global deflationary pressures.  For good measure, he said the Fed will need to help the economy “for quite a period of time.”  Next FOMC decision is January 27.

There is a full slate of Fed speakers this week. Evans, Bostic, and Mester speak Monday. Evans and Williams speak Tuesday. Harker, Bullard, and Evans speak Thursday, followed by Clarida Friday. All are expected to echo the dovish message that the Fed sent in December. Of note, Judy Shelton will be nominated again for the Board of Governors and was among 30 submitted to the Senate by the White House in a standard move when a new Congress is sworn in. Even if Republicans win both runoff races in Georgia, Shelton would not have the votes to pass and so it will be up to President-elect Biden to make a new nomination.

This will be a very important data week for the US. The highlight will of course be December jobs data Friday. Consensus sees +50k vs. +245k in November, with unemployment seen rising a tick to 6.8%. Ahead of that, ADP releases its private sector jobs estimate Wednesday and it too is expected at +50k vs. +307k in November. December ISM manufacturing PMI will be reported Tuesday and is expected at 56.6 vs. 57.5 in November, while ISM services PMI will be reported Thursday and is expected at 54.5 vs. 55.9 in November. The employment components in both sectors will be closely watched. Final Markit PMI readings will be released this week as well.

Weekly jobless claims Thursday will be important.  Regular initial jobless claims came in at 787k the previous week and PUA initial claims fell to 308k, both the lowest since late November. Meanwhile, regular continuing claims fell to 5.2 mln last week.  Both PUA and PEUC continuing claims fell to a total of 13.2 mln, the lowest since mid-November and so the signs point to a stabilizing labor market after weakening earlier in the month.

Other minor data will be reported. November construction spending (1.0% m/m expected) will be reported Monday. December auto sales (15.7 mln annualized rate expected) will be reported Tuesday. November factory orders (0.7% m/m expected) will be reported Wednesday. December Challenger job cuts and November trade (-$67.0 bln expected) will be reported Thursday. Lastly, November wholesale trade sales and inventories and consumer credit will be reported Friday.

Canada also reports December jobs data Friday. Consensus sees -20k vs. +62.1k in November. If so, this would be the first monthly job loss since April, when the pandemic first hit. Ahead of that, Markit December manufacturing PMI will be reported Monday, followed by December Ivey PMI and November trade Thursday. For now, the Bank of Canada is on hold as fiscal policy will be the main channel for stimulus in 2021. Next policy meeting is January 20 and no change then is expected.

 

EUROPE/MIDDLE EAST/AFRICA

The ECB remains concerned about the strong euro. Governing Council member Rehn said that while the ECB doesn’t target the exchange rate, “that does not mean that the appreciation is not important” since it leads to a loss of competitiveness and impacts the outlook for growth and inflation. He noted that “We monitor exchange-rate developments very closely and we will continue to do so in the future.” That said, there is not much the bank can do besides jawbone. Next policy meeting is January 21 and more jawboning seems likely.

Eurozone final PMI readings will come out this week. Manufacturing PMI readings will be reported Monday. The preliminary reading was 55.5, and the final one will include Spain and France. Both nations are expected to improve from November. Eurozone final services and composite PMI readings will be reported Wednesday. Here, the preliminary readings were 47.3 and 49.8, respectively. Eurozone November retail sales will be reported Thursday and are expected to fall -3.4% m/m vs. +1.5% in October. This drop reflects the impact of the virus lockdowns, but the PMI readings suggest resilience in December.

Germany has a heavy data week. November retails sales will be reported Tuesday and are expected at -2.0% m/m vs. +2.6% in October. December unemployment will be reported Tuesday and is expected to rise 10k vs. -39k in November. If so, this would be the first rise since June and would push the unemployment rate up a tick to 6.2%. December CPI will be reported Wednesday, with headline expected to rise a tick to -0.6% y/y (EU Harmonized). November factory orders will be reported Thursday and are expected at -0.2% m/m vs. +2.9% in October. November IP, trade, and current account data will be reported Friday. Exports are expected to rise 1.0% m/m and imports by 0.4% m/m, while IP is expected to rise 0.7% m/m vs. 3.2% in October. Germany remains the engine of eurozone growth, but Spain and Italy are starting to look better as well.

 

ASIA

Japan has a light week. Final manufacturing PMI will be reported Monday. Final services and composite PMI readings will be reported Wednesday. November real cash earnings will be reported Thursday and are expected to rise 0.2% y/y vs. a revised -0.1% (was -0.2%) in October. If so, this would be the first positive reading since February. November household spending will be reported Friday expected at -1.0% y/y vs. 1.9% in October. The October reading was flattered by low base effects stemming from last year’s consumption tax hike, but the overall trend is one of improvement. With fiscal stimulus in the pipeline, the Bank of Japan is likely to remain on hold for now. Next policy meeting is January 21 and no change is expected then.