Drivers for the Week Ahead

  • The December jobs data was an eye-opener and sets the tone for a weak ending for 2020; President-elect Biden is already calling for another significant round of fiscal stimulus; December retail sales Friday will be the highlight of a big US data week
  • the US reports December inflation data; the US curve continues to steepen; Fed officials are not concerned yet; supply will also come into focus this week due to a heavy UST auction schedule; the Fed releases its Beige Book report Wednesday; Fed manufacturing surveys for January will start to roll out
  • Eurozone has a light data weak; UK has its monthly data dump Friday; we expect another slug of fiscal stimulus while downplaying notions of negative rates by the BOE; Japan has a fairly busy data week; rising virus numbers and the sluggish economy are taking a toll on the government’s popularity

The Blue Wave trades remain in play but the dollar is still not partaking.  Equity markets are higher and UST prices are lower.  Yet DXY is up for the fourth straight day and is trading above 90 for the first time since December 29.  We view this bounce as temporary and continue to target the February 2018 low near 88.25.  The euro is testing the $1.22 area while sterling is testing the $1.3550 area.  USD/JPY is trading above 104 for the first time since December 15 but feels heavy at around 103.85.

 

AMERICAS

The December jobs data was an eye-opener and sets the tone for a weak ending for 2020. The loss of -140k jobs was the first since April. With lockdowns likely to widen as the virus numbers continue rising, there is a risk that we get another drop in January. Weekly jobless claims Thursday will be watched closely for any signs of improvement, as recent claims data suggest some stabilization. Initial claims are expected at 785k vs. 787k last week, while continuing claims are expected at 5.0 mln vs. 5.072 mln last week.

President-elect Biden is already calling for another significant round of fiscal stimulus. He acknowledged that “The price tag will be high. It will be in the trillions of dollars.” This fits in with our view that the floor will likely be around $1.5 bln and the ceiling perhaps around $2.5 trln. And these numbers don’t include a likely infrastructure bill potentially totaling $1 trln. Biden is already getting some pushback, not from Republicans but from his own party. Senator Manchin said he opposed boosting stimulus checks to $2000 from the $600 approved in a December, instead favoring targeted payments to those who need it the most. That said, we believe moderate Republicans will support another large package. All states are hurting now so it’s not a Red vs. Blue debate.

December retail sales Friday will be the highlight of a big US data week. Headline sales are expected flat m/m vs. -1.1% in November, while ex-autos are expected to fall -0.2% m/m vs. -0.9% in November. The so-called control group used for GDP calculations is expected flat m/m vs. -0.5% in November. Obviously, we see downside risks to these readings in light of the weak jobs data. With emergency unemployment benefits set to run out at the end of the year before the last minute deal to extend them, we suspect many consumers were cautious last month.

Ahead of that, the US reports December inflation data. CPI will be reported Wednesday, with headline inflation expected to pick up a tick to 1.3% y/y and core inflation expected to remain steady at 1.6% y/y. PPI will be reported Thursday, with headline inflation expected to fall a tick to 0.7% y/y and core inflation expected to fall a tick to 1.3% y/y. The inflation debate has picked up with the unexpected return of the Blue Wave and so this data has taken on more significance.

The US curve continues to steepen.  At 104 bp, the 3-month to 10-year curve is the steepest since late March and the year’s high from March 18 comes in near 120 bp.  The 10-year yield of 1.12% is the highest since March 19, while 10-year TIPS inflation breakeven inflation rate of 2.07% is the highest since October 2018.  Clearly, the rise in the long end is driven in part by rising inflation expectations here in the US.

Fed officials are not concerned yet. Clarida added his voice the chorus Friday, stressing that rates at this level were not a concern. Kaplan and Bullard made similar comments last week. Yet we know from the December FOMC minutes that “a couple” of Fed officials were concerned about rising long rates. Then, the 10year was trading around 0.90% and so we are nearly 25 bp higher. What’s the red line? The Fed is probably fine until the 10-year starts to poke above 1.25%. Charts suggest that a break above 1.3250% may lead to a quick move up to the December 2019 high near 1.95% and we just don’t think the Fed wants to see that kind of steepening right now. So far, the rise has been slow and steady and easily digestible for the markets, but the pace has picked up since last week. Stay tuned.

Supply will also come into focus this week due to a heavy UST auction schedule. $58 bln of 3-year notes will be sold Monday, followed by $38 bln of 10-year notes Tuesday and $24 bln of 30-year bonds Wednesday. These come on top of $54 bln in 3-month and $51 bln of 6-month bills to be sold Monday. Simply put, this is a lot of paper for the market to digest and bidding may be cautious ahead of the inflation data. Looking ahead, the next round of stimulus will have to be funded by increased debt issuance and so it’s not too surprising that curve steepening continues.

The Fed releases its Beige Book report Wednesday. It is being prepared for the upcoming January 26-27 FOMC meeting. Since the last meeting December 15-16, the US outlook has clearly darkened and so the Beige Book should reflect this. The labor market has clearly softened as the economy lost momentum amidst rising virus numbers. While we expect some divergence between the manufacturing and service sectors may be highlighted, the overall tone of the report is likely to be fairly cautious and perhaps even downbeat.

There are many Fed speakers this week (*FOMC voter in 2021). Bostic* and Kaplan speak Monday. Brainard*, Rosengren, Kaplan, Kashkari, and George all speak Tuesday. Brainard*, Harker, and Clarida* speak Wednesday, followed by Rosengren, Bostic*, Powell*, and Kaplan Thursday. After midnight Friday, the media embargo goes into effect and there will be no more speakers until Chair Powell’s post-decision press conference the afternoon of January 27.

Fed manufacturing surveys for January will start to roll out.  Empire survey starts the ball rolling Friday and is expected at 5.5 vs. 4.9 in December.  This will be the first snapshot for January and will help set the tone for other data to come.  December IP will also be reported Friday and is expected to rise 0.4% m/m vs. 0.4% in November.

Other minor data will be reported. November JOLTS job openings (6500 expected) will be out Tuesday, followed by the December monthly budget statement (-$123.5 bln expected) Wednesday and December import/export prices Thursday. November business inventories (0.5% m/m expected) and preliminary January University of Michigan consumer sentiment (80.0 expected) will be reported Friday.

 

EUROPE/MIDDLE EAST/AFRICA

Eurozone has a light data weak. November IP will be reported Wednesday and is expected to rise 0.2% m/m vs. 2.1% in October. Germany reports 2020 GDP data Thursday. Full year contraction of -5.2% is expected vs. 0.6% in 2019. This would imply -4.0% y/y contraction in Q4 vs. -3.9% in Q3. More noteworthy is the expected budget deficit equal to -6.0% of GDP vs. a 1.5% surplus in 2019. Germany went into the crisis in a strong budgetary position and that has allowed policymakers to use fiscal policy aggressively to help soften the blow to the economy. Eurozone reports November trade Friday.

The UK has its monthly data dump Friday. November GDP, IP, services, construction output, and trade will all be reported. GDP is expected to contract -4.8% m/m, IP is expected to contract -4.2% m/m, services are expected to contract -5.8% m/m, and construction is expected to rise 0.5% m/m. Yet whatever the readings are, markets are already braced for even worse numbers in December and January as the lockdowns hit. The virus numbers continue to worsen and so the impact is likely to carry over into February and perhaps even March. Bottom line is that Q1 is likely to see UK GDP contract.

We expect another slug of fiscal stimulus while downplaying notions of negative rates by the BOE. Some of the more dovish external MPC members have resurrected talk of negative rates recently but we do not think the internal members are on board with it. The UK financial sector is already struggling with the post-Brexit landscape and that last thing they need is negative rates. Next Bank of England policy meeting is February 4. New macro forecasts will be contained in its quarterly Monetary Policy Report and this should set the table for more QE in 2021. Since the bank just increased QE by GBP150 bln in November, the next boost seems unlikely until the March 18 or May 6 meeting.

 

ASIA

Japan has a fairly busy data week. November current account data will be reported Monday, where an adjusted JPY2 trln surplus is expected. December machine tool orders will be reported Wednesday, followed by November core machine orders (-6.5% m/m expected) Thursday. December PPI will also be reported Thursday and is expected to remain steady at -2.2% y/y.

Rising virus numbers and the sluggish economy are taking a toll on the government’s popularity. The approval rating for the cabinet has fallen to 41.3% in the latest poll conducted January 9-10, down 9 points from the previous month. The government’s overall response to the coronavirus saw a disapproval rate of 68.3%, with 79.2% saying the state of emergency in Tokyo was imposed too late. These readings suggest general election s will be held later rather than sooner, and that another stimulus package is likely in an effort to boost the government’s standing. For now, the BOJ is on hold as fiscal policy carries the load. Next policy meeting is January 20-21 and no change is expected then.