Drivers for the Week Ahead

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Win Thin
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• We get the first February data from the US manufacturing sector this week; the US economy remains strong; FOMC minutes will be released Wednesday
• Canada reports some key data this week
• Preliminary eurozone February PMI readings will be reported Friday; UK has a busy data week
• Japan has a busy data week; Australia reports January jobs data Thursday

Concerns about the coronavirus are likely to keep risk sentiment under pressure, as the ultimate impact is still unknown. Global growth was already at risk before the virus hit and now the outlook is even cloudier.

The dollar rally continues. DXY traded at a new cycle high Friday near 99.166 and remains on track to test the October 1 cycle high near 99.667. After that is the May 2017 high near 99.888.  Elsewhere, the euro remains heavy and traded at a new low for this move today near $1.0820.  There is a gap from April 2017 on the weekly charts between $1.0780-1.0820 that now needs to be filled.  We remain bullish on the dollar.

AMERICAS

We get the first February data from the US manufacturing sector this week.  The regional Fed manufacturing surveys for February give first look.  The Empire reading starts the ball rolling Tuesday and is expected at 5.0 vs. 4.8 in January.  The Philly Fed survey will be reported Thursday and is expected at 11.0 vs. 17.0 in January.  Markit then reports preliminary February PMI readings Friday, with manufacturing expected to fell to 51.5 from 51.9 in January.

Besides the manufacturing sector, we will also get some other clues to the state of the economy.  January PPI (headline 1.6% y/y and core 1.3% y/y expected), housing starts (-11.7% m/m expected), and building permits (2.1% m/m expected) will be reported Wednesday.  Weekly jobless claims will be reported (210k expected) Thursday and will be for the BLS survey week containing the 12th of the month.  Existing home sales (-1.7% m/m expected) will be reported Friday.

The US economy remains strong.  Advance Q4 GDP came in at 2.1% SAAR and that strength appears to be carrying over into 2020.  The Atlanta Fed’s GDPNow model estimates Q1 GDP growth at 2.4% SAAR vs. 2.7% previously.  Elsewhere, the NY Fed’s Nowcast model estimates Q1 GDP growth at 1.4% SAAR vs. 1.7% previously.  Both models will be updated today.  While these early reads are subject to significant revisions, we are clearly far from recession and the Fed is right to maintain steady rates in order to assess how the outlook unfolds in 2020.

FOMC minutes will be released Wednesday.  There is also a full slate of Fed speakers this week.  Bostic, Mester, Kashkari, Kaplan, and Barkin all speak Wednesday.  Barkin speaks again Thursday.  Kaplan, Brainard, Bostic, Clarida, and Mester all speak Friday.  All are expected to mirror the wait-and-see tone taken by Powell during his Humphrey-Hawkins testimony last week.

The Fed can’t be happy that the US yield curve is flirting with inversion again.  Nor can it be happy that markets are fully pricing in a rate cut this year followed by nearly 70% odds of a second one by January 2021.  Much of this is due to the still-unknown global impact of the coronavirus.

Canada reports some key data this week.  December manufacturing sales will be reported (0.8% m/m expected) Tuesday, followed by January CPI (headline 2.3% y/y expected) Wednesday.  December retail sales (0.1% m/m expected) will be reported Friday.  Relatively firm data have pushed out Bank of Canada easing expectations, as WIRP suggests only 10% odds of a cut at the next policy meeting March 18.

EUROPE/MIDDLE EAST/AFRICA

Preliminary eurozone February PMI readings will be reported Friday.  Composite reading is expected to ease to 51.0 from 51.3 in January, with both manufacturing and services components seen falling.  Composite PMI readings for Germany and France are expected to fall to 50.8 and 51.0, respectively.  Earlier in the week, February ZEW survey for the eurozone and Germany will be reported Tuesday.  March GfK consumer confidence will then be reported Thursday.

The ECB releases the account of its January 23 meeting Thursday.  Nothing changed at that meeting, but markets hope to get some more insight about the ongoing review.  For now, markets see the ECB on hold for the foreseeable future.  WIRP suggests only 5% odds of a cut at the next policy meeting March 12.

UK has a busy data week.  Labor market data will be reported Tuesday.  January CPI will be reported Wednesday, with headline expected at 1.6% y/y vs. 1.3% in December and CPIH expected at 1.7% y/y vs. 1.4% in December.  Retail sales will be reported Thursday, with headline expected to rise 0.7% m/m and 0.6% y/y.  Preliminary February PMI readings will be reported Friday.  Composite reading is expected to ease to 52.8 from 53.3 in January, with manufacturing and services components seen falling to 49.7 and 53.4, respectively.

ASIA

Japan has a busy data week.  Q4 GDP was much weaker than expected, contracting -6.3% annualized vs. -3.8% expected.  January trade (-JPY568 bln expected) and December core machine order (-8.9% m/m expected) will be reported Wednesday.  January national CPI, department store sales, and preliminary February PMI readings will be reported Friday.  Headline inflation is seen falling a tick to 0.7% y/y, while ex-fresh food is seen rising a tick to 0.8% y/y.

Australia reports January jobs data Thursday.  Total employment is seen rising 10k vs. 28.9k in December, while the unemployment rate is seen rising a tick to 5.2%.  The RBA presented a fairly upbeat outlook for the labor market and economy at this month’s meeting, and suggested rates are now on hold unless the impact of the coronavirus becomes protracted.  WIRP suggests 8% odds of a cut at the next meeting March 3, though odds rise as the year progresses to 100% by the October 6 meeting.  Preliminary February PMI readings will be reported Friday.