The Week Ahead - highlights: 4 to 8 December 2017
- As Friday's gyrations more than amply demonstrated, it is the unscheduled events, above all in the political sphere, which continue to be a, if note the, key influence on financial market prices, and that will remain the case in the week ahead.
- Statistically it is US Payrolls week, though this has of late become notable for the lack of volatility that it engenders. Headline Payrolls are seen up a 'military medium' 185K, way above the assumed estimate of the equilibrium rate of 80-100K. The Unemployment Rate is seen at sticking to its cyclical low at 4.1%, though a rebound in the participation rate after last month's drop to 62.7%, and / or a drop in the Underemployment Rate would be more significant. Eminently none of this will matter, if Average Hourly Earnings do not bounce back as anticipated (consensus 0.3% m/m 2.6% y/y vs. Oct 2.4% y/y).
- Otherwise the week gets off to a slow start in data terms, though Tuesday will see the usual array of Services PMIs and the Non-manufacturing ISM, along with the final and more detailed breakdown of Eurozone Q3 GDP, and UK BRC Retail Sales. The rest of the week also sees China's Trade Balance and CPI & PPI, Japan Labour Cash Earnings & revised Q3 GDP, Australian Q3 GDP & Current Account, German Factory Orders, UK and European national Industrial Production, UK Trade and Construction Output.
- In central bank terms, the focus will be on rate meetings in Australia, Canada and India, as the Fed enters its purdah period ahead of next week's FOMC meeting. There will be plenty of BoJ and ECB speakers. The RBA has been resolute in its resistance to even entertaining talk of a rate any time soon, and the consensus does not expect a rate hike ahead of Q4 2018, and it will likely to continue to subdued inflation and wage growth, despite a clearly improving labour market, and a housing market that continues to "run hot". By contrast the Bank of Canada has been pushing back on market expectations of a third 25 bps rate hike (current 1.0%) in the near-term, sounding a cautious tone, in no small part predicated on continued below target inflation, as well as concerns over the outcome of NAFTA negotiation. The question then is how it balances an obvious slowdown in Q3 GDP (1.7% SAAR vs Q2 3.6%, mostly due to a hefty drag from net exports, and a slowing housing market), against continued strong gains in Employment, as evidenced by the drop in Friday's November Unemployment rate to a near 10-yr low of 5.9%, and nascent signs of some wage pressures, with Average Hourly Wages rsing to 2.7% y/y. The latter prompted markets to raise the chances of a January rate hike to 61.5% by the close on Friday. India's RBI is expected to keep rates on hold this week, but will probably continue to impart a modestly hawkish bias to its outlook, with inflation picking up, and last week's Q3 GDP and Manufacturing PMI also suggesting that growth is recovering from the impact of demonetization and the introduction of the GST tax.
- So what about politics? The eternal, even infernal, dichotomy of hopes for passage of a US tax reform bill on the one hand, pitted against the seemingly endless allegations of impropriety and nefarious activities of current and former members of President Trump's highly unstable cabinet and coterie of advisers will continue to be a key focal point. Meanwhile the very delicately balanced Brexit negotiations will focus on Monday's meeting between PM May and EU President Tusk, as the decision on whether to initiate second stage negotiations at the 14/15 EU leaders meeting rapidly approaches - anyone professing to know how that will turn out would be best described as presumptuous. Sadly it has to be observed that the deep seated blame culture that pervades British politics appears to have prejudged any outcome, with a move to the next stage likely to be hailed as a victory for British supremacy despite incessant obstruction by Brussels, Berlin and latterly Dublin, and a failure to be attributed to the same three capitals wishing to sabotage Brexit. Anyone that might suggest a failure to understand the basics of negotiation might be a key contributor will of course be lynched and pilloried, and therein lies the key fault line in what is commonly know as gunboat diplomacy
- Corporate earnings are few and far between, as is seasonally typical, with Dollar General, home builder Toll Brothers and Canada's Bank of Montreal the likely highlights. This week will in effect be the last hurrah for govt bond auctions in the Eurozone, with multi-tranche sales in France (EUR 3.0-4.0 Bln) and Spain (estimate EUR 3.0-4.0 Bln) completing their issuance for 2017, while the UK sells £5.0 Bln total of 5 & 30-yr Gilts, and Germany has a tiny EUR 2.0 Bln sale of 10-yr Bunds. Of rather more interest will be whether the flight to safety rally in G7 / Eurozone govt bond yields in reaction to the Flynn news in the US, which above all and perversely squeezed long-dated bond prices, gets any further traction. The rally was perverse in so far as (inherent more volatile) long dated bonds are hardly the best destination for those seeking safety from such political 'shocks'.
..........................................................................
Marc Ostwald
Strategist
ADM Investor Services International