- After a quiet holiday week, things are about to get very interesting; jobs data have taken on less importance; FOMC minutes Wednesday will be important; we believe the strong dollar trend remains intact for 2022; Canada reports December jobs data Friday too; BOC tightening expectations remain elevated
- Eurozone has a busy data week; December eurozone inflation readings will come out; the ECB will continue to be pulled in two different directions; U.K. has a quiet week; BOE tightening expectations have come off a bit
- Japan reports some key data; BOJ tightening expectations have gone nowhere
After a quiet holiday week, things are about to get very interesting. The recent calm will likely break with an incredibly busy January. Frist, we get the December jobs report this Friday. Next week brings CPI data January 12, PPI data January 13, and retail sales January 14. There will be a small two-week window for Fed speaking engagements in early January, as the media blackout for the January 25-26 FOMC meeting takes effect at midnight January 14. The Beige Book for that meeting will be released January 12. We believe things are likely to heat up quickly as markets reopen after the holidays.
That said, the jobs data have taken on less importance. Barring a total collapse in the labor market, the Fed is tapering faster and is looking towards liftoff sometime in H1. Consensus sees 400k vs. 210k in November, while the unemployment rate is expected to fall a tick to 4.1%. Average hourly earnings are expected to slow to 4.2% y/y from 4.8% in November. All indicators suggest the labor market continues to heal, albeit unevenly.
Ahead of the jobs data, we will get some important clues. ISM manufacturing will be reported Tuesday, with the headline expected at 60.2 vs. 61.1 in November. Keep an eye on the employment component, which stood at 53.3 in November. ADP reports private sector jobs Wednesday, with consensus at 360k vs. 534k in November. ISM services will be reported Thursday, with the headline expected at 67.0 vs. 69.1 in November. Here, the employment component stood at 56.5 in November.
Survey data for December has so far been solid. Last week, December Chicago PMI came in at 63.1 vs. 62.0 expected and 61.8 in November. In normal times, readings above 60 are rare but during the current pandemic recovery, Chicago PMI has been above 60 for ten straight months and eleven of the past twelve. Regional Fed manufacturing surveys for December were mixed last week. Dallas came in at 8.1 vs. 11.8 in November, while Richmond came in at 16 vs. a revised 12 (was 11) in November. Before that, Empire came in at 31.9 vs. 30.9 in November, Philly Fed came in at 15.4 vs. 39.0 in November, and Kansas City came in steady vs. November at 24.
FOMC minutes Wednesday will be important. Since the Fed accelerated tapering at that December meeting, markets will be looking for clues as to when the conditions for liftoff will likely be met. WIRP suggests nearly 2 in 3 odds of liftoff March 16, while May 4 is fully priced in. All told, three hikes this year are fully priced in. After the minutes, there will be several Fed speakers. Bullard speaks Thursday and Daly and Bostic speak Friday. Except for some hawkish comments by Waller on December 17, these will be the first glimpses of current Fed thinking since Chair Powell’s press conference December 15.
We believe the strong dollar trend remains intact for 2022. The U.S. economy remains poised to outperform in 2022, which in turn will give the Fed greater confidence in normalizing policy over the course of the year. This stands in stark contrast to the ECB and BOJ, both of which are nowhere close to hiking rates. The central bank divergence theme should continue to drive currency markets this year. While three Fed hikes are priced in, we believe markets are underestimating the Fed’s capacity to tighten. Swaps market sees the terminal Fed Funds rate at 1.5%, which history suggests is much too low. Lastly, the removal of global monetary accommodation is the major reason we remain negative on EM. This asset class thrives on cheap and abundant global liquidity and it’s clear that there will be less and less of that as we move through 2022.
There are some minor data reports sprinkled throughout the week. November construction spending (0.7% m/m expected) will be reported Monday, followed by JOLTS job openings and December auto sales (13.1 mln annual pace expected) Tuesday. December Challenger job cuts, November trade (-$74.7 bln expected), weekly jobless claims, and factory orders (1.5% m/m expected) will be reported Thursday. November consumer credit ($22.5 bln expected) will be reported Friday.
Canada reports December jobs data Friday too. Consensus sees 25.0k jobs added vs. 153.7k in November, with the unemployment rate expected to remain steady at 6.0%. Ahead of that, December Markit manufacturing PMI will be reported Tuesday, while November leading indicator and building permits will be reported Wednesday. Trade data will be reported Thursday. December Ivey PMI will also be reported Friday. All in all, the Canadian economy continues to recover nicely from the pandemic.
Bank of Canada tightening expectations remain elevated. WIRP suggests a little more than 50-50 chances of liftoff at the next meeting January 26, which seems too soon given the BOC’s forward guidance for likely Q2 liftoff. Those odds rise to nearly 100% for the March 2 meeting. All told, five hikes are priced in for 2022 that would take the policy rate up to 1.5%. Swaps market is pricing in another 50 bp of tightening next year that would see that rate peak at 2% by end-2023, which seems too low in light of historical precedent.
Eurozone has a busy data week. Final December manufacturing PMI will be reported Monday, followed by final services and composite PMI readings Wednesday. Germany reports November retail sales Tuesday and is expected at -0.5% m/m vs. 0.1% in October. Germany reports November factory orders Thursday and are expected at 2.2% m/m vs. -6.9% in October, followed by IP (1.0% m/m expected) and trade data Friday. November eurozone sales data will also be reported Friday and expected at -0.5% m/m vs. 0.2% in October.
December eurozone inflation readings will come out. France reports December CPI Tuesday, with headline EU Harmonized inflation expected at 3.5% y/y vs. 3.4% in November. Italy reports December CPI Wednesday, with headline EU Harmonized inflation expected at 4.2% y/y vs. 3.9% in November. Germany then reports CPI data Thursday, with headline EU Harmonized inflation expected at 5.6% y/y vs. 6.0% in November. The eurozone reports Friday, with headline inflation expected at 4.8% y/y vs. 4.9% in November and core expected at 2.5% y/y vs. 2.6% in November. There are upside risks to these CPI readings, as Spain last week reported headline EU Harmonized inflation at 6.7% y/y vs. 5.7% expected and 5.5% in November.
The ECB will continue to be pulled in two different directions. Of course, the hawks will remain concerned about high inflation. However, we believe headwinds are building for the eurozone economy and so the ECB’s decision to taper quite aggressively in Q2 will be open to second-guessing. As it is, eurozone last week reported weaker than expected M3 growth for November. It slowed to 7.3% y/y vs. 7.7% in October and was the slowest since March 2020. In other words, the boost to money growth from the ECB’s emergency pandemic measures has basically worn off already.
U.K. has a quiet week. Final December manufacturing PMI will be reported Tuesday, followed by final services and composite PMIs Thursday. November consumer credit will also be reported Tuesday. Much of the November data came in firmer than expected, though some of the strength in consumption was attributed to early shopping due to supply chain concerns ahead of the holidays. We may have to wait until January to get a cleaner read on the U.K. economy but we see headwinds ahead from Brexit (still!), energy shortages, and both fiscal and monetary tightening.
Bank of England tightening expectations have come off a bit. WIRP suggests another hike is 75% priced in for the February 3 meeting. After that, a hike every other meeting is pretty much priced in that would take the policy rate to 1.0% by end-2022, about 25 bp lower than what was priced in last month. Swaps market is pricing in one more hike in 2023 that would see that rate peak at 1.25%, also about 25 bp lower than what was priced in last month. Note that the BOE will halt QE reinvestment when the policy rate hits 0.5% and will actively shrink the balance sheet when that rate hits 1.0%. As such, the BOE will likely be removing accommodation quite rapidly as the year progresses.
Japan reports some key data. December Tokyo CPI Friday will be the main focus. Headline inflation is expected at 0.7% y/y vs. 0.5% in November, while core (ex-fresh food) is expected at 0.5% y/y vs. 0.3% in November. Final December manufacturing PMI will be reported Tuesday, followed by final services and composite PMIs Thursday. November real cash earnings and household spending will also be reported Friday. Earnings are expected at -0.5% y/y vs. -0.7% in October, while spending is expected at 1.4% y/y vs. -0.6% in October. Last week’s data were mixed. November retail sales and IP showed continued recovery, but the unemployment rate unexpectedly rose a tick to 2.8%.
Bank of Japan tightening expectations have gone nowhere. And that’s the way it should be. The bank has clearly set itself up to be amongst the last of the major central banks to remove accommodation. The swaps market sees no tightening through 2024 and we expect this to be codified by the BOJ when it includes FY24 in its macro forecasts starting with the April Outlook Report. This should keep the yen under selling pressure, though it is always subject to some temporary bouts of strengthening due to periodic risk off impulses.