• This will be a very busy data week for the US, culminating with January jobs data Friday; ahead of jobs data, we get other important readings for January; efforts to pass the next relief bill will continue this week; US Treasury will make its quarterly refunding announcement Wednesday
• Canada also reports January jobs data Friday; eurozone has a busy week; Italian political drama may end this week; BOE meets Thursday and is expected to keep policy steady
• Japan has a quiet week; RBA meets Tuesday and is expected to keep policy steady; over the weekend, China reported weak official PMI readings

The dollar staged a broad-based rally last week as risk-off impulses roiled global financial markets.  We believe those impulses will eventually fade.  However, markets are likely to remain jittery at the start of this week after US stocks closed at the lows on Friday, with investors likely to be concerned with softer Chinese data reported over the weekend (see below). DXY remains stuck in the 90-91 range but should eventually move lower.  The euro is holding above $1.21 for now but feels heavy, while sterling is trading around $1.37.  The yen is no longer trading as a haven asset during this risk-off episode as USD/JPY is trading at the highest level since November 16 near 105.  With Friday’s clean break above 104.50, the pair is on track to test that month’s high near 105.70.

AMERICAS

This will be a very busy data week for the US, culminating with January jobs data Friday. Consensus currently sees +50k NFP, with the unemployment rate steady at 6.7%. ADP Wednesday will provide another clue and it is expected at 50k vs. -123k in December. Bloomberg consensus for NFP started out at 100k, fell to 75k, and fell again to stand at 50k now. We could easily get another negative reading on February 5 but we will get more clues before that.

Weekly jobless claims data will be reported Thursday.  Regular initial claims are expected at 830k vs. 847k last week, while regular continuing claims are expected at 4.50 mln vs. 4.77 mln the previous week. Of note, weekly claims data for the BLS survey week containing the 12th of the month were mixed. Regular and PUA initial claims totaled 1.422 mln (unadjusted), the highest since mid-September. On the other hand, regular continuing clams fell to 5.21 mln (unadjusted), the lowest since mid-March. PUA and PEUC continuing claims for the survey will be released this Thursday and together jumped by 2.5 mln (unadjusted) the prior week.

Ahead of jobs data, we get other important readings for January. ISM reports manufacturing PMI Monday and it’s expected at 60.0 vs. a revised 60.5 (was 60.7) in December. Last week’s 63.8 print for Chicago PMI warns of an upside surprise for ISM, though the two don’t always correlate well. This will be followed by ISM services PMI Wednesday and it’s expected at 56.7 vs. a revised 57.7 (was 57.2) in December. The employment components for both ISM reports will be closely watched for signs of further weakness in the labor market. Auto sales will also be reported Monday and are expected at an annual 16.10 mln rate vs. 16.27 mln in December.

Efforts to pass the next relief bill will continue this week. Reports suggest ten Republican Senators have drawn up a $600 bln alternative to President Biden’s $1.9 trln proposal and have asked for a meeting to discuss. We view this as a trial marker from the Republicans and if horse-trading leads them to split the difference, we are left with a potential package of around $1.25 bln. This is close to what we thought was a reasonable compromise that would be just north of $1 trln, as ten Republican Senators would hit the magic number of 60. However, other reports suggest there is a contingent of Democratic lawmakers that want to forget ahead with or without bipartisan support via the budget reconciliation process that requires only simple majority passage in both houses. Stay tuned.

The US Treasury will make its quarterly refunding announcement Wednesday. This will be watched for any clues that new Treasury Secretary Yellen is changing its debt issuance strategy. During her confirmation hearing, she said Treasury would study issuance of 50-year bonds but this week seems too soon to make any such decision. We think a relief bill of around $1 trln may be a sweet spot for the US. That is, it will provide significant stimulus to the economy without overwhelming the market with an excessive supply of bond issuance.

With the media embargo over, Fed speakers will be plentiful. Kashkari, Kaplan, and Bostic speak Monday, followed by Kaplan and Mester Tuesday. Kashkari, Bullard, Harker, Mester, and Evans speak Wednesday. Kaplan and Daly speak Thursday. The Fed delivered a dovish hold last week and we do not expect any of the regional Fed presidents to bring up tapering again for a long, long time.

Other minor US data will trickle out this week. December construction spending will be reported Monday and is expected to rise 0.8% m/m. January challenger job cuts, Q4 unit labor costs and productivity, and December factory orders (0.7% m/m expected) will be reported Thursday. December trade (-$65.7 bln expected) and consumer credit ($12 bln expected)will be reported Friday.

Canada also reports January jobs data Friday. A drop of -45.8k is expected vs. a revised -52.7k (was -62.6k) in December. Of note, the December drop was due largely to part-time jobs (-95.4k), which offset a 42.7k gain in full-time jobs. Unemployment is expected to rise to 8.9% from a revised 8.8% (was 8.6%) in December. If so, this would be the second monthly rise from the cycle trough of 8.6% in November and would move further above the pre-pandemic rate of 5.7% from last February. For now, fiscal policy will bear the load of stimulus as the Bank of Canada is likely to remain on hold for now. December trade and January Ivey PMI will also be reported Friday.

EUROPE/MIDDLE EAST/AFRICA

Eurozone has a busy week. Final January PMI readings will be reported this week, with manufacturing Monday and services and composite Wednesday. Q4 GDP will be reported Tuesday. Last week, Germany, France, and Spain all reported stronger than expected GDP data and so there are upside risks to the headline eurozone reading. Consensus sees -0.9% q/q vs. 12.5% in Q3. If we were to simply annualize this rate, it would be -3.6% and nearly eight percentage points lower than the 4.0% posted by the US in Q4. Looking ahead, the problem is that the entire region may still be in for prolonged virus lockdown cycle, especially after the vaccine rollout issues.   Of note, eurozone M3 jumped 12.3% y/y in December vs. 11.0% expected and actual in November. This is the highest rate since November 2007 and reflects the ECB’s unprecedented efforts to maintain favorable financing conditions.

Eurozone January CPI will be reported Wednesday. Headline inflation is expected at 0.6% y/y vs. -0.3% in December. Last week, Germany and Spain reported higher than expected inflation and so there are upside risks to the headline eurozone reading there. France reports CPI Tuesday. December retail sales will be reported Thursday and are expected to rise 2.0% m/m vs. -6.1% in November. Similarly, France and Spain reported stronger than expected sales data last week and so there are upside risks here too. Germany reports December retail sales Monday and are expected to fall -2.0% m/m vs. a revised 1.1% (was 1.9%) gain in November. German factory orders will be reported Friday and are expected to fall -1.3% m/m vs. a 2.3% gain in November.

Italian political drama may end this week. Weekend talks yielded no breakthroughs. Reports suggest President Mattarella will decide Monday whether to give Conte or perhaps someone else another mandate to form a government. Comments last week suggest Renzi does not want to trigger fresh elections. Reports suggest Renzi would back former ECB President Draghi for Prime Minister, while other reports suggest Renzi will rejoin the ruling coalition if Conte replaces Finance Minister Gualtieri, who is well-respected by the markets. Stay tuned.

Bank of England meets Thursday and is expected to keep policy steady. Despite some recent official remarks on negative rates, we continue to see that as unlikely. Note that the bank will issue its quarterly Monetary Policy Report at this meeting, which will contain updated macro forecasts that may hint at further action in the future. We believe another increase in asset purchases is likely later this year, probably a month or two after Chancellor Sunak’s March budget statement as he will give the BOE an indication of how much support will be needed. Final UK January PMI readings will be reported this week, with manufacturing Monday and services and composite Wednesday.

ASIA

Japan has a quiet week. Final January PMI readings will be reported this week, with manufacturing Monday and services and composite Wednesday. January vehicle sales will also be reported Monday, while December household spending and leading index will be reported Friday. For now, the Bank of Japan is on hold. However, it reportedly discussed allowing more movement in 10-year yields, confirming previous leaks. No decision has been reached as the bank continues its policy review for the March 19 meeting.

Reserve Bank of Australia meets Tuesday and is expected to keep policy steady. The bank releases its quarterly Statement on Monetary Policy Friday, which will contain updated macro forecasts. Governor Lowe speaks Wednesday and then testifies to parliament Friday. For now, all signs point to the RBA remaining on hold for much (if not all) of this year, with fiscal policy being used to provide stimulus as needed. For instance, the wage subsidy program is set to expire in March and is likely to be extended. Final January PMI readings will be reported this week, with manufacturing Monday and services and composite Wednesday. This will be followed by December trade Thursday and retail sales Friday.

Over the weekend, China reported weak official PMI readings.  Manufacturing fell to 51.3 vs. 51.6 expected and 51.9 in December, while non-manufacturing fell to 52.4 vs. 55.0 expected and 55.7 in December.  As a result, the composite fell to 52.8 from 55.1 in December, the lowest since February.  Caixin reports January China manufacturing PMI Monday and is expected at 52.6 vs. 53.0 in December, while Caixin services and composite readings will be reported Wednesday. While we remain confident in China’s recovery, further softening of the data will raise concerns for Australian policymakers (and for markets in general).