- Jobs data gave markets a dose of reality; weekly jobless claims data Thursday will be watched for signs of improvement; January CPI data Wednesday will be the US data highlight this week; Treasury will sell $126 bln in total coupon debt this week; US curve has steepened to new highs; January budget statement Wednesday will draw some attention; President Biden’s proposal continues its way through Congress
- Germany has a busy week; Re-enter the Draghi. UK has its monthly data dump Wednesday; BOE Governor Bailey speaks Monday and Wednesday and we look for some damage control; Sweden’s Riksbank meets Wednesday and is expected to keep rates steady at 0.0%
- Japan has a fairly busy week
The dollar rally was cut short by the jobs data (see below). We had an outside down day for DXY Friday whereby it made a new high but then reversed to close below the previous day’s low. This pattern suggests further losses near-term. Similarly, the euro had an outside up day that suggests further gains near-term. Of note, the euro had given up about half of its gains from the November-January rally before seeing the bounce to end last week. USD/JPY was unable to make a clean break above its 200-day moving average near 105.60 Friday and is trading lower. While we are getting increasingly confident that the dollar can carve out a bottom in Q1, the recovery won’t be a straight line as the US data can continue to disappoint. That said, the vaccine rollout here continues and should allow the US economy (and the dollar) to outperform in the coming months.
Jobs data gave markets a dose of reality. Only 49k jobs were created vs. 105k expected, but revisions led to a net -159k fewer jobs in November and December. Some of the details were solid, with average hourly earnings up 5.4% y/y vs. 5.0% expected and average weekly hours at 35.0 vs. 34.7 expected. However, the drop in the unemployment rate from 6.7% to 6.3% was largely due to a 400k drop in the labor force. If there had been no change in the labor force, the rate would only have fallen to 6.6%. Simply put, the recovery in jobs is stalling out and the need for more stimulus remains acute. Indeed, President Biden seized on the report to justify quick passage of his relief proposal (see below).
Of note, there are still 10 mln out of work due to the pandemic. And that's just in the NFP numbers. We know gig workers and such are also deep in the hole. This slack should prevent wage inflation, which in turn should prevent core inflation. Headline inflation is subject to the vagaries of energy and food prices but the Fed looks beyond that. Powell has already said the expected rise in headline inflation over the next few months is seen as transitory. Looking ahead, no further talk of tapering from the Fed and more talk of big stimulus from Treasury is likely to continue weighing on the dollar and so we can't sound the all clear just yet. That said, we are becoming increasingly confident that the dollar bottoms in Q1.
Weekly jobless claims data Thursday will be watched for signs of improvement. Regular initial claims are expected at 760k vs. 779k last week, while regular continuing claims are expected at 4.41 mln vs. 4.59mln the previous week. Last week’s initial claims were the lowest since late November and the continuing claims the lowest since March. Elsewhere, emergency PUA and PEUC continuing claims have resumed falling after an early January spike, which is another supportive sign for the jobs. All in all, the signs point to some modest healing is being seen in the labor market as 2021 gets under way and hopefully that will be reflected in upcoming NFP readings.
January CPI data Wednesday will be the US data highlight this week. Headline inflation is expected to rise a tick to 1.5% y/y, while core is expected to fall a tick to 1.5% y/y. As noted above, any acceleration in inflation is seen as transitory by the Fed. In its most recent economic projections from December, it saw core PCE of 1.8% in 2021, 1.9% in 2022, and 2.0% in 2023. The Fed will update its projections at the March 17 meeting. Fed Chair Powell speaks to the Economic Club of New York Wednesday. Ahead of that, Mester speaks Monday and Bullard speaks Tuesday.
The US curve has steepened to new highs. Our favored metric (3-month to 10-year) has risen to 114 bp, the highest since last March and nearing that month’s peak near 120 bp. The 2- to 10-year spread has risen to 106 bp vs. 80 bp at the start of this year and 0 bp in August 2019, and is the highest since April 2017. The pace of steepening has so far not been disruptive as equity markets power higher and spread product continue to narrow. It would appear that the steepening is due to the “right” reasons (improved US economic outlook) than ”wrong” (excessive debt issuance). In comparison, the steepening in the US has move way ahead of that in the EU, Japan, and the UK, and is only comparable to Australia. This supports our view that growth differentials (and inflation expectations) are starting to play an increasingly larger role in asset prices as investors become more confident that the vaccine-led normalization is within sight.
The US Treasury will sell $126 bln in total coupon debt this week. $58 bln of three-year notes will be sold Tuesday, $4 bln more than the November refunding. $41 bln of 10-year notes will be sold Wednesday, the same as November. Lastly, $27 bln of 30-year bonds will be sold Thursday, the same as November. Primary dealers were expecting no change given the Treasury’s huge cash balance of $1.6 trln currently. The last time the market had to absorb a bug slug of issuance was the large reopening during the week of January 11, during the last bout of US curve steepening. Then, $58 bln of 3-year notes, $38 bln of 10-year notes, and $24 bln of 30-year bonds were easily absorbed by the market, with a large chunk going to indirect bidders representing foreign demand. Long yields fell and the curve flattened. Until now. Let’s see if history repeats.
The January budget statement Wednesday will draw some attention. A deficit of -$300 bln is expected. If so, the 12-month total would rise to another record high -$3.6 trln. Higher outlays continue to put upside pressure on the deficit and that is only going to get worse as the next round of spending is likely enacted next month. For now, the market has been able to absorb the issuance but this week will provide another big test.
Speaking of stimulus, President Biden’s proposal continues its way through Congress. Last Friday, the House adopted the Senate budget resolution and so the bill will proceed with only Democratic votes. Biden said he wants support from the Republicans but stressed that “If I have to choose between getting help right now to Americans who are hurting so badly, and getting bogged down in a lengthy negotiation -- or compromising on a bill that’s up to the crisis -- that’s an easy choice. I’m going to act and I’m going to act fast.” Majority Leader Hoyer said the House plans to vote on the final package the week of February 22, with Democrats hoping to complete the entire process by mid-March, when some provisions from the December bill expire. As we’ve note before, the reconciliation process cannot be used for some elements of the package, with Biden admitting that the $15 minimum wage won’t be included.
Other minor data round out the week. December JOLTS job openings will be reported Tuesday and are expected at 6400 vs. 6527 in November. December wholesale trade sales and inventories and January real earnings will be reported Wednesday. Preliminary February University of Michigan consumer sentiment will be reported Friday and is expected at 80.9 vs. 79.0 in January.
Germany has a busy week. December IP will be reported Monday and is expected to rise 0.3% m/m vs. 0.9% in November. Trade and current account data will be reported Tuesday, with exports expected to fall -0.6% m/m and imports expected to fall -2.0% m/m. December real sector data so far for Germany have surprised to the downside and those risks carry over into the readings this week. France reports December IP Wednesday, which is expected to rise 0.4% m/m vs. -0.9% in November. Eurozone IP will be reported next week and is expected to fall -0.5% m/m vs. a 2.5% gain in November. Given the lockdowns, we know that January data will be even worse.
Re-enter the Draghi. He will pursue talks with party leaders as he tries to form a majority that will allow him to successfully navigate the pandemic recovery. Of note, the League’s Salvini expressed support for Draghi while stressing a final decision won’t be made until after a second round of talks. Even though Salvini stands to win the most from fresh elections, he doesn’t want to be the one to trigger them in the middle of a pandemic. Five Star also seems ready to fall in line. Renzi was the one who suggested Draghi and so his Italia Viva seems likely to fall in line too. As such, markets are pricing in a Draghi-led government. 10-year BTP yields fell 9 bp last week to 0.53% while 10-year Bund yields rose 7 bp to -0.45%. As a result, the spread narrowed to a mere 98 bp, the lowest in five years.
The UK has its monthly data dump Wednesday. December IP, construction output, services index, and trade will all be reported. IP is expected to rise 0.6% m/m vs. -0.1% in November, construction is expected to rise 0.5% m/m vs. 1.9% in November, services is expected to rise 1.1% m/m vs. -3.4% in November, and a trade deficit of -GBP5.75 bln is expected vs. -GBP5 bln in November. December and Q4 GDP will also be reported, which are expected to rise 1.0% m/m and 0.5% q/q, respectively. Yet we know from the lockdowns that January data will be much worse.
Bank of England Governor Bailey speaks Monday and Wednesday and we look for some damage control. The 10-year Gilt yield rose 16 bp last week as the BOE pushed back against negative rates and started talking about tapering this year. Sterling also gained 1% against the euro last week. We think that was the wrong message to send to the markets right now. Yes, the UK vaccine rollout is going very well but the UK economy is still facing a hangover from Brexit on top of the current lockdowns.
Sweden’s Riksbank meets Wednesday and is expected to keep rates steady at 0.0%. At its last meeting November 26, the bank delivered a dovish surprise with a larger than expected SEK200 bln expansion of asset purchases, bringing the total up to SEK700 bln. It said a rate cut “was not on the table” at that meeting but noted as it has in the past that the repo rate “can be cut if this is assessed to be an effective measure, particularly if confidence in the inflation target were to be threatened.” We believe it does not want to go negative again and will instead rely on further QE is more stimulus is needed. Of note, SEK has weakened against EUR the past three meeting days. Before that, SEK had gained on six straight meeting days.
Japan has a fairly busy week. December current account data will be reported Monday, with an adjusted JPY2.2 trln surplus expected. Real cash earnings and January machine tool orders will be reported Tuesday, with earnings expected to contract -3.4% y/y vs. a revised -0.7% (was -1.1%) in November. January PPI will be reported Wednesday and is expected to fall -1.6% y/y vs. -2.0% in December. For now, the Bank of Japan is on hold. However, if the economy continues to suffer and Prime Minister Suga’s popularity continues to fall, we fully expect another round if fiscal stimulus by mid-year.