Drivers for the Week of February 14, 2021

Here's a look at the main drivers in Developed Markets this week.
  • January retail sales data Wednesday will be the US data highlight this week; Fed manufacturing surveys for February will start to roll out; weekly jobless claims data will be watched closely; reports suggest that President Biden has zeroed in on two potential nominees for the vacant seat on the Fed’s Board of Governors; FOMC minutes will be released Wednesday afternoon; this will be a fairly busy data week for Canada
  • Eurozone has a fairly light data week; the eurozone economy will continue to suffer from the poorly run vaccine rollout; UK has another busy data week; the UK economy will be facing two distinct cross-currents in 2021
  • Japan has a heavy data week; the economy is likely to suffer from the current lockdowns and GDP is expected to contract in Q1; Australia has a busy week; for now, the RBA is on hold as the nation continues to make good headway containing the virus

The dollar is coming off its worst week since mid-December. The dollar was on tear for much of January and early February but has softened after the weak jobs data February 5. DXY peaked that day and has since fallen nearly 1.5% and retraced about half this year’s rally. A break below 90.1234 would set up a test of the January low near 89.209. The euro is holding above $1.21, while sterling’s relentless rally has taken it to a new multi-year high near $1.3870 today. USD/JPY has recovered to trade above 105 again. While we are increasingly confident that the dollar can carve out a bottom in Q1, last week’s volatile price action suggests its recovery won’t be a straight line.

AMERICAS

January retail sales data Wednesday will be the US data highlight this week. Headline sales are expected to rise 1.0% m/m vs. -0.7% in December, while sales ex-autos are expected to rise 0.9% m/m vs. -1.4% in December. The so-called control group used for GDP calculations is expected to rise 0.9% m/m vs. -1.9% in December. Signs of life in the US economy would go a long way for the dollar right now. The greenback has been trading on its back foot ever since the weak January jobs number. If retail sales can bounce back that month despite the poor labor market, the dollar outlook could improve.

January PPI data Wednesday will also hold some interest. Headline PPI is expected to rise 0.9% y/y vs. 0.8% in December, while core PPI is expected to rise 1.1% y/y vs. 1.2% in December. Last week, CPI came in lower than expected, with both headline and core rising 1.4% y/y. Despite weak price pressures, US yields continue to edge higher. The 10-yaer UST yield is trading above 1.20% for the first time since last March, while the 3-month to 10-year curve at 117 bp is the steepest since then too. The reflation trade continues and for now, that will probably mean a weaker dollar before a turnaround is seen later in Q1.

Fed manufacturing surveys for February will start to roll out. Empire survey will be reported Tuesday and is expected at 6.0 vs. and 3.5 in January. Philly Fed survey is out Thursday and expected at 20.0 vs. 26.5 in January. Markit reports preliminary February PMI readings Friday, with manufacturing expected at 58.5 vs. 59.2 in January and services expected at 58.0 vs. 58.3 in January. These are the first snapshots for February and will help set the tone for other data to come. January IP will be reported Wednesday and is expected to rise 0.4% m/m vs. 1.6% in December.

Weekly jobless claims data will be watched closely. Regular initial claims are expected at 773k vs. 793k the previous week, while regular continuing claims are expected at 4.423 mln vs. 4.545 mln the previous week. Together with PUA initial claims, total initial claims fell to 1.1 mln (unadjusted) last week to the lowest since early January. So far, so good. However, PUA and PEUC continuing claims jumped by 2.6 mln. Combined with regular continuing claims, the total of 18.7 mln (unadjusted) last week is the highest since early December.

These divergent trends suggest labor market stress is ongoing. Basically, fewer people are getting laid off and going on unemployment, but those that are unemployed are not going back to work fast enough to prevent the jump in continuing claims. We think this reflects the ongoing impact of the virus and lockdowns. We all know that the road to recovery would be uneven but we’re expecting things to get better as the vaccine rollout continues. If this negative trend in continuing claims continues, then we have to be ready for another soft jobs number for this month. Stay tuned.

Reports suggest that President Biden has zeroed in on two potential nominees for the vacant seat on the Fed’s Board of Governors, Lisa Cook and William Spriggs. Cook currently teaches at Michigan State University and is also on the steering committee of the Washington Center for Equitable Growth think tank that was co-founded by White House adviser Boushey. Cook worked for a year in the Obama administration as an economist with the Council of Economic Advisers and earned a Ph.D. in economics from the University of California-Berkeley. Spriggs is chief economist at the AFL-CIO and also teaches at Howard University. He served as an assistant secretary in the Labor Department during the Obama administration and earned a Ph.D. in economics from the University of Wisconsin-Madison. Both are eminently qualified for the post but no formal nomination has been made yet. This seat remains vacant after Judy Shelton’s nomination died in the Senate.

Overall, President Biden will need to consider four senior posts at the Fed over the coming year. Besides the vacant seat, the terms of Chair Powell and Vice Chair Clarida end early next year and Governor Quarles’s term as vice chair for financial supervision ends later this year. Powell has made clear that he would like to stay on and it’s hard to make a case for why he shouldn’t. Yes, he had a rocky start under the constant haranguing of President Trump, but we believe Powell has done an excellent job during the pandemic. Biden would be hard-pressed to find anyone more dovish than Powell, who has made clear that policy will remain accommodative until those most hurt by the pandemic have a chance to recover.

FOMC minutes will be released Wednesday afternoon. The Fed delivered a dovish hold at the January meeting and the minutes should reflect that. Recall that Chair Powell said the path ahead remains uncertain and the Fed remains committed to its dual mandate. He noted that the US is a long way from full recovery and that policy will remain accommodative until the Fed’s goals are reached. Most importantly, he stressed that the whole focus on an exit strategy is premature and that it’s too early to talk about tapering. Ahead of the minutes, Bowman, George, Kaplan, and Daly all speak Tuesday and Barkin and Rosengren speak Wednesday morning. Brainard and Bostic speak Thursday, followed by Barkin and Rosengren Friday.

Other minor data round out the week. December TIC data will be reported Tuesday, followed by December business inventories (0.5% m/m expected) Wednesday and then January building permits (-1.6% m/m expected) and housing starts (-0.7% m/m expected) and January import/export prices Thursday. January existing home sales (-3.0% m/m expected) will be reported Friday.

This will be a fairly busy data week for Canada. Highlights are January CPI Wednesday and December retail sales Friday. Headline inflation is expected to rise 0.9% y/y vs. 0.7% in December, while common core is expected to rise 1.4% y/y vs. 1.3% in December. Headline sales are expected to fall -2.5% m/m vs. 1.3% in November, while sales ex-auto are expected to fall -2.4% m/m vs. 2.1% in November. Canada also reports December manufacturing sales Monday and January existing home sales Tuesday. For now, the Bank of Canada is on hold while fiscal policy carries the load in 20221. Next policy meeting is March 10 and no change is expected then.

EUROPE/MIDDLE EAST/AFRICA

Eurozone has a fairly light data week. The highlight will be preliminary February PMI readings to be reported Friday. Headline manufacturing PMI is expected at 54.3 vs. 54.8 in January, services PMI is expected at 45.8 vs. 45.4 in January, and composite PMI is expected at 48.0 vs. 47.8 in January. French composite is seen falling to 47.5 from 47.7 in January, while the German composite is seen falling to 50.5 from 50.8 in January. Ahead of the PMIs, December IP and trade data will be reported Monday, with IP expected to fall -0.8% vs. a 2.5% gain in November. February ZEW survey will be reported Tuesday.

The eurozone economy will continue to suffer from the poorly run vaccine rollout. Next European Central Bank decision is March 19. New macro forecasts will be released then and will likely be marked down from December. Most believe the ECB is done adding stimulus but we are not convinced.

UK has another busy data week. January CPI will be reported Wednesday, with headline expected to fall a tick to 0.5% y/y and CPIH expected to remain steady at 0.8% y/y. Preliminary February PMI readings, January retail sales, and public sector net borrowing data will be reported Friday. Headline manufacturing PMI is expected at 53.1 vs. 54.1 in January, services PMI is expected at 42.0 vs. 39.5 in January, and composite PMI is expected at 43.0 vs. 41.2 in December. Headline sales are expected to fall -2.7% m/m vs. 0.3% in December, while sales ex-auto fuel are expected to fall-2.1% m/m vs. 0.4% in December. UK CBI also releases results of its February industrial trends survey Friday, with total orders expected at -35 vs. -38 in January.

The UK economy will be facing two distinct cross-currents in 2021. First, the vaccine rollout is one of the best in the world. If this continues, then the economy will be able to reopen much faster than the continent will. On the other hand, the UK is facing a Brexit handover in both trade and services and the negative impact will become clearer as the pandemic ebbs. We expect expansionary fiscal and monetary policies to continue this year as a result. Next Bank of England decision is March 18. We believe the bank was much too optimistic at this month’s meeting. If the data disappoint in Q1, the bank may have to acknowledge more downside risks ahead.

ASIA

Japan has a heavy data week. Q4 GDP data will be reported Monday, with growth expected at 2.4% q/q vs. 5.3% in Q3. Annualized, growth is expected at 10.1% vs. 22.9% in Q3. January trade and December core machine orders will be reported Wednesday. Exports are expected to rise 7.0% y/y vs. 2.0% in December, while imports are expected to fall -5.5% y/y vs. -11.6% in December. Core machine orders are expected to fall -6.2% m/m vs. 1.5% in November. Preliminary February PMI readings and January national CPI will be reported Friday. Headline is expected to fall -0.7% y/y vs. -1.2% in December, while core (ex-fresh food) is expected to fall -0.6% y/y vs. -1.0% in December.

The economy is likely to suffer from the current lockdowns and GDP is expected to contract in Q1. Deflationary pressures remain persistent. While monetary policy is on hold, we fully expect another round of fiscal stimulus later this year. Next Bank of Japan policy meeting is March 18-19 and no change is expected then. Policymakers should be happy that USD/JPY remains fairly buoyant and trading near the 105 area. Break above 105.25 is needed to set up a test of the February 5 high near 105.75.

Australia has a busy week. RBA minutes will be released Tuesday. Recall that the bank delivered a dovish surprise at this month’s meeting by extending its asset purchases beyond mid-April with an AUD100 bln increase. Governor Lowe also said that he didn’t expect a rate hike until 2024 at the earliest. January jobs data will be reported Thursday, with a 30k gain expected vs. 50k in December and the unemployment rate expected to drop a tick to 6.5%. Preliminary February PMI readings and January retail sales will be reported Friday, with sales expected to rise 2.0% m/m vs. -4.1% in December.

For now, the RBA is on hold as the nation continues to make good headway containing the virus. Some risks lie ahead and so policymakers remain in wait and see mode. Next RBA policy meeting is March 2 and no change is expected then. AUD is likely to test the January high near .7820 soon. Break above would put .80 in the market’s sights.

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