Drivers for the Week of February 21, 2021

Here's a look at the main drivers in Developed Markets this week.
  • Fed manufacturing surveys for February will continue to roll out; there will be a full slate of Fed speakers this week; we get our second look at Q4 GDP Thursday; weekly jobless claims data will be watched closely
  • It’s a quiet week in terms of eurozone data; UK reports labor market data Tuesday
  • Japan has a busy week, with most of the data coming towards the end; RBNZ meets Wednesday and is expected to keep rates steady at 0.25%; we suspect the RBNZ may deliver a dovish hold this time

Despite the strong US data reported last week, the dollar was largely on its back foot. Interestingly, the dollar did fine against the euro, yen, and Swiss franc and poorly against the growth-sensitive dollar bloc and Scandies. DXY is down two straight days and is nearing last week’s low near 90.118. A clean break below 90.123 would set up a test of the January near 89.209. The euro is on track to test last week’s high near $1.2170, while sterling is trading above $1.40 for the first time since 2018 and is on track to test the April 2018 high near $1.4375. USD/JPY is trading around 105.50 and feels heavy. A break below 105.10 would set up a test of the February 10 low near 104.40. We are still confident that the dollar is carving out a bottom in Q1, but recent volatile price action suggests its recovery path won’t be a straight line.


Fed manufacturing surveys for February will continue to roll out. Dallas Fed reports Monday and is expected at 5.0 vs. 7.0 in January, Richmond Fed reports Tuesday and is expected at 16 vs. 14 in January, and Kansas City reports Thursday and is expected at 15 vs. 17 in January. So far, Philly Fed came in at 23.1 vs. 26.5 in January and Empire survey came in at 12.1 vs. 6.0 in January, both stronger than expected. Of note, Markit preliminary February PMI readings were reported Friday, with manufacturing at 58.5 vs. 58.8 expected and 59.2 in January and services at 58.9 vs. 58.0 expected and 58.3 in January. This pushed the composite up a tick to 58.8. Chicago PMI will be reported Friday and is expected at 61.0 vs. 63.8 in January.

There will be a full slate of Fed speakers this week. The main event will be Powell’s semi-annual testimony before the Senate Banking Committee Tuesday and the House Financial Services Committee Wednesday. Of course, he is widely expected to underscore the Fed's dovish stance. Ahead of that, Kaplan and Bowman speak Monday. Afterward, Brainard and Clarida speak Wednesday. Bostic, Bullard, Quarles, and Williams all speak Thursday.

We get our second look at Q4 GDP Thursday. The economy is expected to have grown 4.2% SAAR vs. 4.0% preliminary and 33.4% in Q3. However, this is old news and markets are already looking ahead to 2021. The Atlanta Fed’s GDPNow model suggests Q1 growth is 9.5% SAAR after the January retail sales data, while the New York Fed’s Nowcast model suggests Q1 growth is 8.3% SAAR. Of note, Bloomberg consensus for Q1 is currently at 3.4% SAAR but will likely move higher after the retail sales data.

Weekly jobless claims data will be watched closely. Regular initial claims are expected at 840k vs. 861k the previous week, while regular continuing claims are expected at 4.42 mln vs. 4.494 mln the previous week. Together with PUA initial claims, total initial claims fell last week to 1.1 mln (unadjusted), the lowest since early January. However, PUA and PEUC continuing claims jumped by 2.6 mln last week. Combined with regular continuing claims, the total of 18.7 mln (unadjusted) last week is the highest since early December. This week’s continuing claims data will be for the BLS survey week containing the 12th of the month and will be very important. Consensus for February NFP due out next Friday is starting out at 100k vs. 49k in January but is subject to many revisions as more and more clues will be revealed in the coming days.

Other minor data round out the week. January Chicago Fed National Activity Index (0.50 expected) and leading index (0.4% m/m expected) will be reported Monday, followed by December S&P CoreLogic house prices and February Conference Board consumer confidence (90.0 expected) Tuesday. January new home sales (1.5% m/m expected) will be reported Wednesday, followed by durable goods orders (1.1% m/m expected) and pending home sales (-0.5% m/m expected) Thursday. January advance goods trade (-$83.0 bln expected), wholesale and retail inventories, personal income (9.5% m/m expected) and spending (2.4% m/m expected), core PCE deflator (1.4% y/y expected), and final January University of Michigan sentiment (76.4 expected) will be reported Friday.


It’s a quiet week in terms of eurozone data. Germany sentiment indicators will be reported this week. IFO business climate for February will be reported Monday and is expected at 90.5 vs. 90.1 in January. GfK consumer confidence for March will be reported Thursday and is expected at -14.0 vs. -15.6 in February. German PMIs held up well in February but the real sector data have been performing much more poorly of late and so we see downside risks to this week’s sentiment indicators. Elsewhere, France and Spain give us the first snapshot for February CPI Friday. Germany reports CPI next Monday and the eurozone reading comes out next Tuesday.

UK reports labor market data Tuesday. Employment for the three months ending in December is expected at -30k vs. -88k previously, pushing the unemployment rate up a tick to 5.1%. If so, this would be the highest rate since March 2016 and comes despite aggressive government measures to support the labor market. Chancellor Sunak is under great pressure to deliver more relief for labor and small businesses in his March budget and the data is likely to prove supportive. CBI releases the results of its distributive trades survey for February that same day, with retailing reported sales expected at -40 vs. -50 in January.


Japan has a busy week, with most of the data coming towards the end. January convenience store sales will be reported Monday, while department store and supermarket sales will be reported Thursday. They will give clues to January retail sales that will be reported Friday, which are expected to fall -1.2% m/m vs. -0.7% in December. January IP, housing starts, construction orders, and February Tokyo CPI will also be reported Friday. Both headline and core (ex-fresh food) inflation are expected at -0.4% y/y vs. -0.5% in January. IP is expected to rise 3.8% m/m vs. -1.0% in December.

RBNZ meets Wednesday and is expected to keep rates steady at 0.25%. At its last meeting November 11, the bank kept rates steady and expressed skepticism about negative rates. Asset purchases were kept steady but officials unveiled the new Funding for Lending Program that provides 3-year funding for banks at the official cash rate. While the FLP was widely seen as setting the table for negative rates next year, Governor Orr said then that “it’s too early to tell” whether the RBNZ will need to take rates negative. Consistent with this improved outlook, the bank upgraded its 2020 growth forecast to -4.0% from -5.8% previously. All in all, it was a surprisingly less dovish tilt in the communication and markets reacted accordingly.

We suspect the RBNZ may deliver a dovish hold this time. Why? Since that meeting, the curve has steepened sharply, with the 20-year yield up over 100 bp, while NZD has gained 7% against USD, second only to AUD during that time. While the economic data have been coming in firm, these developments are serous headwinds on the economy and we do not think the RBNZ was prepared for this reaction. As such, we expect some dovish pushback from the bank this week. Ahead of the decision, Q4 retail sales will be reported Tuesday. January trade will be reported Friday.

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