- November jobs report will be the highlight; growth remains solid; University of Michigan reports preliminary December consumer sentiment; Canada highlight will also be the November jobs report
- French President Macron remained defiant; Germany reported weak IP; BOE MPC member Greene sounded hawkish
- Japan reported mixed October cash earnings data; India delivered a dovish hold
The dollar is getting some traction ahead of the jobs report. DXY is trading higher for the first time since Monday near 105.826 as markets await fresh clues to Fed policy. USD/JPY trading higher near 150.55 after mixed wage data cast doubt on a December BOJ hike (see below). Elsewhere, the euro is trading flat near $1.0585 as French President Macron pledged to form a new government in the coming days (see below), while sterling is trading flat near $1.2770. We look for the dollar rally to continue after this period of consolidation. While the U.S. election results have turbo-charged this dollar move, faithful readers will recall that we have been resolute in our belief that the strong U.S. fundamental story continues to favor higher UST yields and a higher dollar. Today’s jobs report as well as other key data still to come over the next two weeks should confirm our thesis. Market pricing for the Fed has already adjusted, which has given the dollar a huge lift.
AMERICAS
November jobs report will be the highlight. Bloomberg consensus for NFP has crept up to 220k vs. 12k in October, while its whisper number has risen to 217k. The poor October NFP number reflected hurricanes and strike activity and so a bounce is expected and argues for some upside risks to November. The unemployment rate is expected to remain steady at 4.1% while annual average hourly earnings growth is projected to ease a tick to 3.9% y/y. Overall, wage growth is running around sustainable rates that are consistent with the Fed’s 2% inflation target given annualized non-farm productivity growth was 2.2% in Q3.
The market continues to see a cut by the Fed in December. Odds stand at nearly 70%, which we think overstates the case given that the Fed will has to digest jobs data today, inflation data next week, and retail sales data right before the decision. Judging from the recent Fed comments, the December meeting is quite live but very much data-dependent. Our best guess is that a jobs number above 200k would cement a hold while a number below 100k would cement a cut. Anything in between and the Fed will look to the upcoming data for more guidance. Stay tune. In the meantime, Bowman, Goolsbee, Hammack, and Daly all speak today. At midnight tonight, the media blackout goes into effect and there will no Fed speakers until Chair Powell’s post-decision press conference December 18.
Growth remains solid. The Atlanta Fed GDPNow model now has Q4 growth at 3.3% SAAR, up a tick from the start of this week despite the soft ISM services PMI. Next update will come this Monday. Elsewhere, the New York Fed's Nowcast model is tracking Q4 growth at 1.8% SAAR and will be updated today. Its initial estimate for Q1 growth should also be published today.
University of Michigan reports preliminary December consumer sentiment. Headline is expected to rise to an 8-month high of 73.3 vs. 71.8 in November, which would be indicative of healthy consumer spending activity. Both current conditions and expectations are expected to rise to 65.2 and 77.7, respectively. Positive real wage growth, encouraging labor demand, and strong household balance sheets suggest household spending will remain an important tailwind to GDP growth.
Canada highlight will also be the November jobs report. Consensus sees a 25.0k rise in jobs vs. 14.5k in October, while the unemployment rate is expected to rise a tick to 6.6%. Overall, the labor market is softening. Employment growth has been modest and firms’ hiring intention remain muted. Bottom line: the Bank of Canada has room to keep cutting the policy rate. The market is pricing in 55% odds of a follow-up 50 bp cut in December.
EUROPE/MIDDLE EAST/AFRICA
French President Macron remained defiant. In a televised speech last night, he said “The mandate you gave me democratically is for five years and I will exercise it fully.” Macron said he would appoint a new Prime Minister in the coming days. He will reportedly meet with lawmakers in his party’s alliance today, as well as others outside it. Socialist leader Faure said he is willing to discuss possible support for a new government “But that doesn’t mean I’m giving up what I want. What I want is mutual concessions.” With the horse-trading likely to take some time to complete, markets for now remain quite sanguine. The euro is steady on the week while French bond spreads continue to tighten.
Germany reported weak IP. Orders came in at -1.0% m/m vs. 1.0% expected and a revised -2.0% (was -2.5%) in September, while the y/y rate fell to -4.5% vs. -3.3% expected and a revised -4.3% (was -4.6%) in September. The modest recovery in factory orders offers some hope of a recovery in the German industrial sector. However, with its manufacturing PMI stuck near 43.0 in both October and November, any recovery is likely to be limited. A 25 bp cut by the ECB next week is widely expected. Looking ahead, the swaps market is pricing in 150 of total easing over the next 12 months that would see the policy rate bottom near 1.75%.
Bank of England MPC member Greene sounded hawkish. Specifically, she noted that “Services inflation, in particular, has remained stubbornly high. That’s underpinned mostly by wage growth. Wage growth has been coming down as well, but not as quickly as I would have liked.” However, she acknowledged that consumption is likely to remain sluggish and noted that “Given the structure of the UK mortgage market in particular, I think consumption will take a while to recover, even as rates are coming down just because of the fixed terms of UK mortgages. I think there could be weak consumption for a while in UK and also across Europe, whereas the U.S. consumer just seems to see no bounds.” We concur.
ASIA
Japan reported mixed October cash earnings data. Nominal cash earnings came in as expected at 2.6% y/y vs. 2.5% in September while real earnings came in a tick higher than expected at 0.0% y/y vs. -0.4% in September. The less volatile scheduled pay growth for full-time workers came in a tick lower than expected at 2.8% y/y and was steady from September. Odds of a hike then have been up and down all week and are now up to nearly 65% again after dropping to 30% mid-week. We still do not see a compelling case for the Bank of Japan to hike rates at the December 18-19 meeting.
Reserve Bank of India kept rates steady at 6.5%, as expected. However, it was a dovish hold as the vote split to hold shifted to 4-2 from 5-1 at the last meeting October 9, with the dissents in favor of a 25 bp cut. Furthermore, the RBI unexpectedly cut the cash reserve ratio 50 bp to 4.0%. Governor Das said that “At this critical juncture, prudence and practicality demand that we remain careful and sensitive to the dynamically evolving situation,” but added that if the economy slows further, “it may need policy support.” Next RBI meeting is February 7. The swaps market is pricing in 50-50 odds of a 25 bp cut over the next three months but has fully priced in 50 bp of easing over the subsequent nine months. Of note, the RBI will now allow local banks to offer higher deposit rates to non-resident Indians, which is an effort to attract inflows and signals some concern about the weak rupee.
