• Markets will be keenly focused on Fed Chair Powell; Fed Beige Book report will be released; ADP reports its private sector jobs estimate; ISM services PMI will also be important; October JOLTS data are worth discussing; Canada also reports November PMIs
  
• The French government is on the verge of collapse; political paralysis in France and Germany means the ECB will have to do the heavy lifting; eurozone and U.K. reported firmer final November PMIs; BOE Governor Bailey did not offer new policy guidance; Poland is expected to keep rates steady at 5.75%
  
• Japan reported firmer final November services and composite PMIs; Australia reported soft Q3 GDP data and firmer final November services and composite PMIs; Caixin reported mixed services and composite PMIs; Korea President Yoon lifted martial law less than a day after decreeing it

The dollar is treading water ahead of ADP, ISM services PMI, and Powell. DXY is trading slightly higher near 106.425 as markets await clues about the U.S. economy and monetary policy. The yen is underperforming, with USD/JPY climbing to trade above 151 after oscillating around 150 the last few days. The price action confirms our belief that this pair is unlikely to trade below 150 for any significant amount of time given still-wide interest rate differentials that continue to favor the dollar. Elsewhere, the euro is trading lower near $1.05 ahead of the French no confidence vote (see below), while sterling is trading flat near $1.2675. AUD is underperforming after soft GDP data brought forward RBA easing expectations to April (see below). 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. Key data still to come this week should confirm our thesis. Market pricing for the Fed has already adjusted, which has given the dollar a huge lift.

AMERICAS

Markets will be keenly focused on Fed Chair Powell. He participates in a moderated discussion and this will be his last appearance before the media blackout for the upcoming FOMC meeting takes effect. In his last speech November 14, Powell hinted that the Fed may hit the snooze button at the December 17-18 meeting. Powell also highlighted that “the economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.” Moreover, Powell acknowledged that the October U.S. inflation data “was slightly more than an upward bump than we had expected.” Not much has changed since then, although we have all the key U.S. data for November still to come. Musalem also speaks today.

Other Fed officials remain cautious. Daly said “In order to keep the economy in a good place we have to continue to recalibrate policy. Whether it’ll be in December or sometime later, that’s a question we’ll have a chance to debate and discuss in our next meeting, but the point is we have to keep policy moving down to accommodate the economy.” Kugler said “I will vigilantly monitor for incoming risks or negative supply shocks that may undo the progress that we have achieved in reducing inflation. I view our current policy setting as well positioned to deal with any uncertainties we face in pursuing both sides of our dual mandate.”

The Fed Beige Book report will be released. The October Fed Beige Book presented a mixed picture of the US. economy. According to the Beige Book “On balance, economic activity was little changed in nearly all Districts since early September, though two Districts reported modest growth…Despite elevated uncertainty, contacts were somewhat more optimistic about the longer-term outlook.” We expect a similar tone to be maintained in this report.

ADP reports its private sector jobs estimate. Headline is expected at 150k vs. 233k in October and comes ahead of the jobs report Friday. Bloomberg consensus for NFP stands at 218k vs. 12k in October, while its whisper number stands at 190k. Recall that the poor October NFP number reflected hurricanes and strike activity. The unemployment rate is expected to remain steady at 4.1% while annual average hourly earnings are expected 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.

ISM services PMI will also be important. Headline is expected at 55.7 vs. 56.0 in October. The regional Fed ISM services prints point to upside risk, as does the S&P Global services PMI, which rose to a nearly 3-year high of 57.0 vs. 55.0 in October. Keep an eye on prices paid, which is expected at 57.0 vs. 58.1 in October, as well as employment, which is expected to remain steady at 53.0. October factory orders will also be reported and are expected at 0.2% m/m vs. -0.5% in September.

October JOLTS data are worth discussing. Job openings rose to 7.744 mln vs. 7.519 mln expected and a revised 7.372 mln (was 7.443 mln) in September. The details were generally good. The job openings rate rose 0.2 ppt to 4.6% and the layoffs rate dipped 0.1 ppt to 1.0%, suggesting there is no layoff spiral underway. The quits rate increased 0.2 ppt to 2.1%, which is indicative of improving worker confidence in finding a new job. Disappointingly, the hiring rate dropped 0.2 ppt to 3.3% and is in line with softer labor demand. Overall, the JOLTS data does not warn of any significant deterioration in the labor market.

Vehicle sales continue to strengthen. November sales came in at a 16.50 mln SAAR vs. 16.10 mln expected and 16.04 mln in October. This was the strongest since May 2021 and bodes well for headline retail sales due out December 17.

Canada also reports November PMIs. S&P Global reports its services and composite PMIs today. Ivey PMI will be reported tomorrow.

EUROPE/MIDDLE EAST/AFRICA

The French government is on the verge of collapse. Left-wing and right-wing groups plan to vote for a no-confidence motion today. The debate will begin at 10 AM ET and the vote will follow shortly thereafter. What happens if the French government falls? According to POLITICO, “the French constitution provides for at least two stopgap solutions. The first allows the government to put forward a so-called “special law” allowing the state to effectively carry over the previous year's budget for a few months. The second option is more complicated but would effectively see the parliamentary debate continue until December 21 and then allow the government to adopt the budget via a government order. Barnier would still expose himself to a no-confidence vote, which he'd most likely lose, but the budget would be adopted.” Regardless, France’s political drama faces additional twists and turns. New parliamentary elections cannot be held before June 2025 and President Macron has pledged to stay in place until May 2027, when his term ends.

Encouragingly, France’s political crisis is not morphing into a wider financial market crisis. While French-German 10-year government bond yield spreads have widened to near 12-year highs recently, French bond yields are drifting lower in absolute terms. Moreover, the 10-year yield premium for Italy, Spain, and Portugal over safer German peers are contained near recent lows.

In Germany, fiscal support for the weak economy will likely take time to materialize. Parliamentary election will be held February 23, but the formation of a new coalition government could take weeks or months. In the meantime, calls are growing for lawmakers to relax the so-called debt brake, which restricts annual structural deficits to 0.35% of GDP in any fiscal year. Bundesbank President Nagel argued for more room for fiscal stimulus, warning that the German economy faces a complicated and weak outlook. We concur.

Political paralysis in France and Germany means the ECB will have to do the heavy lifting. The swaps market is now pricing in 150 of total easing over the next 12 months that would see the policy rate bottom near 1.75%. However, it’s clear that markets are likely underestimating the ECB’s capacity to ease in the face of little or no fiscal stimulus in the pipeline. Cipollone, Lagarde, Makhlouf, and Nagel speak today.

Eurozone reported firmer final November PMIs. Headline services rose three ticks from the preliminary to 49.5 while headline composite rose two ticks to 48.3. Looking at the country breakdown, the German composite fell a tick from the preliminary to 47.2 while the French composite rose over a point to 45.9. Italy and Spain reported for the first time and their composite PMIs came in at 47.7 and 53.2, respectively. Both were down significantly from October and suggests that weakness in the core is spreading to the periphery.

Bank of England Governor Bailey did not offer new policy guidance. Bailey discussed the BOE’s three potential outlooks for rates as already outlined in the November Monetary Policy Report. He pointed out that the central view underpinning the November projections was based on the market pricing of four cuts next year, which he viewed as consistent with “gradual” interest rate reductions. The two other policy paths implied the BOE could cut rates more aggressively or cause monetary policy to remain more restrictive. Odds of a 25 bp rate cut at the December 19 meeting remain low at about 10%, while markets continue to price in 75 bp of total easing over the next twelve months. Bottom line: relative monetary policy trend between the ECB and BOE still favors a lower EUR/GBP.

U.K. reported firmer final November services and composite PMIs. Services came in at 50.8 vs. 50.0 preliminary, which helped drag the composite up to 50.5 vs. 49.9 preliminary. That means that the composite continues to remain above 50, albeit just barely. This suggests Q4 GDP growth is likely to remain very sluggish after eking out a 0.1% q/q gain in Q3.

National Bank of Poland is expected to keep rates steady at 5.75%. Governor Glapinski holds his post-decision press conference tomorrow. Minutes from the November 6 meeting will be published Friday. At that meeting, the bank kept rates on hold and Governor Glapinski stressed that rate cut discussions were unlikely before March 2025. The market is pricing in 50 bp of easing over the next six months followed by another 75 bp of easing over the subsequent six months.

ASIA

Japan reported firmer final November services and composite PMIs. Services came in at 50.5 vs. 50.2 preliminary, which helped drag the composite up to 50.1 vs. 49.8 preliminary. That means that the composite did not spend two straight months below 50, albeit just barely. This suggests Q4 GDP growth is likely to remain very sluggish after eking out a 0.2% q/q gain in Q3.

Australia reported soft Q3 GDP data. Real GDP grew 0.3% q/q vs. 0.5% expected and 0.2% in Q2, while the y/y rate slowed to 0.8% vs. 1.1% expected and 1.0% in Q2. Government spending and public investment contributed the most to growth (0.3 ppt each), while inventory destocking was the biggest drag (-0.4 ppt). Net exports added 0.1 ppt to GDP growth, while household spending was flat. Markets brought forward the timing of the first 25 bp rate cut to April from May previously and now see 75 bp of total easing in 2025. October household spending and trade data will be reported tomorrow and should give some hints on Q4 growth.

Australia reported firmer final November services and composite PMIs. Services came in at 50.5 vs. 49.6 preliminary, which helped drag the composite up to 50.2 vs. 49.4 preliminary. That means that the composite has stayed above 50 for two straight months, albeit just barely. That suggests Q3’s lackluster growth is carrying over into Q4.

Caixin reported mixed services and composite PMIs. Services came in at 51.5 vs. 52.4 expected and 52.0 in October, but the composite still rose four ticks to 52.3 due to a much stronger manufacturing PMI. Compare this to the official composite PMI, which was unchanged at 50.8. Despite the stimulus measures seen so far, we do not expect much impact on the economic outlook.

Korea President Yoon lifted martial law less than a day after decreeing it. For now, Korea seems to have avoided a full-blown constitutional crisis. The opposition has submitted an impeachment motion against Yoon whilst calling for him to resign. Even if he survives, Yoon will be severely weakened for the rest of his term, which ends in 2027. Yoon overplayed his weak hand and the opposition called his bluff. The fallout from South Korea’s brief imposition of martial law will likely continue to weigh on Korean financial markets and KRW, if nothing else from the political paralysis that is likely to continue. However, Korea’s large current account surplus (4% of GDP) should help cushion the decline in KRW as the country does not depend on foreign savings to finance domestic investments. Additionally, Korea has massive foreign exchange reserves of over $410 bln (about 20% of GDP) that can be deployed to support KRW.