• Discussions on President Biden’s proposed $1.9 trln fiscal package will begin in earnest this week; the FOMC decision Wednesday will be closely watched; we get our first look at Q4 GDP Thursday; Fed manufacturing surveys for January will continue to roll out; weekly jobless claims data Thursday will be closely watched
  
• ECB Chief Economist Lane speaks Wednesday; Germany has a busy week; eurozone countries also report Q4 GDP Friday; UK reports labor market data Tuesday
  
• Japan has a very busy week; the bottom line is that the Japanese economy remains weak and more stimulus is likely

The dollar is likely to remain on its back foot this week if the Fed delivers a dovish hold, as we expect. DXY was up modestly Friday after retracing nearly half of its recent bounce and has held on to those gains, but we look for weakness to resume. A break of last week’s low near 90.048 and then 89.874 (62% retracement objective of the January rally) is needed to set up a test of the January 6 low near 89.209. The euro continues to edge higher after the ECB decision and a break of $1.2235 is needed to set up a test of the January 6 high near $1.2350. Sterling remains buoyant despite weak economic data and is testing the $1.37 area, pushing the EUR/GBP back below the .89 level. USD/JPY remains heavy and is likely to continue having trouble breaking above 104.

Americas

Discussions on President Biden’s proposed $1.9 trln fiscal package will begin in earnest this week. Director of the National Economic Council Brian Deese held virtual talks Sunday with a 16-member bipartisan group of Senators about key elements of the proposal. Reports suggest Biden and Vice President Harris will also begin meeting with lawmakers from both parties in the coming days to discuss the package. Emergency unemployment benefits are set to expire in mid-March and so time is of the essence. In the meantime, President Biden is relying on executive orders to provide as much relief as possible in the quickest manner, including a mandate for federal contractors to pay a $15 per hour minimum wage.

The FOMC decision Wednesday will be closely watched. Not because the Fed will change policy. It won’t. Nor will it issue new forecasts and Dot Plots. Those come in March. Yet this meeting will give the Fed an important opportunity to better frame its policy outlook. Recently, several regional Fed presidents started talking about tapering. This helped push long yields higher and the Fed leadership quickly pushed back, with Powell, Clarida, and Brainard all saying it was too early to talk about tapering. We expect the Fed to codify this stance once and for all at this meeting. At the same time, the Fed will surely acknowledge weakness in the US economic data in justifying its ultra-dovish stance. After Powell’s post-decision press conference, Kaplan will be the next Fed speaker Friday.

We get our first look at Q4 GDP Thursday. The economy is expected to have grown 4.2% SAAR vs. 33.4% in Q3. The Atlanta Fed’s GDPNow model suggests Q4 growth was 7.5% SAAR, while the New York Fed’s Nowcast model suggests Q4 growth was 2.58% SAAR. Of note, the New York Fed’s separate Weekly Economic Index suggests Q4 growth was 4.6% SAAR, which is very close to Bloomberg consensus. That said, this is old news and markets are braced for an extremely weak Q1 despite the fact that the New York Fed’s Nowcast model is currently tracking Q1 growth at 6.65% SAAR.

Fed manufacturing surveys for January will continue to roll out. Dallas Fed reports Monday and is expected at 12.0 vs. 9.7 in December. Richmond Fed reports Tuesday and is expected at 17 vs. 19 in December. Kansas City reports Thursday and is expected at 12 vs. 14 in December. So far, Philly Fed came in at vs. a revised 9.1 (was 11.1) in December and Empire survey came in at 3.5 vs. 6.0 expected and 4.9 in December. Of note, Markit preliminary January PMI readings were stronger than expected, with manufacturing at 59.1 vs. 56.5 expected and 57.1 in December and services at 57.5 vs. 53.4 expected and 54.8 in December. Chicago PMI will be reported Friday and is expected at 58.0 vs. a revised 58.7 (was 59.5) in December.

Weekly jobless claims data Thursday will be closely watched. Regular initial claims are expected at 880k vs. 900k the previous week. PUA claims were 424k last week and so together with regular (unadjusted) claims totaled 1.4 mln, nearly unchanged from the previous week. Last week’s readings were for the BLS survey week containing the 12th of the month. Clearly, recent deterioration in the labor market is persisting and likely to generate another weak (and possibly negative) NFP for this month. We know it’s still early yet but Bloomberg consensus sees +100k for January NFP. A lot can still happen and continuing claims data will be another piece of the puzzle since they lag initial claims by a week and will be for the BLS survey week. These are expected at 5 mln vs. 5.054 mln last week. Whether January NFP is +100k or -100k, the fact of the matter is that the US economy has lost momentum and needs further stimulus to tide it over until the virus is under control and vaccinations are more widely rolled out.

Other minor data round out the week. Chicago Fed National Activity Index for December (0.10 expected) will be reported Monday, followed by November S&P CoreLogic house prices and January Conference Board consumer confidence (89.0 expected) Tuesday. December durable goods orders (1.0% m/m expected) will be reported Wednesday, followed by advance goods trade (-$83.5 bln expected), wholesale and retail inventories, leading index (0.3% m/m expected), and new home sales (2.3% m/m expected) Thursday. Friday sees December personal income (0.1% m/m expected) and spending (-0.4% m/m expected), core PCE deflator (1.3% y/y expected), pending home sales (-0.3% m/m expected), and final January University of Michigan sentiment Friday.

Europe/Middle East/Africa

ECB Chief Economist Lane speaks Wednesday. The event – “In search of a fitting monetary policy: the ECB’s strategy review” – is quite self-explanatory. The results of the review have been delayed from end-2020 to mid-2021 due to the pandemic. The ECB delivered a less dovish than expected hold last week by noting that its full EUR1.85 trln PEPP may not be needed. We do not believe that the ECB will taper its purchases anytime soon, but eventual tapering is certainly the implied message here. We expect Lane to field some questions about ECB policy. We know he is on the dovish side of the spectrum and so he may push back against the tapering narrative. That said, the ECB did not seem that concerned about the exchange rate and so markets are rightly taking the euro higher since the meeting.

Germany has a busy week. IFO business climate survey for January will be reported Monday and is expected at 91.4 vs. 92.1 in December. An expected rise in expectations to 93.6 is not seen as enough to outweigh an expected drop in the current assessment to 90.6. GfK consumer confidence for February will be reported Wednesday and is expected at -7.9 vs. -7.3 in January. January CPI will be reported Thursday, with headline inflation (EU Harmonized) expected to rise 0.5% y/y vs. -0.7% in December. Q4 GDP and January unemployment will be reported Friday. Growth is expected flat q/q vs. 8.5% in Q3, while the y/y rate is expected at -3.2% vs. -3.9% in Q3. Unemployment is expected to rise 7.5k after unexpectedly falling -37.0k in December.

Other eurozone countries also report Q4 GDP Friday. France is expected to contract -4.0% q/q vs. an 18.7% rise in Q3, while the y/y rate is expected at -7.6% vs. -3.9% in Q3. France also reports December consumer spending that day, which is expected to jump 23.9% m/m vs. -18.9% in November. Spain is expected to contract -1.3% q/q vs. a 16.4% rise in Q3, while the y/y rate is expected at -10.7% vs. -9.0% in Q3. Spain also reports December retail sales that day.

UK reports labor market data Tuesday. Employment for the three months ending in November is expected to fall -105k vs. -144k previously, driving the unemployment rate up a couple of ticks 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 January that same day, with retailing reported sales expected at -33 vs. -3 in December.

Asia

Japan has a very busy week. December retail and department store and supermarket sales Thursday will be important. Retail sales are expected to fall -0.9% m/m and -0.5% y/y, while department store and supermarket sales are expected to fall -3.6% y/y. December labor market data, IP, and January Tokyo CPI will be reported Friday. Headline CPI is expected at -0.9% y/y vs. -1.2% y/y in December, while core (ex-fresh food) is expected at -0.6% y/y vs. -0.9% in December. Unemployment is seen rising a tick to 3.0%, while the job-to-applicant ratio is seen falling a tick to 1.05. IP is expected to fall -1.5% m/m vs. -0.5% in November. Minor data include December PPI Tuesday, along with December housing starts and construction orders Friday.

The bottom line is that the Japanese economy remains weak and more stimulus is likely. And lockdowns seen since December will only make things worse. The BOJ kept policy on hold last week, as expected. However, the bank could deliver a surprise at its March 19 meeting, when it plans to release the results of its policy review. Reports suggest it may allow the 10-year yield to trade in a wider band than the current 20 bp on either side of 0%. However, a steeper yield curve would lead to tighter monetary conditions and so we are a bit skeptical that the bank will take this step. On the other hand, we continue to believe that Prime Minister Suga will deliver another slug of fiscal stimulus near mid-yea as he girds for elections this autumn.