This week’s US economic calendar will likely take a back seat to Wednesday’s FOMC meeting statement.
It’s widely expected that the Fed will remain on hold, probably conveying a very similar messaging from the October meeting.
Friday’s stellar employment report should add to policymakers’ confidence that consumer spending will be able to hold the line amidst the soft patch in business investment. Thus, Chair Powell could reiterate his recent remarks which indicate that the Committee sees policy in the right place, barring a “material reassessment” to the outlook. In this light, we could also expect Powell to echo a similar view from October, that while the bar to cutting rates is high, the bar for hiking is even higher as prudence would suggest the FOMC fade the strength in the massive jobs report. After all, it’s seldom wise to place too much emphasis on the noisy Jobs reports that are subject to significant revisions.
All in all, the December FOMC statement should largely mirror the communique from October, the only essential difference being that the Fed will not be cutting the policy rate.
The run-up economic data has been a bit wishy-washy at times, but on balance and key data points reinforces the Fed’s rosy economic view, which could be even upgraded to “strong” considering Friday’s employment report.
However, the Fed could also strike a cautionary tone around trade policy and global growth risks that continue to linger. Hence, Powell is likely to convey a cautiously optimistic assessment, allowing the data to do the talking over the coming months.
At the end of the day, “uncertainties” around the “implications of global developments” alongside “muted inflation pressures” should leave the FOMC in wait-and-see and data dependency 101 mode.
UK ELECTION WEEK
After weeks of waiting and years in the making, this week will see the third UK General Election in the last five years. While not in the same league as Italian politics in terms of frequency, it’s still the highest number of elections held in the UK over any five-year period since the early 1970s.
PM Johnson’s mandate is clear as a bell: leave the EU in January. And he’s hoping that this week’s election will break the Parliamentary deadlock on Brexit. If polls are correct, PM Johnson’s gamble could pay off.
At the time of writing the Tories hold a 10-15 point lead over Labour, which should translate into a resounding majority if the numbers hold up into election day. The reason I say “if” is that Theresa May had a similar lead with around a week to go, and we know how that story ended.
No two ways about it, early-week polls will be critical for sentiment as it could give traders a heads-up if the numbers are trending in a similar direction to 2017. Last-minute sentiment swings could make this one of the most unpredictable events in some time but it’s also without question one of the most critical events in the UK’s storied history.
View all the events: AxiTrader Economic Calendar
Weekly Look at the Yuan
The Yuan is the key bellwether trade war sentiment gauge
Last week provided a not-so-subtle reminder that when it comes to trade war it’s never over ‘til it's over. But the Yuan rallying into week’s end on the back of expectations that a deal will happen sooner or later did reinforce our argument that the markets are starting to price in peak tariffs based on the scheduled December tariffs being delayed and some positive tail, including a rollback in the 15% tariffs imposed in September.
Based on price action alone, one could argue that the markets are effectively pricing in a 75% chance of a delay in tariffs and maybe a 25% chance of a rollback. So, there is still some room for a potential Yuan rally to around 6.90, if the September rollback is put into effect.
Critical economic releases by county in Asia
In a bit of a surprise last week, the Reserve Bank of India kept its policy rate steady on a unanimous vote but maintained an explicit easing bias. In part due to the Fed pause, it also allows RBI time to assess the effectiveness of the monetary policy transmission of its previous rate cuts. Economists expect the RBI’s monetary easing to resume as soon as February, subject to inflation prints.
After a higher than expected inflation print last week, economists expect the Bangko Sentral ng Pilipinas (BSP) to leave its policy settings unchanged at its final meeting of the year (December 12) as it waits for the recent 2ppt RRR cuts to filter through the economy.
Economists expect China’s CPI inflation to head higher to 4.5% in November, from 3.8% in October, driven by surging pork prices. In contrast, they expect the PPI inflation to remain in negative territory, albeit slightly better at -1.5% vs -1.6% in the same period.
While the People’s Bank of China could continue to ease, the higher CPI prints limit policy scope and investment banks have been revising lower their cumulative MLP rate cut expectations from 50-45 bps to 20-25 bps for 2020.
Analysts think that Malaysia’s IP is likely to remain weak with its growth at 1.7% in October, unchanged from September, suggesting continued below-potential growth.
In contrast, they expect Singapore’s high-frequency data to reconfirm the market's expectation of a sustained, modest rebound in growth as retail sales growth is likely to rise by 0.4% in October, vs a 2.2% fall in September.
To view all the events, go to: AxiTrader Economic Calendar
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Two-year yields have covered their prior six-month range in the last week alone – and whether or not this move is sustainable matters a lot