Market movers for the week ahead – BBH
Analysts at BBH suggest that in addition to the US jobs data at the end of the week, there are two other events that are important for investors, without discussing Trump's first State of the Union Address.
Key Quotes
“In fact, Trump will deliver the State of the Union Address a few hours after Yellen chairs her last FOMC meeting. The market understands that there is practically no chance of a rate hike.”
“However, a hawkish hold is the most likely outcome Wednesday. Growth impulses are stronger, even though Q4 GDP disappointed. The part of the economy that is the most responsive to monetary policy, final domestic purchases rose by a robust 4.8%. Inflation and market-based measures of inflation expectation have risen. In the first look at Q4 GDP, the core PCE deflator rose from 1.3% to 1.9%. The 10-year breakeven rate (the difference between the yield of the conventional 10-year note and the 10-year TIPS) has risen by about 20 bp since the December FOMC meeting and at nearly 2.10%, where it finished last week. It is at three-year highs.”
“The US Treasury will announce the details of the quarterly refunding Wednesday. This is important because investors have already been put on notice that the size of the coupon offerings will increase. Many participants still do not appear to appreciate that the government's net issuance this year will be around twice last year's $550 bln. Around a third or so will be T-bills, but this cannot happen until the debt ceiling is resolved. Coupon issuance is going to rise as the Federal Reserve increasingly withdraws from buying (at a rate of $60 bln in Q1 18, $90 bln in Q2, $120 bln in Q3, reaching a terminal velocity of $150 bln in Q4 18).”
“The US non-farm payrolls are likely to bounce back from the weather-induced weakness in December. The median estimate is around 180k after December 148k increase. The US averaged 171k net new jobs a month last year, down from 187k average in 2016 and 226k in 2015. The point is that US jobs growth is doing fine, but it is well past the cyclical peak. Auto sales, which will be reported also seem to be past their cyclical peak, but were re-energized last year replacements are devastating storms.”
“The focus has turned to average hourly earnings growth. Currently, it is seen in the context of the outlook for core inflation, but it is also an important driver or income and consumption. Average hourly earnings have risen at an average monthly pace of 0.2% in every year since 2010. The average for the last three months of 2017 slipped to a 0.1% pace. However, average hourly earnings rose 0.3% in December and are forecast to have matched that in January. The year-over-year pace slowed to 2.5% in December 2017 compared with 2.9% in December 2016. A 0.3% increase in December will lift the pace to 2.6%.”
“There are two eurozone economic reports that will draw attention. First, following the UK and US, the first estimate of Q4 GDP will be reported Tuesday. The median in the Bloomberg survey looks for a 0.6% pace, the same as in Q3. The risk lies to the upside, given what appears to have been a broadening of the expansion.”
“Second, and more important for monetary policy is the preliminary estimate of January CPI Wednesday. Most economists are looking for the headline rate to slip to 1.3% from 1.4%, while the core rate ticks up to 1.0% from 0.9%. The change is in the opposite direction of what one would expect if the price of oil increase was not fully offset by the euro's appreciation. Given market positioning and sentiment, disappointment with a core rate miss may spur a greater market reaction than an upside surprise on the headline rate.”
“Lastly, Japan reports economic data almost every day this week. These include jobs, household spending, retail sales, industrial production, auto production and sales, manufacturing PMI, construction orders, and housing starts. The key takeaway is that the Japanese economy is continuing its expansion. It is, for the time being, a virtuous cycle of stronger exports spurring capex and output, which boosts the demand for labor, and now consumption. A homegrown threat on the horizon is the sales tax increase planned for October 2019.”