Monday, December 30, 2019

Weekly outlook: Out with a sigh

Marshall Gittler

FХ Strategist & Financial Commentator

I was off last week and not paying much attention to the markets. That seems like a good call, as there wasn’t that much change in the markets over the last week. The dollar fell against all the major currencies, but not by that much.

For the year as a whole however the dollar was up. What’s really noticeable though is the narrow range of currencies during the year. They ranged from -5.2% for SEK to +4.3% for CAD. By comparison, last week’s best performer, NOK, was up 1.8% vs USD during the week – comparable in magnitude to its overall 2019 performance of -2.0%.

NBHM Weekly Analysis

The main reasons for the sluggish volatility in 2019 were economic and monetary policy convergence. I expect less of both in 2020, for two reasons:

  • The US-China trade war is dying down. That means economies should recover, but at different paces.
  • Inflation seems to have bottomed. As it accelerates, countries are less likely to cut rates (which tends towards convergence, as rates can only be cut just so far) and maybe, possibly, conceivably some countries could start thinking about hiking rates, which would encourage monetary policy divergence.

I look for Germany, with its dismal economic performance recently, to be a major beneficiary of increased global trade. In addition, the European Central Bank (ECB) is seen as having a relatively high probability of hiking rates in 2020, although frankly I would be astonished if they did – I think maybe these figures are distorted by end-year factors and don’t reflect actual market views.

NBHM Weekly Analysis

On the other hand, the dollar on average rises ahead of a US election, although the average may not have much meaning in this case when the dispersion is so great. Still, I think Trump has been such a disaster for the US and the world that any indication that he might be removed from office, either by impeachment or election, should help the US currency.

This week:  a becalmed holiday market likely

The main feature this week of course is the New Year’s holiday. Most of the world will be off on Wednesday, New Year’s day, while Japan will be off Tuesday through Friday. New Zealand and Switzerland will be off on Thursday as well as Wednesday. In any case, I expect a lot of people will take the week off and markets will be thin.

Not only is there a major global holiday, but in addition there’s only one major US and one major EU indicator out during the week. No central bank meetings and only the minutes from the latest FOMC meeting out on Friday (plus a couple of Fed speakers that day). It looks to be pretty dull!

However, beware. On average, the last and first week of the year have slightly higher-than-average volatility, but not terribly so.

NBHM Weekly Analysis

But occasionally they are the most volatile weeks of the year, probably because the market is so thin. As long as nothing untoward or unexpected happens, you’re probably safe spending your time a) partying and b) recovering from partying, but you might want to cover any open positions just in case.

This week’s indicators:  final PMIs, FOMC minutes

The indicators, such as they are, are the final manufacturing purchasing managers’ indices (PMIs) for the major economies as well as the PMIs for those countries that haven’t announced yet. In addition, the Institute of Supply Management (ISM) announces its manufacturing index. For the US, we also get the Conference Board consumer confidence index on Tuesday, while in the EU, we get German CPI and employment data on Friday.

The final manufacturing PMIs are normally expected to be unchanged from the preliminary versions – that is, the preliminary version is as good a prediction of the final version as any. One exception this month is that the UK manufacturing PMI is expected to be revised up slightly to 47.6 from 47.4. I doubt if it will make any difference however.

The ISM manufacturing PMI, out on Friday, is expected to rise notably, but still be below the “boom or bust” line of 50. By comparison, the Markit version of the same index didn’t fall below 50 during 2019. It was more or less unchanged in December, which makes me wonder why the ISM version should rise sharply during the month. If it does anyway, that’s likely to be positive for the dollar.

NBHM Weekly Analysis

The Conference Board consumer confidence index is expected to rise slightly. This is no surprise as consumer confidence is basically a function of the stock market and the unemployment rate, both of which are going in the right direction. Maybe it also reflects hope that Trump gets kicked out of office? USD positive

The minutes from the 11 December FOMC meeting will be released Friday afternoon. I doubt if the discussion of the economic outlook will turn up anything new, as most Fed officials who’ve spoken since the meeting have largely endorsed Chair Powell’s message that monetary policy is in the right place barring a “material reassessment.” One point of interest will be what it would take for the Fed to hike rates. Powell raised the bar for hiking significantly when he said, “I would want to see a significant move up in inflation that is also persistent before raising rates to address inflation concerns.” However, he was careful to note that that was his own view. It will be interesting to see what the views on this important point are among the other committee members.

The market will also want to see the discussion about the Fed’s policy review. This review may well result in a change to the Fed’s inflation target away from a “hard” target of 2% to more of a “soft” target, such as “2% over time” or other way of allowing inflation to rise above 2% temporarily to make up for times that it was below 2%. Any move in that direction would probably be negative for the dollar as it would reduce the odds of a rate hike any time soon and indeed could increase the likelihood of a cut, since there would be less concern about overshooting the target.

There are a few Fed speakers on Friday:  Richmond Fed President Barkin (non-voter/hawk), Dallas’ Kaplan (voter/neutral), Fed Governor Brainard (voter/neutral), San Francisco’s Daly (non-voter/dove), Chicago’s Evans (non-voter/dove) and However, only Barkin and Kaplan are likely to comment on the outlook for policy. The other three will be appearing on a panel discussion at the American Economic Association meeting to discuss women in central banking, although they may say something of interest to the market during the Q&A session.

Other US indicators out during the week include advance trade balance and pending home sales on Monday.

As for the EU, the main point of interest will be the German inflation data on Friday. Inflation is expected to pick up notably during the month, which should be bullish for EUR.

NBHM Weekly Analysis

The German employment data and Eurozone money supply, including bank lending, are also going to be released on the same day.

There are no major indicators out for Japan, Canada, Australia or New Zealand. Pretty dull!

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