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by Charalambos Pissouros

Weekly Outlook: Jan 06 – Jan 10: US and Canada Jobs Data, EZ and Norway CPIs

The end of last week was marked by tensions in Middle East, and thus, this week, investors may be on the lookout on whether this will escalate further. With regards to the economic agenda, focus could fall on the US and Canadian employment reports for December, as these data sets could reshape market expectations with regards to the Fed’s and BoC’s future course of action. We also get Eurozone’s and Norway’s inflation prints for the month.

Monday appears to be a relatively light day. We get the final Markit services and composite PMIs for December from several Eurozone nations and the bloc as a whole. As it is always the case, the final numbers are expected to confirm their preliminary estimates. The UK’s final prints are also coming out, with both the services and composite indices expected to be revised a tick higher, to 49.1 and 48.6 from 49.0 and 48.5.

On Tuesday, during the European morning, we get Switzerland’s CPI rate for December, which is expected to have remained unchanged in negative territory, at -0.1% yoy. At its latest meeting, the SNB kept interest rates unchanged at -0.75% and reiterated that it remains willing to intervene in the FX market as necessary. That said, since then, the Swiss franc strengthened decently, raising questions as to how willing to intervene the Bank is. A strong franc could work against inflation, and with the CPI rate in negative territory, investors may be on the lookout on whether the Bank will indeed decide to step in soon in order to halt the franc’s advance.

Switzerland CPI inflation

We also get inflation data for December from the Eurozone. The preliminary headline CPI rate is forecast to have risen to +1.3% yoy from +1.0%, while the core one is forecast to have held steady at +1.3% yoy. Last week, the German preliminary CPI accelerated to +1.5% yoy from +1.1%, supporting the case for a similar reaction in Eurozone’s headline number. At the latest (and the first for Christine Lagarde) ECB policy meeting, officials kept interest rates untouched and reiterated that they expect them to remain at their present or lower levels until the inflation outlook robustly converge to their aim. At the press conference, Lagarde reiterated Draghi’s words that officials stand ready to adjust all their instruments if needed, but added that there are some stabilization signs in growth slowdown. Thus, a relative recovery in economic data would confirm her view and may lessen the need for additional stimulus.

German vs Eurozone CPIs inflation

Later in the day, we get the US ISM non-manufacturing index for December, which is expected to have risen to 54.5 from 53.9. On Friday, the manufacturing index dipped further into the contractionary territory, to 47.2 from 48.1, which is the lowest level in more than a decade. If the non-manufacturing index disappoints as well, this would increase concerns with regards to the performance of the US economy in the last quarter of 2019 and may lead to downside revisions in GDP estimate models, like the Atlanta Fed GDPNow and the New York Fed Nowcast. The US factory orders and Canada’s trade balance, both for November, are also due to be released.

On Wednesday, the only top-tier economic release on the agenda is the ADP employment report for December. The report is expected to show that the private sector has gained 156k jobs, more than doubling November’s 67k print. This could raise speculation that the NFP number, due out on Friday, may also come near its forecast, which is at 160k. However, we have to repeat for the umpteenth time that the ADP is far from a reliable predictor for the NFP number. Even in November, the ADP revealed a 67k job gains, but nonfarm payrolls came in at 266k. Taking into account data from January 2011, the correlation between the two time-series at the time of the release (no revisions are considered) has now declined to 0.41%.

ADP vs NFP employment reports

On the political front, UK PM Boris Johnson will meet with the EU Commission President Ursula von der Leyen ahead of the kick-start of the negotiations over trade, which will begin after the UK formally exits the EU on January 31st. With Johnson holding a hard line that any trade accord should be found before December 2020, this meeting could send some first vibes on how the officials talks will start rolling.

On Thursday, the ECB releases the minutes from its latest policy meeting. Given that there was no major shift in policy, neither in language, at that meeting, we don’t expect the minutes to result in any fireworks. However, it would be interesting to see whether other members share Lagarde’s view that there are signs of stabilizing in growth slowdown.

As for Thursday’s data, during the Asian morning, Australia’s trade balance for November is coming out, as well as Chinas CPI and PPI rates for December. Australia’s trade surplus is forecast to have increased to AUD 6.1bn from 4.5bn in October, while no forecast is currently available for the Chinese data. Later in the day, ahead of the ECB minutes, Eurozone’s unemployment rate is forecast to have remained unchanged at 7.5% in November. Canada’s housing starts and building permits for December and November respectively are also due to be released.

Finally, on Friday, the highlight is likely to be the US employment report for December. Expectations are for nonfarm payrolls to have increased 160k, less than November’s stellar print of 266k, but still a solid number consistent with further tightening in the labor market. The unemployment rate is forecast to have remained unchanged at its 50-year low of 3.5%, while average hourly earnings are anticipated to have accelerated to +0.3% mom from +0.2%, which barring any revisions to the prior monthly prints, could keep the yoy rate unchanged at +3.1%.

Fed funds futures market vs FOMC interest rate expectations

At its last meeting for 2019, the FOMC decided to keep interest rates unchanged, reiterating that “the current stance of monetary policy is appropriate to support sustained expansion of economic activity.” With regards to the new “dot plot”, it pointed to no action in 2020, one hike in 2021 and another one in 2022. However, market participants remained unconvinced that officials are done cutting rates, and they still see another one coming in October. A decent employment report is unlikely to vanish cut expectations, especially if the ISM non-manufacturing PMI disappoints as the manufacturing one did. The jobs numbers may just prompt investors to push that timing back.

We get employment data for December from Canada as well. The unemployment rate is expected to have ticked down to 5.8% from 5.9%, while the net change in employment is forecast to show that the economy has gained 22.5k jobs after losing 71.2k in November. The message we got from the last BoC gathering is that officials have quickly switched back to neutral, after flirting with the idea of easing at the prior meeting. Thus, combined with the accelerating inflation for the month, a relatively decent employment report is likely to confirm further their choice of taking their hands away from the cut button.

Canada unemployment rate

As for the other data, earlier in the day, we have Norway’s CPIs for December. The headline rate is expected to have ticked up to +1.7% yoy from +1.6%, while the core rate is anticipated to have held steady at +2.0% yoy. When they last met, Norwegian policymakers kept their policy and forward guidance unchanged, reiterating that rates will most likely remain at their current level in the coming period. Thus, in our view, a small uptick in the headline inflation rate is unlikely to raise bets over any change to that outlook.

Norway CPIs inflaiton



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