FOREX News Today

European Outlook: Asian stock markets managed to move mostly higher, after gains in Europe and on Wall Street yesterday. The Italian MIB closed with slight losses Monday, but it seems investors quickly got over the widely expected rejection of Italy’s constitutional reform and Renzi’s resignation. Italy may once again have to look for a new government, but that is hardly anything new in a country where it is extremely rare for a government to last full term Italy is hardly heading for an exit from the EU, even if EMU membership is under scrutiny in some quarters, but the problems of Italy’s banks will likely come back to the forefront and keep pressure on Italian markets, which actually managed to outperform in the last week ahead of the referendum. Still, U.S. and European stock futures are heading south this morning, and oil prices are down. The European calendar has German factory orders at the start of the session, which are expected to rebound from the contraction in September. There is also the final and detailed reading of Eurozone Q3 GDP and Swiss inflation data. Already released overnight, U.K. BRC like for like retail sales came in weaker than expected.

RBA Rates left unchanged: Cash rates remain on hold at 1.5% as expected. “Rising AUD could complicate economic transition” Steady policy consistent with growth and inflation targets, global economy growing at a slower rate but Chinese economy has “Steadied”.  Large supply of apartments to hit housing market (where prices are rising “briskly”)  in the next few years. Global inflation more balanced than for “some time”. Labour market conditions have improved and commodity prices have risen. However, outlook for inflation remains “low for some time”.  AUD unchanged following announcement and statement.  RBA next meet February 8.

US Reports Yesterday: The U.S. ISM-NMI bounce to a 1-year high of 57.2 from 54.8 in October, but a similar 57.1 in September, left the measure much closer to the 10-year high of 59.6 in July of 2015 than the 6-year low of 51.4 in August. The ISM-adjusted ISM-NMI bounced less sharply, to 56.1 from 54.2 in October, versus an 8-month high of 56.3 in June, a 10-year high of 59.0 in July of 2015, and a 6-year low of 50.7 in August. The ISM-adjusted average of the major producer sentiment surveys surged to a 16-month high of 53 from 51 in October and 50 in August and September. We saw a 49 expansion-low in January and February, and previously in October of 2012. The employment gauge surged to a 1-year high of 58.2 from 53.1.

FedSpeak:  St. Louis Fed hawk-dove Bullard: new tax, fiscal and regulatory policies in Washington could make the U.S. a higher-speed economy if they improve productivity. But any such policy changes should not be viewed as needed stimulus since the economy is not in recession. The impact on current low-growth, low interest rate regime depends on proper execution and focus on productivity improvements. Absent such changes, he’s still sticking with his one-rate-hike-only call to reach neutral policy, which is appropriate since inflation and unemployment are close to target. But this appears to give him an exit strategy if the fiscal outlook changes significantly. Dudley of NY Fed on CNBC: it’s premature to take on board market views of fiscal expansion, he said, but if fiscal policy got more expansive, the Fed would probably remove accommodation more quickly. But it depends on the specifics of any fiscal stimulus, which is as yet unknown. He’s essentially echoing his earlier speech on the economic outlook and he’s generally pleased that there has been an uptick in wages and inflation, which was the goal. Dudley notes that there will be lags in implementing any fiscal legislation, however, and any Fed policy adjustments as a result will be out over the horizon. Overall, he sees “downside risks to the economy reduced.” Dodd-Frank is not perfect, so changes are appropriate, but essential ingredients on capital requirements, etc. should remain. He also sees the rising dollar as consistent with expectations about growth. He is making a bid for automatic fiscal stabilizers again as well. Evans: we’re on cusp of period of rising rates, said the dovish Chicago Fed president, and he expects inflation to move “more solidly” toward the Fed’s 2% target. He said the state of demand in the U.S. is really quite good, growth should continue and with unemployment at 4.6% you don’t need explicit infrastructure stimulus. Evans echoed Dudley, saying we need to have patience to assess what the new administration’s policies will be, though policies under discussion could reinforce the U.S. growth trajectory. This is more optimistic on the growth front for Evans, therefore slightly more hawkish by implication.

Main Macro Events Today                

• EUR Gross Domestic Product –  Year on Year Eurozone area GDP is out later this morning and it is expected to remain unchanged at 1.6% with Month on month GDP also unchanged at 0.3%.

• US Factory Orders – October factory goods data is out later today and should reveal a 2.6 increase for the headline with shipments up 0.3% and inventories up 0.2%. This follows respective September figures which had orders up 0.7%, sales up 0.9% and inventories up 0.1%. Data in line with forecasts would leave the I/S ratio unchanged from September’s 1.34.

FOREX News Today

European Outlook: Equities headed broadly south in Asia overnight, with technology stocks leading the way amid warnings that any Trump induced stimulus is likely to be short lived and concerns about the health of the U.S. economy and stability in Europe start to weigh again. European stock markets already reversed lower with U.S. markets during yesterday’s PM session and U.S. and FTSE 100 stock futures are also in the red. Italy was the main exception again yesterday, with the MIB still holding on to a nearly 1% gain on Thursday as markets are still betting on a technocrat government taking over from Renzi after Sunday’s referendum on constitutional reform. European bond futures declined with stocks on Thursday, with Eurozone peripherals outperforming going into next week’s ECB meeting and amid a Reuters source story saying a 6 months QE extension without tapering is the option favoured by many. The U.K. meanwhile was focused on fresh sterling strength amid some hints that the government may be heading for a “soft” Brexit with the possibility of ongoing contributions to the EU budget in return for market access. Today’s economic calendar has Eurozone PPI, Swiss Q3 GDP and the U.K. Construction PMI.

US Reports Yesterday: Revealed a solid 53.2 November ISM reading and a 0.5% October construction spending rise that followed big upward Q3 revisions, both of which lifted prospects for GDP. We also saw a 17k Thanksgiving week spike in claims that reversed the remarkably tight 333k Veteran’s Day figure, however, while the available vehicle sales figures have posted a modest 1% drop-back after a prior 6% two-month climb.  NFP should exceed the consensus 175k and could be as high as 190K later today.

FX Update: The dollar has traded modestly softer into the London interbank opening, while the euro has traded perkily. EURUSD edged out a two-week high at 1.0690, and EURJPY forayed further into five-month high territory, despite the uncertainty about Italy’s referendum on constitutional reform this weekend. Markets are betting that a technocrat government will form should PM Renzi resign in the event of a “No” vote. The forex market has also been unperturbed by Reuters citing an unnamed source saying that most ECB council members are in favour of extending the QE program by six months beyond next March without tapering. USDJPY has remained buoyant, holding around the 114.00 level, but has remained below the nine-and-a-half-month high seen at 114.82 yesterday. Market participants are treading cautiously into the release of the November U.S. employment report today. The release it less essential than is often the case this month with expectations for the Fed to hike this month by 25 bp fully discounted and with markets anticipating fiscal expansion when president-elect Trump takes up the reins at the White House.

Fed Policy Outlook: The markets are fully priced for a December 14 hike, but key will be what’s indicated for the policy trajectory in 2017. Expectations are for relatively dovish stance to accompany the tightening. Note that the upcoming FOMC meeting includes the release of updated economic forecasts, along with the dot-plot, and a Yellen press conference. Most Fedwatchers are looking for two more tightenings next year, consistent with Fedspeak that’s been stressing that moves will be gradual. However, policy actions will still be data dependent, yet it’s still too early to predict the disposition of growth and inflation next year, and we doubt the FOMC will even try with respect to its updated forecasts. Hence, there is likely to be a rather innocuous statement and little change to the forecasts, that will limit expectations for aggressive moves. Yellen is also likely to council patience. Additionally, the leaning of the new voters on the Committee is to the modestly dovish side, with Evans, Kashkari, Harker, and Kaplan coming on board, replacing the more hawkish George, Mester, Bullard, and Rosengren.

Main Macro Events Today                

• US Non-Farm Payrolls – November employment data is out today and expectations are for 177k headline gain for the month following a 161k figure in October and 191k in September, with risk to the upside as high as 190K. The unemployment rate should remain steady at 4.9% (median 4.9%). As we discussed in Monday’s commentary, headline risk is firmly to the upside as producer sentiment and claims have both improved significantly.

• Canada Employment – Employment, due Friday, is seen rising 15.0k in November after the 43.9k surge in October. But the recent run of surprisingly strong job gains (August +26.2k, September +67.2k) maintains the risk for pull-back in jobs (median is -10.0k). Of course, this same line of thinking was in play for the October report, and there was a solid expansion in jobs. The unemployment rate is expected to hold steady at 7.0%.

Janne Muta

Chief Market Analyst

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