The Forex Week Ahead November 13-17th
The Forex Week Ahead North America Duelling tax proposals being crafted within the House of Representatives and Senate are setting up for a confrontation of sorts that may negatively impact market confidence in tax reform. That will combine with some key data releases that are expected to be on the softer side, Fed-speak and retail-focused earnings to make for elevated market risk over the coming week. The broad tone of the pending data releases is likely to be dovish to the rates market on balance. There are two indicators of particular note: CPI and retail sales, both of which land on Wednesday. Headline CPI should slip by about two-tenths on the back of year-ago base effects and gasoline prices. Gas prices fell by about 5% MoM in seasonally unadjusted terms. With about a 3.4% weight in CPI, that would shave month-ago CPI by about 0.2%. Core CPI is expected to be more resilient, but how meaningful this may be is constrained by the fact that core CPI and the Fed’s preferred measure of core PCE have been so far apart this year. As for retail sales, the risk is skewed to the downside. The 5% MoM drop in gas prices during October carries about an 8% weight and therefore would knock about 0.4% off headline sales. A roughly 20% weight on auto sales puts a hefty weight on the 2.7% MoM drop in vehicle sales. A strong rise in the prior month’s headline sales (+1.6% MoM) and core sales ex-autos and gas (+0.5%) poses a high jumping off point for October’s sales. On balance, expecting a flat to negative headline and small rise in monthly core sales may be prudent.
Europe Germany’s economy will also be in the spotlight. Around 0.5% QoQ growth in seasonally adjusted but non-annualized terms seems reasonable. That would be within the ballpark of growth figures over 2016–17 with a small acceleration having occurred over the first half of the year. Germany also updates the ZEW investment sentiment gauge on Tuesday and it has been riding at the highest level since 2011 in terms of the current assessment while forward-looking expectations are well below high points set over the past two-three years. The second pass at Eurozone CPI will include details necessary to calculate so-called ‘supercore’ CPI. The initial October CPI estimate showed inflation slipping a tick to 1.4% YoY.
UK inflation report on Tuesday and retail sales two days later will likely be near-term data noise in the face of grander global developments and because the bigger issue is where inflation goes over the next year and not just where it went last month. Retail sales will be the lesser issue amid expectations for flat to slightly higher readings for sales including and excluding fuel in the wake of a weak report for September. After hitting 3% YoY in September, UK CPI is expected to cross over that threshold in the October reading. That will further reinforce the need for BoE Governor Carney to soon write a letter to Chancellor of the Exchequer Philip Hammond explaining why inflation has crossed 3%. Regardless, the issue is expected to be a transitory matter. Consensus anticipates inflation falling back down toward the 2% target over 2018–19 as temporary effects of factors such as pound sterling’s past movements and the effects on import prices dissipate. All of this, mind you, is state-contingent upon Brexit negotiations that are, of course, going smashingly well.
Asia Japan’s growth rate probably slowed in Q3. After registering 2.5% growth in Q2 (initially reported at 4%), growth is expected to dip down to about 1.5% at a quarterly annualized and seasonally adjusted rate. That’s more like the Japanese economy we’ve come to know over time. Fleeting moments of growth well above the noninflationary potential speed limit have usually returned back down to earth in short order. Growth returning to around where it was over the prior two quarters before the modest Q2 acceleration fits that pattern. Still, however, the Bank of Japan’s estimated output gap stood at +1.2% (mild excess aggregate demand) as of Q2 and the level of excess demand sits at its highest since 2008Q1. That may stabilize or bump slightly higher in Q3, but the connection with core CPI inflation remains tenuous.