The US dollar was initially riding higher on Powell’s hawkish comments but Trump’s tariffs sent it down. The upcoming week features a full buildup to the Non-Farm Payrolls, four rate decisions, but politics will likely remain in the headlines as well Here are the highlights for the upcoming week.
Fed Chair Jerome Powell made his first testimony on Capitol Hill and eventually voiced a hawkish stance. He noted that since the dot-plot was last published in December, quite a few things point to stronger growth and inflation. In his second appearance, he said that four hikes in 2018 would still count as gradual. The current dot-plot of the Fed stands at three hikes this year. This sent the USD higher across the board. However, Trump later came out with the announcement of tariffs on steel and aluminum, sending stocks and bond yields lower. The greenback continued gaining ground against commodity currencies but lost ground to the euro and the safe-haven yen. The pound had issues of its own: an EU draft on the future relationship with the UK had a very tough stance and triggered angry responses. The pound suffered from this acrimony. Politics also start the week, which is packed with events.
Italian elections: Sunday, first results from 22:00 GMT, when markets open. Italians go to the polls under a new electoral system and amid high uncertainty, as 30% were undecided the last time that polls were allowed to be published. The most likely scenario is a hung parliament, which would then lead to another grand coalition under incumbent PM Paolo Gentiloni. Such an outcome would be favored by markets. Another possible option is an outright majority for the right-wing alliance led by former PM Silvio Berlusconi. In this case, the PM would either be the mainstream Antonio Tajani, favorable for markets, or Matteo Salvini of The League, a populist that would be unfavorable for markets. The more remote options are a victory for the 5-Star Movement, the biggest party according to polls, and that would be negative for the euro and another possibility is a victory for the center-left PD, which would be favorable for the euro but seems very unlikely. The full results may become known only in the European morning. Note that Germany’s SPD party will announce the results of its postal ballot on participation in Merkel’s coalition on Sunday. An approval is on the cards and priced in, but nothing is certain. A rejection of a grand coalition (GroKo) would extend uncertainty in the largest economy in the euro-zone and send the euro down.
UK Services PMI: Monday, 9:30. The third and last of the UK’s PMIs is for the most important sector, the services one. The score in this forward-looking index stood at 53 and now a small rise to 53.3 is on the cards. The UK economy is not doing that great.
US ISM Non-Manufacturing PMI: Monday, 15:00. The US services sector is enjoying robust growth, and this will likely continue. After having a score of 59.9 in January, a small drop to 58.9 is projected for February. This is a market-mover on its own and also a hint towards Friday’s Non-Farm Payrolls report.
Australian rate decision: Tuesday, 3:30. The RBA is expected to leave the interest rate unchanged at 1.50% once again. The Australian economy is doing OK, but the central bank worries about growing household debt and wages that are not rising very quickly. The team led by Phillip Lowe is currently projected to keep interest rates unchanged throughout the year and any different hint may move the Aussie.
Australian GDP: Wednesday, 00:30. Australian publishes its GDP data only once, without any revisions, giving the release a more significant impact. After a quarterly growth rate of 0.6%, A slightly slower growth rate is expected, 0.5% in the last quarter of the year. In addition, yearly growth is also expected to be more modest.
ADP Non-Farm Payrolls: Wednesday, 13:15. The publication by ADP for the private sector doesn’t always correlate very well with the official BLS NFP on Friday, but still moves the markets. After reporting an impressive gain of 234K in January, a somewhat smaller increase of 194K positions is expected for February.
Canadian rate decision: Wednesday, 15:00. The Bank of Canada raised the interest rate in January after two excellent jobs reports, but things have changed since then. Canada saw a big drop of 88K jobs in January and the retail sales report was quite worrying. Moreover, the recent tariffs imposed by Trump are very damaging to Canada. the BOC has already expressed concerns over NAFTA and immediate tariffs on steel will have another chilling effect. The team led by Stephen Poloz may even hint that rate cuts are possible.
Euro-zone rate decision: Thursday, 12:45, press conference at 13:30. The European Central Bank will probably refrain from making an announcement on QE. The program runs through September, and they have time to announce the next steps. The economy is doing quite well but inflation is not going anywhere fast. This is the reality and the key message from Frankfurt for quite some time. However, ECB President Mario Draghi may certainly move markets, especially if they make minor tweaks to the announcement. They may move to a somewhat more hawkish stance by removing the wording about increasing the QE program if necessary but only lengthening it. That would be a hawkish move, but it may cause the euro to rise, something they do not wish to see.
Japanese rate decision: Friday, early morning. The rate decision by the Bank of Japan became more important after the recent speech by Governor Haruhiko Kuroda. He said that they may begin removing stimulus in the fiscal year 2019 (beginning in April 2019). While he conditioned it on inflation reaching the 2% target, the mere mention of an exit was a novelty. Market will want to see if the BOJ also includes such text in the rate decision and if Kuroda talks about it once again. A return to “it is too early to talk about an exit” would weigh on the yen. Note that Kuroda will also speak earlier in the week. In any case, no change is expected in the interest rate which stands at a negative 0.10%.
US Non-Farm Payrolls: Friday, 13:30. The US published a great jobs report for January: a healthy gain of 200K jobs and a rise in wages: 0.3% MoM and 2.9%, above the average of 2.5% y/y seen in 2017. This time, a similar increase of 204K positions is on the cards and wages are projected to rise by 0.3% m/m. While the Fed is currently leaning towards four rate hikes in 2018, this still isn’t a done deal. A solid jobs report is necessary for an upgrade of the dot-plot. The unemployment rate is projected to drop from 4.1% to 4%, but this is accompanied by a low participation rate.
Canadian jobs report: Friday, 13:30. Canada saw a fall of 88K jobs in January after two months of around 79K each month. This time, a more modest gain is likely, around 68K. The unemployment rate, which stood at 5.9%, may slide back to 5.8%. Note that wages are also becoming important in Canada after they rose by 3.3% y/y, better than in the US.
*All times are GMT
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