Week Ahead: Yellen FOMC, Treasury Funding, EZ GDP/​CPI, NFP

North America: US monetary and fiscal policies will be in focus this week. First, Janet Yellen presides over her last FOMC meeting as Chair on Wednesday, which is sandwiched between two important data releases: core PCE deflator - the Fed's preferred inflation gauge - will be released on Monday, while jobs and average wage earnings are out on Friday. Consensus expects core PCE to stay unchanged at 1.5% in December - drifting higher only from Q2 towards 1.8% during 2H18. Given FX volatility over the past week, any extension of US Dollar weakness would be monitored for its potential inflationary impulse through higher global commodity prices and US import prices. That said, whilst the market is currently pricing-in two-to-three Fed hikes this year, any pricing beyond three rate hikes would be difficult to see without an explicit upward revision to the Fed's 2018 dot plot, which - if it happens - may not only come until 21 March, at earliest. Note that the median dot forecast for three 2018 rate hikes has not changed in over a year (see chart). We also think that under the next Fed Chair Powell’s watch, an ‘aversion to inversion’ could keep the Fed from hiking if doing so risks inverting or further flattening the US Treasury curve (10-2yr has held at at 50-60bp spread cushion since early December). 

The median dot plot for 2018f has remained at three hikes for well over a year

Next, on the fiscal side, the US Treasury releases its financing estimates (Mon), annual report (Tue) and refunding statement (Wed). Financing estimates will give clues about the Treasury’s assumed cash balances, while the quarterly refunding statement sets the UST issuance schedule for the next three months. Taken together, higher estimated cash balances – and planned US Treasury auctions – might imply that the Treasury thinks that the debt ceiling will be resolved by Mnuchin’s conservative 28 February 'drop-dead' date, though tax refunding could add to liquidity pressures. Trump’s State of the Union address (Tue) will be watched for rhetoric around US trade relations (a day after Nafta sixth round talks conclude) as well as immigration policy in light of last week’s White House proposal to double the number of immigrants covered by DACA protections. A well-received State of the Union could open the way for a fiscal bill – or more likely another stopgap funding bill – before the current one expires on 8 February. Further out, once government shutdown and debt ceiling concerns are behind us in late February (baseline scenario), we think market attention could quickly shift to the near-doubling of net US Treasury supply that bond investors need to absorb this year (considering estimated 2018 deficit plus Fed balance sheet wind down).

Canada monthly GDP is reported Wednesday. This week will be busy for quarterly earnings reports, particularly in tech ( Facebook Inc A (FB US), Microsoft Corp (MSFT US)  and Paypal Holdings Inc (PYPL US) on Wednesday; Apple Inc (AAPL US), Alphabet Inc Cl C (GOOG US), Amazon.com Inc (AMZN US) and Alibaba Group Holding Ltd (BABA US) on Thursday).

• Existing trades – Strategic long SPX, while buying VIX on dips: We do not anticipate the slew of earnings reports this week to spoil the current positive equity sentiment. Interestingly, even as the S&P 500 hit record highs, the correlation between VIX and SPDR S&P 500 (ETF) (SPY US) has conspicuously turned positive (latest 20-day rolling correlation: 0.61 - see chart). This may reflect some investor anxiety over either a technical pullback or developments in Washington. We continue to hedge equity longs by buying dips on VIX.

S&P 500 and VIX 20-day rolling correlation (lower chart) has reached its highest in at least 10 years

Asia-Pac: Key economic releases in Asia this week are Japan retail sales (Tue), Japan IP, BOJ minutes, China NBS PMI and Taiwan GDP (Wed) and Asian PMIs including Japan and China Caixin (Thu). On Thursday, India presents its FY18-19 budget, which is expected to balance more public investment with fiscal consolidation (FY17-18 deficit target: 3.2%), helped by growing revenues, including Air India stake sales (see Richard Iley's discussion comments, India: Fiscal Slippage, 31 Dec-17). Also on Thursday, North Korea's Olympic athletes arrive in South Korea. In Korea, we monitor developments regarding equity capital gains tax treatment for certain offshore investors while the proposed changes are open for public comment through Wednesday.

The main Antipodean releases this week are New Zealand trade (Tue, consensus sees a narrowing in the trade deficit to NZD125m from previous 1.2bn) and Australian Q4 CPI (Wed). Consensus expects the latter to accelerate slightly from 0.6% to 0.7% q-o-q and 1.8% to 2.0% y-o-y, though estimates vary widely, which could be attributable to the re-weighting of components by the ABS (6 Nov-17 press release). Richard Iley notes disinflationary risks arising from this methodological update (Chart of the Day: RBA Has a Problem, 8 Dec-17).

• Watchlist – Strategic long SGD vs RMB: China’s CFETS is likely to confirm that last week’s RMB index closed at its strongest level since June 2016 (Standard Chartered 26 Jan estimate: ~95.7 - see chart). We think RMB outperformance vs the trade-weighted index – coupled with CNY spot trading on the strong side of the fix for much of the past month (see chart) – heightens the risk of a policy measure to offset recent gains. Such measures may include outflow liberalization measures, targeted FX intervention or even re-deploying the counter-cyclical factor that was suspended on 8 January. The current period is similar to September 2017 when the PBOC scrapped a 20% reserve requirement on FX forwards trading and set daily fixings weaker, which spurred a retracement in USD-CNY (from 6.50 to 6.65) and the RMB index (from 95 to 94). 

• However, before entering this trade, we prefer to wait until there are further signs of either: 1/ Headwinds to export growth (possibly from new export orders from PMIs this week), 2/ RMB strength - and associated loose liquidity conditions - getting in the way of monetary policy conduct and financial deleveraging and/or 3/ Authorities expressing unease over expectations of sustained yuan appreciation.

• When the time is right, we would express expectations of a policy-driven retracement via the Singapore Dollar (i.e. long SGD (USDSGD CURNCY) vs short CNH, CNY (USDCNY CURNCY)) given: 1/ Similar underlying basket constituents and 2/ SGD is likely to stay on the rich side of the SGD NEER band pre-MAS semiannual meeting in April. The risk to this trade is that Beijing takes a principled stance on greater market-determination of exchange rates and - uncharacteristically - shows more willingness to tolerate further RMB appreciation as USD-CNY approaches the 6.20-level just before the August 2015 revaluation.

CFETS RMB Index (SCB estimate in green, official series in red) is closely tracked by SGD-CNH

CNY spot has traded on the strong side of fix for much of the past month (see RMB fix minus spot basis in green/red)

• Monitor – Korean equities (Korea Stock Exchange KOSPI Index (KOSPI INDEX)): We are believers in attractive Korean equity valuations (including the Kosdaq - see Douglas Kim's The New KRX 300 Index & More KOSDAQ Boosting Measures, 11 Jan-18) as well as the potential for a geopolitical risk re-rating catalyzed by North Korea’s participation in the Winter Olympics. However, we share some concerns over the prospect of more US protectionism after Washington imposed tariffs on solar panels and washing machines last week. Second, we are also cautious about onshore tax developments, which may adversely impact foreign equity investors domiciled in Singapore, Hong Kong, Luxembourg and Cayman Islands. MSCI said the measures - currently at a discussion stage, for possible implementation only mid-year - could negatively impact accessibility and index replicability ("South Korea May Harm Stock Market With Tax Plan", Bloomberg, 20 Jan-18). Samsung Electronics Co Ltd (005930 KS) reports earnings on Wednesday.

Europe: This week sees Eurozone GDP and German CPI (Tue), Eurozone CPI (Wed) and country-level PMIs (Thu). 

• Trade idea – Strategic long EUR-USD (entry 1.243, target 1.27 by 8 March ECB MPC, last 1.243): We turn modestly bearish USD on a strategic basis. In our view, it would require up to three more months of evidence pointing to sustained reflation to move the needle beyond the two-to-three Fed rate hikes currently priced-in for the year. In contrast to the Fed, there appears more scope near-term for the market to price-in a more hawkish ECB stance. For instance, strong Euro-area GDP and CPI this week could heighten expectations that the ECB could tweak its language on 8 March, announce the QE end-date by 14 June and wind-down asset purchases by year-end. Draghi’s press conference comments last week under-delivered for those expecting stronger language against an appreciating euro - instead, limiting concerns to euro volatility, rather than level. Moreover, Draghi's criticism that US Treasury Secretary Mnuchin's 'weak dollar' comments breached IMF conventions on exchange rates may have unintentionally precluded verbal intervention on the euro near-term, in our view ("Draghi Hits Back at Mnuchin in Global Currency War of Words", Bloomberg, 25 Jan-18). Focus is likely to remain on the purchase program ahead of a scheduled speech (Mon, 645pm) by Sabine Lautenschlaeger – widely considered the most hawkish member on the Governing Council. Other speakers this week - Coeure (Mon, Fri) and Mersch (Tue) - are also on the hawkish side of the spectrum.

• Italian elections on 4 March could pose a risk to this view if the eurosceptic Five Star Movement continues to gain at the expense of either Berlusconi's center-right or Gentiloni's center-left coalitions, though we note that: 1/ Recent polls still show the eurosceptics unable to independently form a government and 2/ '5SM' leaders have softened their tone on euro-area departure as well as the EU's 3% deficit limit. 

Eurozone business surveys point to economic momentum - presenting upside risk to 4Q17 GDP (prior 0.70% q-o-q)

• Watchlist - Strategic relative value short Spanish vs German equities: In Spain, the separatist coalition-controlled Catalan parliament is expected to vote Carles Puigdemont as regional president on Tuesday, even as the Constitutional Court ruled over the weekend that the parliamentary session would be suspended if Puigdemont tries to be re-elected without being physically present in the chamber. A Madrid-Barcelona showdown would reignite tensions and reintroduce volatility in the Ibex, which outperformed in the past week on the back of a sovereign rating upgrade. Spanish equities this week sees earnings reports from Bankia SA (BKIA SM)(Mon), Banco Santander SA (SAN SM) (Tue) and Banco Bilbao Vizcaya Argentari (BBVA SM)(Thu). Like the DAX, Spain's Ibex generates nearly half of sales from exports - ~10ppts higher than either France's CAC or Italy's MIB . Although Eurozone equity correlations with the euro have weakened recently, a return to historical norms would make short Ibex vs the DAX an attractive 'euro-neutral' relative value trade. 

International revenue exposure of major European indices (DB via FT, 21 July-17)

EM ex-Asia: Among the EM central banks meeting this week are Colombia BanRep (Mon), Hungary MNB (Tue), Czech CNB (Thu), Chile BCCh (Thu) – but no changes are expected. In EM ex-Asia macro events this week, we will watch Turkey's CBRT Inflation Report and Mexican Q4 GDP (Tue), Turkey trade and tourist arrivals as well as South African trade (Wed) and country-level PMIs (Thu). 

• Watchlist – Long oil and commodity EM FX vs short manufacturers: Our modestly bearish view on the USD as well as the ramp-up in trade rhetoric favors exploring going long oil and commodity-driven currencies versus net-commodity importers and those that depend more on manufactured goods exports, for example, long ZAR-TRY, long COP-MXN and long MYR vs PHP or THB.

• Watchlist - Long CZK vs short HUF: We will digest outcomes from this past weekend's Czech presidential elections as well as this week's CNB and MNB policy meetings to gauge whether support remains for continued medium-term divergence in these two CEE currencies.

• Watchlist – Long Saudi Tadawul: Saudi equities may get a sentimental boost from this weekend’s release of billionaire Prince Alwaleed bin Talal, which suggests that the anti-corruption drive that began in November is finally seeing some closure. However, the asset holdings mix of the reported $100bn-total settlement (from 200 Saudis in detention since November) as well as asset transfer – and redemption – plans are unclear. Alwaleed is chairman of Kingdom Holding Co (KINGDOM AB), which surged 10% in Sunday trading.

Happy trading in the week ahead.

Full agenda – Week of 29 January 2018:

Note: Calendar items are filed under the local day but specified times are in Singapore time zone unless otherwise noted.

• Mon/29 Jan:

• DM: US personal income and spending (930pm), US core PCE deflator (930pm, prior 1.5% yoy), US Dallas Fed mfg (1130pm)

• EM: Colombia BanRep MPC (current 4.75% OLR)

• Speakers: Riksbank Ingves (415pm), ECB Lautenschlaeger (645pm), Riksbank Jochnick (7pm), ECB Coeure (12am)

• Events: US Treasury financing estimates, Nafta round six talks conclude, Congress deadline for US Treasury to release list of Putin ‘oligarchs’ intended to penalize Moscow for 2016 election meddling, China NPC Standing Committee meeting (29-30 Jan), EU ministers meet (may adopt new set of Brexit directives), India Pres. Kovind presents govt agenda as parliament budget session begins

• Companies: Lockheed Martin, First Abu Dhabi, Banco de Chile, Bankia earnings

• Tue/30:

• DM: New Zealand trade (545am), Japan jobless rate (730am), Japan retail sales (750am), Australia NAB business confidence (830am), France GDP (230pm), Italy manufacturing/consumer confidence (5pm), UK mortgage approvals (530pm), Eurozone GDP(4Q first reading, 6pm), Eurozone consumer confidence (6pm), Germany CPI (9pm), US CB consumer confidence (11pm)

• EM: Turkey CBRT Inflation Report (330pm), Hungary MNB MPC (9pm, current 0.90%/-0.15% ODR), Mexico GDP (Q4-p, 10pm)

• Speakers: BOE Carney (1130pm, to Parliament Economic Affairs Cmte.), Trump State of the Union address (watch for infrastructure plan, immigration stance), ECB Mersch (1230am), Treasury Sec Mnuchin delivers annual report to Senate Banking Cmte.

• Events: Catalonia parliament votes on regional president, Hungary PM Orban meets Austria’s Kurz

• Commodities: API weekly US oil inventory

• Companies: Pfizer, McDonalds, SAP, Santander, NTT Docomo, Chubb, Aetna, Canon, HDFC

• Wed/31:

• DM: Japan BOJ Summary of Opinions (750am), Japan IP (750am), Australia CPI (Q4, 830am), Australia private sector credit (830am), Switzerland SNB currency allocation (4Q17, 230pm), France CPI (345pm), Germany unemployment (455pm), Eurozone CPI (core-actual/headline est., 6pm), Eurozone unemployment, US ADP (915pm), Canada GDP (Nov, 930pm), US Fed FOMC (3am, Chair Yellen’s final meeting)

• EM: Korea IP (7am), China NBS PMI (9am), Turkey trade (3pm), Thailand BOP balance/trade (330pm), Taiwan GDP (Q4-p, 4pm), Turkey tourist arrivals (4pm), South Africa trade balance (8pm), Chile copper production (8pm), India annual GDP estimate (2017, 8pm), Argentina IP (3am)

• Speakers: BOJ Iwata (930am), Riksbank Ingves (5pm), ECB Coeure (550pm)

• Events: US Treasury refunding statement, PM May and business delegation begins 3-day visit to China (31 Jan-2 Feb), Mexico auctions 29 deep-water oil tracts, US GOP retreat (31 Jan-2 Feb, West Virginia), US Senate Dems retreat (Mount Vernon)

• Companies: Microsoft, Facebook, Samsung Electronics, AT&T, Boeing, Siemens, Paypal, Qualcomm, Eli Lilly, Thermo Fisher, ING, KDDI, Mondelez, Anthem, SMFG, Nintendo, Metlife, Mizuho Financial, Volvo, Ebay, ONGC, Hitachi, Southern Copper, Komatsu, ArcelorMittal, ICICI, AFLAC, Infineon earnings

• Thu/1 Feb:

• DM: New Zealand AiG manufacturing (630am), Australia export/import price index (Q4, 830am), Australia building approvals (830am), Japan Nikkei PMI manufacturing (830am), Sweden Swedbank/Silf PMI manufacturing (330pm), Norway manufacturing PMI (4pm), Switzerland PMI manufacturing (430pm), Italy Markit PMI manufacturing (445pm), Germany Markit/BME PMI manufacturing (Jan-f, 455pm), Eurozone Markit PMI manufacturing(Jan-f, 5pm), UK Markit PMI manufacturing (530pm), Canada Markit PMI manufacturing (1030pm), US Markit PMI manufacturing (Jan-f, 1045pm), US ISM manufacturing (11pm), US auto sales

• EM: Korea CPI (7am), Korea trade (8am), Korea PMI manufacturing (830am), Taiwan PMI manufacturing (830am), Vietnam PMI manufacturing (830am), Indonesia PMI manufacturing (830am), Thailand PMI manufacturing (830am), Philippines PMI manufacturing (830am), China Caixin PMI manufacturing (945am), Thailand CPI (11am), Indonesia CPI (11am), India PMI manufacturing (1pm), Peru CPI (1pm), Russia PMI manufacturing (2pm), Turkey PMI manufacturing (3pm), Poland PMI manufacturing (4pm), Czech PMI manufacturing (430pm), South Africa PMI manufacturing (5pm), Brazil IP (7pm), Czech CNB MPC (8pm, current 0.50% repo rate), Brazil PMI manufacturing (9pm), Mexico Markit PMI manufacturing (1130pm), Chile BCCh MPC (5am, current 2.50% overnight rate target)

• Speakers: ECB Praet (715pm), BOE Brazier (130am), Colombia BanRep Gov Echavarria and FinMin Cardenas (1-2 Feb)

• Events: DPRK athletes arrive in Korea, India FinMin Jaitley presents annual budget

• Companies: Apple, Alphabet, Amazon, Alibaba, Royal Dutch Shell, Visa, Roche, Mastercard, Dow Dupont, Unilever, Novo Nordisk, Amgen, Altria, UPS, Daimler, Bradesco, Time Warner, ConocoPhillips, BBVA, Cigna, CME Group, Blackstone earnings. Wal-Mart Stores changes its name to Walmart Inc to support increased focus on e-commerce

• Fri/2:

• DM: New Zealand building permits (545am), Australia PPI (Q4, 830am), US jobs (nonfarm payrolls/unemployment rate/average hourly earnings, 930pm), US factory orders (11pm), US durable goods orders (Dec-f, 11pm), US UMich sentiment (11pm)

• EM: Malaysia PMI manufacturing (830am), Chile retail sales (8pm), Singapore PMI (9pm)

• Speakers: ECB Coeure (6pm), Fed Kaplan (230am), Fed Williams (430am)

• Commodities: Baker Hughes US rig count (2am), ICE/CFTC weekly traders report (~2am/430am)

• Companies: Exxon Mobil, Chevron, Merck, Mitsubishi UFJ, Charter Comm., AstraZeneca, Honda, Sony, Phillips, Denso, Estee Lauder, Mitsubishi Elec Corp, Deutsche Bank earnings

• Sovereign ratings: Azerbaijan (Fitch), Kuwait (S&P), Mozambique (S&P)

Trade updates:

• EUR-JPY: We closed a tactical short EUR-JPY trade (+0.9%) opened last week to capitalize on BOJ communication challenges amid economic and price recovery and in anticipation that the ECB would talk down the euro (Week Ahead in Global Macro: US Shutdown, Germany SPD, BOJ, ECB, Malaysia BNM, Brazil Lula in Court). While JPY strength exceeded expectations, ECB communication underwhelmed.

• DAX: We converted our long DAX position to long iShares MSCI Germany ETF (EWG US) to reflect a more positive view on the euro, booking a 1.1% gain.

• EWZ: We stopped out of last week's Brazilian equities trade idea (-5%), where we saw asymmetric risk-reward in being short ahead of ex-President Lula da Silva's trial. However, the best-case scenario - of a unanimous verdict upholding his corruption conviction - materialized.