What Could Go Wrong? Full Week Ahead Preview

Ok, it’s time to break out the Jared Vennett clip, because the coming week should bring plenty in the way of excitement:

 

First on the agenda will be everyone playing catch up after Friday. Stocks were weighed down by the ABC story which incorrectly cited a person close to Michael Flynn as saying the disgraced former national security adviser was prepared to testify against “candidate” Trump when the reality (for now) is apparently that Flynn will testify against “President elect” Trump. Ultimately, that doesn’t change much in terms of the doom and gloom surrounding the administration but what it does mean is that the end isn’t as nigh as it seemed just after lunchtime on Friday.

The news got materially worse for Trump over the weekend (e.g. the KT McFarland story) and the President exacerbated the situation with an ill-advised Saturday tweet that seemed to amount to an admission of guilt in the obstruction of justice investigation. He would of course go on to make things worse still with a veritable deluge of insults and insinuations blasted out between Saturday evening and Sunday afternoon.

The point though is that the market will now need to reclaim the Friday afternoon losses and also price in the Senate passing their version of the tax bill early Saturday morning. All of that should combine to give the dollar and risk assets some support. Have a look at what you’re already seeing on Sunday evening:

DollarES

As Goldman writes, we’re now in the home stretch for the GOP tax bill. They’ll still need to go to conference though:

We expect congressional Republican leaders to begin conference negotiations immediately, and believe they will target completion the week of December 11. If successful, this would produce final details around December 11-13, and final passage in the House and Senate December 14-15. One reason we expect this timing is because of the need to address expiring spending authority by December 8, which we expect to be extended temporarily through December 22, creating only a short period before year end when Congress is not addressing other fiscal deadlines.

WindowTax

Note the reference to the spending authority expiration. They’ll need to address that almost immediately. “There’s not going to be a government shutdown. It’s just not going to happen,” McConnell told George Stephanopoulos on ABC’s “This Week” on Sunday. At issue is DACA and this comes on the heels of last week’s boondoggle when Trump effectively uninvited Pelosi and Schumer to a planned meeting at the White House.

Here’s Politico underscoring just how crazy this week is likely to be:

Congress faces another frantic week as GOP leaders and President Donald Trump wrestle with a possible government shutdown; immigration, tax and gun policies; multiple allegations of sexual harassment against lawmakers; and the probe into Russia’s meddling in the 2016 election.

Funding for federal agencies is set to run out on Friday, but lawmakers don’t really think there will be a shutdown — at least not yet. Still, a pile-up of contentious policy fights coupled with frequent distractions as Trump’s frustration grows with the Russia investigation has many Republicans anxious about the next few weeks.

House GOP leaders have proposed a two-week “continuing resolution” to keep the government open until Dec. 22, arguing they need the funding extension to make progress in bipartisan talks to boost both defense and non-defense spending. They expect they’ll need a second two-week funding bill in late December to get past the holidays, though the odds of a shutdown would drastically increase during that time if a budget deal isn’t close.

Right now, Speaker Paul Ryan (R-Wis.) is short of the GOP votes he needs to pass a CR, though top Republicans believe they will get there by week’s end. But Senate Democrats, who can block any funding bill, could be key to keeping the government open.

So yeah, all of that. And also jobs. Consensus is 200k for November on the NFP headline, and notably, hurricane effects should have faded materially at this point. As usual, the AHE print will be watched closely, especially ahead of the Fed. “We forecast a bounce in average hourly earnings to 0.3% m/m (2.7% y/y) and expect average weekly hours to remain unchanged at 34.4,” Barclays writes on Sunday evening. For their part, BofAML is at 210k, on what they’re saying will be “some residual hurricane payback.”

Goldman is going with 225k and that’s based on an early holiday, “some additional” hurricane normalization, and some Puerto Ricans thrown in there for good measure. To wit:

We estimate nonfarm payrolls rose 225k in November, compared to a consensus of +200k. November job growth likely benefited from additional normalization in hurricane-affected regions. Additionally, the early Thanksgiving this year is likely to boost retail job growth, as relatively more of the holiday hiring will occur before the survey week. The arrival of over 200k Puerto Ricans in Florida (following Hurricane Maria) could also increase payrolls this month. We estimate a stable unemployment rate (4.1%), as the downward trend (-0.3pp over the last three months) seems due for a pause. For average hourly earnings, we estimate +0.3% with upside risk, reflecting somewhat favorable calendar effects and a boost from the unwind of hurricane-related distortions.

On the central bank front, we’ll get the RBA and this is also a BoC week. As Barclays reminds you, the entire “Goldilocks” outlook for 2018 hinges on DM inflation remaining subdued enough to give policymakers the excuse they need to maintain a gradualistic approach to normalization:

A key underpinning of our bullish 2018 outlook for risk assets is an assumption that inflation will remain low enough for major central banks to continue an orderly and wellsignalled reduction of accommodative monetary policy. Indeed, last week’s developed economy core inflation data suggested no need to hurry, with a rate of just 1.4% in the US and less than 1% in the euro area and Japan. Across the G10 spectrum, only the UK has inflation above the central bank’s target and we expect central bank meetings this week to reflect this dynamic (Figure 2).

DMInflation

The bank sees both the RBA and the BoC adopting a cautious stance, although it’s worth noting that the econ in Canada is picking back up again as Bloomberg’s Luke Kawa will be more than happy to tweet-shriek at you if you ask him. Look how excited he was about Friday’s jobs and GDP data:

And then note the palpable sense of disappointment when he realized Mike Flynn had just ensured that no one would remember:

Poor guy. Them’s the breaks when you’re on the Canadian econ beat.

Here’s BofAML on the RBA and the BoC:

The Reserve Bank of Australia (RBA) meets on Tues with little prospect of any meaningful change in communication or guidance for the foreseeable future. 3Q GDP released the day after could impact sentiment. Strong investment, public demand, net exports, alongside a positive base effect, could see GDP spike to 3.2% YoY.

We expect the BoC to remain on hold on Wed as it waits for inflation and the impact of recent hikes on the economy. We see a dovish statement following recent economic deceleration, financial stability risks and external uncertainties. BoC is likely to resume hiking in 2018, with three hikes to put the overnight rate at 1.75% by year-end.

Of course the Brexit drama will drag on, although on Sunday evening, GBPUSD quickly pared losses as leveraged accounts covered intraday shorts following an article in The Times which quoted a senior EU official as saying this: “Brexit deal 90% there.” This is the official line from the UK: “With plenty of discussions still to go, Monday will be an important staging post.” Theresa May and David Davis are headed to Brussels today to meet Juncker and Tusk.

If you can sort through all of that, you’ll also want to keep an eye on Turkey, which releases CPI data. Remember, inflation is running rampant over there and that’s exacerbating an already tenuous situation as Erdogan fumes over the Zarrab debacle in the U.S. and what it might mean for relations between Ankara and Washington.

Oh, and Bitcoin. There’s always Bitcoin.

So good luck out there. Here’s the full calendar from BofAML:

Calendar

 

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