The dollar and crude will probably be in the spotlight in the week ahead as the market continues to ponder the outlook for the greenback following the midterms and everybody tries to make sense of Sunday’s inconclusive OPEC+ meeting in Abu Dhabi.
A bubblin’ crude (oil that is)
Crude is obviously in a bear market and WTI is riding a 10-session losing streak amid a supply glut in the U.S. and the Trump administration’s decision to grant Iran sanctions waivers to eight nations.
On Sunday, the Saudis said they’ll export fewer barrels next month, but the cartel and its allied producers stopped short of announcing an actual change in policy. Instead, they decided to go with what amounted to a warning about the necessity of adopting “new strategies” going forward.
Long and wrong?
As for the dollar, a Democrat-controlled House effectively rules out any further push for massive fiscal stimulus (or at least not Trump’s brand of stimulus). Of course just because the U.S. fiscal trajectory isn’t going to get any worse, doesn’t mean it’s going to get any better either. This is a longer-term concern for dollar bulls and while twin deficit issues were trumped in 2018 by Fed hikes and U.S. economic outperformance, it’s entirely possible that the market starts to worry about America’s red ink problem again.
Amusingly, spec positioning in the dollar rose to its highest level since January of 2016 in the week through Tuesday (i.e., in the week ahead of the midterms).
“For most of the year, the USD had rallied because of US economic outperformance, Fed hikes, a ratcheting of trade tensions, and idiosyncratic political risks in DM and EM economies”, Barclays wrote over the weekend, adding that “naturally, the recent selloff raises questions about whether we are witnessing the end of the dollar rally, or merely experiencing some retracement.”
The bank goes on to argue that while U.S. growth should decelerate in 2019 as the fiscal impulse wanes, so too will growth moderate in the rest of the world, leaving the USD thesis intact. Assuming the Fed continues to hike, that too will be supportive.
CPI will take center stage on the data front this week. Inflation came in cool in both September and October, blunting some of the impact from persistent upward pressure on wages as evidenced both in AHE and, earlier this month, in the private-sector wages and salaries breakdown that accompanied the Q3 ECI report.
“After two soft readings, our economists expect core CPI to normalize to 0.2% MoM in October”, BofAML says. Specifically (because I know you care), they’re “looking for improvement in used car inflation, which has been particularly volatile this year, and shelter inflation.” Importantly, Goldman sees the tariffs starting to show up. To wit:
We estimate a 0.23% increase in October core CPI (mom sa), which would leave the year-over-year rate stable at +2.2%. Our forecast reflects a rebound in used car prices, following a 49-year-low inflation reading in September that was probably influenced by methodological changes. We also estimate an increase in apparel prices, which rebounded in September but still look depressed relative to import prices. We also expect tariffs on $200bn of Chinese goods will add around 2bps to monthly core inflation in October, by boosting for example the household furnishings category.
Remember, the Trump administration has variously insisted that the tariffs won’t necessarily lead to higher prices – that’s about to be tested and if we do get a hot print this week, it will come at a particularly sensitive time ahead of the Trump-Xi trade talks at the G-20. Retail sales are on the agenda this week as well.
There are so many Fed speakers coming up that it’s almost impossible to document them all, but for those interested, they’re all listed in the calendar at the bottom of this post. Most notably, Powell is up to bat.
When in Rome
Across the pond, investors will focus on Italy’s response to the EU’s demands that the populists revise their budget or, in other words, investors will continue to wonder how long it’s going to be before this situation starts to spiral out of control again.
Di Maio was on the tape with some characteristically absurd comments over the weekend. “What is the limit to dialogue with the EU? If you ask us to massacre Italians for us it’s ’no,’ we go ahead with the budget”, he told La7 television.
I don’t know about you, but I don’t recall Brussels ever suggesting that they intend to “massacre” any Italians, but maybe I just missed that.
Di Maio went on to contend that “the Italian people have already given too much for European rules, now is the time to be close to the people.”
As ever, the populists are just doing it for “the people”.
The ECB is reportedly pondering a new round of LTROs for Italian banks starting in January, in what sounds like an effort to help Rome after QE winds down at the end of the year. The ECB has been the major bid for BTPs and in the absence of that bid, yields could rise materially. If the spread to bunds balloons enough, it could imperil Italian banks, who took down a large portion of the ECB’s TLTROs.
UniCredit dove last week after slashing its 2018 and 2019 revenue targets. The shares have fallen in six of the last seven weeks.
Since May, Italian shares have managed to underperform damn near everything on the planet, including mainland Chinese shares.
According to a source who spoke to Reuters, Italy may “reduce its GDP estimate for next year to convince Brussels the country won’t go above a deficit of 2.4 percent of GDP in 2019.” That’s one way to do things, I guess.
“If Italy refuses to comply with the EC’s recommendations or provide a plan of corrective action, it could ultimately be fined”, Barclays reminds you. Fortunately for Italy in that scenario, they are broke, which means they won’t have to pay.
Also on deck in Europe: GDP and IP.
This divorce isn’t final
In the UK, a raft of data looms, with CPI, the employment report, and retail sales coming down the pike. As ever, it’s Brexit that matters, though. “We expect EURGBP to continue drifting lower into year-end, given our expectations of a Brexit deal being agreed, although risk-reward in the very near term is tilted for a squeeze higher, barring any further positive Brexit talk”, Barclays says. Over the weekend, the Times reported that Brussels has dealt a fresh blow to May. To wit:
Theresa May has been plunged into a deeper crisis after Brussels rejected her key Brexit proposal, which was intended to avoid the UK being trapped in an indefinite customs union.
The prime minister had hoped to unite her cabinet and overcome the final hurdle in negotiations with the EU by offering to create an “independent mechanism” to oversee how the UK might leave a temporary customs arrangement if Brexit talks collapsed.
But this weekend senior EU officials sent shockwaves through No 10 by rejecting May’s plan, sparking fears that negotiations have broken down days before “no-deal” preparations costing billions need to be implemented.
The pound is under pressure already in a sour start to the new week.
Finally, you can expect Donald Trump to be in a particular combative mood this week – suffice to say his trip to Paris did not go well.