The Week Ahead in Five Points

 

Shaping the holiday week, we identify five general points that we expect to underpin the US dollar and equities.  

1. Last week's events (FOMC and SNB) reinvigorated the divergence thesis that was questioned during what appears to have been a technical correction. US data in the days ahead will reinforce the perception of US economic strength. This may also ease concerns that the strength of the dollar is curbing growth.  At the same time, more aggressive ECB action is anticipated, while the BOJ may have to increase its efforts.  

2. Durable goods orders will be lifted by a sharp jump in Boeing orders, but the details of the report should point to stronger capex in Q4. The data will be scrutinized for insight into the energy sector as well. The market expects an upward revision in Q3 GDP from 3.9% to a 4.3%. If so, it would be the first consecutive 4%+ quarters since H2 03.     November's consumption is expected to have been boosted by a rise in income.  The November employment data points to  a 1% increase in wages and salaries.  

3. There appears to be a general consensus that the ECB will announce a sovereign bond purchase program early next year.   This anticipation and the decline in oil prices have driven European bond yields to record lows.   It has helped ensure that the Greece's political uncertainty stays localized.  Economic data alone will not persuade the market otherwise. That said, money supply data and credit data, due December 30, will be important for assessing the next phase of the TLTROS, which require banks to increase their lending books.    A non-binding opinion of the European Court of Justice on the OMT program is expected on January 14.    It is not seen as an obstacle.  

4.  It seems that a 500 bln euro sovereign bond buying program may have been agreed to in theory.  Relative to the euro area GDP, it is modest--around 4%.   The Bank of Japan would have done a commensurate amount between now and the end of Q1.   Once the principle is agreed, thorny technical issues remain.  Does it make sense to buy instruments with a negative yield?   What are the implications for the yield curve and duration?  What is the role of the national central banks in the risk-taking and operations?  

5.  It is a busy week for Japanese economic reports.  Two key take-aways are likely.  First, the data is likely to show a little improvement in the real economy after a poor start to Q4.   Second, the weakness of the yen is unlikely to have filtered into higher consumer prices yet.   The core CPI, when adjusted for the sales tax hike, will slip further below 1%.  If the BOJ cannot find some way to adjust its views to look past the drop in oil prices, then the market will expect it to do more as the inflation target becomes more elusive.