Financial markets have been highly volatile over the past two months with multiple bellwether stocks either falling into or near bear territory. Most market participants define a bear market as a 20 percent or more drop. For this week, there are two possible events that could prove to be inflection points.
The first key event is the G20 meeting in Argentina. Finance ministers start arriving November 26 but the big event is the expected meeting between Presidents Trump and Xi. Markets continue to be hopeful for some progress but issues between the two countries are much more complicated than between other trading partners. Further complicating matters is a collapse of preliminary talks ahead of the G20 meeting, meaning there likely won't be an extensively negotiated draft typical of most international meetings.
Given the equity sell off in both countries, there is mutual motivation for progress. However, we maintain that the fundamental issues remain difficult to solve making a symbolic "ceasefire" the best case outcome. While this would still be seen as a positive, albeit a minor one, as existing tariffs would likely remain in place, it isn't a game changer.
The other key event to watch is Fed Chair Powell's speech on November 28 for insights into whether the Fed could pause its rate hikes in light of recent market turmoil and concerns over a slowdown in growth.
Starting in 2019, the Fed decided to hold press conferences after every meeting, as opposed to every other meeting, which could make pausing an easier task. Markets have been discounting non-press conference meetings for policy action, limiting the opportunities for the Fed to move rates.
Beyond the complicated analysis over the health of the US economy—the economy is still printing solid economic numbers--the Fed also has to deal with the politics of it all. President Trump has been highly critical of the Fed. Because of this, the Fed needs to be careful that it isn't seen as caving to the president or overly influenced by the stock market. In our view, this December is too soon to pause but the Fed's 2019 forecast certainly has downside risk.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to remain unchanged at 0.10%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
Expectations for a slight decline from 137.9 to 135.7
Q3 GDP Revision
Expectations for an upward revision from 3.5% to 3.6%
New Home Sales
Expectations for an increase from 553k to 582k
Pers. Inc. and Spend.
Expectations for gains of 0.4%
Expectations for a strong gain from 58.4 to 59.3
Canada Monthly GDP
Expectations for a 2% annualized gain
Expectations to remain unchanged at -3.9
EZ Unemployment Rate
Expectations for a slight improvement from 8.1% to 8.0%
EZ CPI Core
Expectations to remain unchanged at 1.1%
German IFO Biz Surv.
Expectations for a slight decline from 102.8 to 102.3
German Jobs Report
Expectations for jobless claims to drop from 11k to 10k
German CPI MoM
Expectations to remain unchanged at 0.2%
Asia/Japan, and New Zealand
China Manufact. PMI
Expectations to remain unchanged at 50.2
Japanese Jobs Report
Expectations for the UR to remain at 2.3%
Expectations for a YoY decline from 1.5% to 1.1%
Japanese Ind. Prod.
Expectations for a strong gain of 1.2% after a -0.4% print
New Zealand Trade
Expectations for the trade deficit to improve to -850 mil
Alternating positive and negative headlines around Italy's budget moved the euro around during the holiday shortened week. Ultimately, it was the weak flash PMI numbers that pushed the euro lower. Weakness was especially notable in Germany with the failure for the manufacturing sub-component to stabilize indicating that weakness may not be so temporary. The markets are still holding the view that European growth could surpass US growth by mid/late 2019, but in the near term, expect the euro to remain under pressure.
The GBP had another volatile week as the markets alternated between optimism and pessimism on the Brexit withdrawal deal. PM May has launched a campaign to appeal to the UK population to gain support for the deal, but the chances that she is able to get the Withdrawal Agreement through Parliament the first time out looks slim. Expect the GBP to continue to have headline risk. Results of the EU summit to discuss Brexit should be a key driver of GBP sentiment. Given near term uncertainty, the bias is for a lower GBP.
Ministry of Finance data shows that Japanese investors turned back to being net sellers of foreign bonds after being a net seller last week. US rates remain a key driver of the currency. Given this, keep an eye on Jay Powell's speech this week as the markets look for clues as to how the Fed will react to stock market volatility and increased concerns over a slowdown in global growth. Expect range trading.
The CAD weakened again this past week as oil prices fell to their lowest levels since October of last year. Additionally, BoC comments about the bank reviewing its inflation target were seen as dovish by the markets. PM Trudeau unveiled tax cuts but the factors were broadly as expected. USMCA is still expected to be signed by the end of November, however increased ratification continues to weigh on the CAD.
Alternating trade headlines moved the CNY around this past week. The news flow kicked off with comments from VP Pence damping trade talk sentiment. Sentiment was then improved when it was reported that more hawkish White House officials would not be accompanying the President to this week's G20 meeting. While we don't expect significant progress to be made at the G20 meeting between Trump and Xi, there remains optimism for at least a cease fire with headlines surrounding this meeting the key driver of the currency in the short term.
The AUD traded lower last week as concerns over US-China trade talks and a drop in commodity prices weighed on sentiment. Australia's commodity export economy is heavily swayed by trade and China's economy. The ebb and flow of trade tensions and the outcome of the G20 meeting between Trump and Xi should be a key driver for the currency. It has been reported that trade hawk Peter Navarro will not be on the guest list. Additionally, China gave approval for the USS Ronald Reagan to dock in Hong Kong. Both of these developments have been cited as evidence that both sides want to make a deal.
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