The best performers last week in G10 were AUD and NZD up 1.6% – both reflect the renewed faith that global growth can be saved by the simplicity of a Trump deal. CNY led the winners in emerging markets as the PBOC pushed the fixes with the Yuan up 1.55% for the week to 6.76 – with 6.71-6.73 the next key support.  If the focus last week was on positive US-China talks, the week ahead is about Europe with UK Brexit and ECB Draghi speech key event risks. Throw in that the Greek Tsipras government likely faces a confidence vote and on-going French protests– all put the EUR/USD relationship back in play after the pendulum of risk moved from despair to euphoria in two weeks. Given the weakness of the European data and the messy politics ongoing, ECB Draghi has a thin wire to balance for investors as they face the liquidity trap. Watch 1.1640 and 1.1300 for the new swings and extremes 1.12-1.17 into the ides of January. 

A stronger USD next week may bring back the negative correlation to S&P 500 

The bounce back in oil prices may be the other problem and issue for Europe and the US as the inflation noise of energy may proves less helpful in 1Q just as it did in 4Q. Emerging Markets may be moving off the current account/real rate focus and back to commodities accordingly.  

India INR off 1.25% was the notable loser last week with oil a key part of the story, politics, RBI policy was the rest. Mexico MXN gained 1.5% with the AMLO financial reform push, the IPO tax cut from 35% to 10% being the most notable driver. Brazil gained 2% with pension reform hopes key. The finer point of tracking FX markets as a barometer for global asset flows reveals a richer diversity of outcomes in the last week than just a return to risk-on and risk-off thinking, making the pendulum analogy less important and the wrong focus for the awful eight risks into the week ahead. 

Thematically, markets have been stuck on China, European politics, Brexit and US politics. But there are more clocks ticking with many different time lines for potential blow-us and surprises than the present tape for global equities suggests. 

Higher oil prices hits FOMC/ECB patience

Themes: 

• US/China Talks: More is less. US Treasury Secretary Steven Mnuchin told reporters Thursday night that Vice Premier Liu He, the most senior economic policy adviser to President Xi Jinping, would travel to Washington later in January to continue trade negotiations. The talks held in Beijing last week were seen as constructive but insufficient to get the deal with intellectual property and technology transfers still the sticking points. 
• China Growth: Pump priming dry wells. The hope that the PBOC RRR cut and the fiscal stimulus plans from Beijing will counter the current slowdown continues. The risk/reward of unwinding reforms is not obvious and the fear that even with a trade deal growth won’t reignite extends with the data in the week ahead crucial to that thinking. 

• FOMC Patience: Expensive Powell Puts. The flip-flop of the FOMC Chair this week was seen as troubling to many Fed watchers as the bowing of the central bank to market turmoil and fears regardless of underlying economics makes the loss of forward guidance and the shift to data dependency create rather than smooth market volatility. The cost of the Powell S&P 500 puts is going to be higher than those of past Chairman. 
• US Shutdown: 23 Days and counting. The longest partial government shutdown in history continues with no end in sight. Some argue this doesn’t matter as it’s less government, others see it beginning to hit the pipeline of work – from IPOs to ETFs and beyond.  The longer the shutdown lasts the more impactful it becomes. 

• 4Q Earnings: Forward guidance key. Bank earnings from JPM and C start the week, with 2018 a banner year but outlooks for 2019 are key.  Expectations for 2019 are modest and anything supporting the bounce back in risk will be seen as positive. The 4Q earnings rate so far is 10.6% according to FactSet with 4% of the S&P500 reported while estimates were for 12.3% on Dec 31, 2018. The number of negative guidance issued rose to 72 – still below the 5Y average of 76. 
• EU Politics: Yellow Vests and more. The French protests ahead of a key debate this weekend make clear Macron is still in trouble. The brittle truce of Italy with the EU on its budget is at the “pretend” stage for investors, while the May EU elections are heating up with Poland and others leading anti-EU struggles over spending, immigration and more. 
• Brexit:No way out.  The delay expectations support GBP and May even as next week seems to be a real deadline and a trigger for uglier politics ahead. 

Question for the Week Ahead: Can China grow at 6.0-6.5% in 2019?

The rolling over of Chinese growth has been a concern for months. The long-held view that CNY weakness will follow any PBOC rate cuts hasn’t played out in the last week. Instead, markets see a technical 6.80 break in USD/CNY opening 6.71 and 6.65 tests should US/China trade talks lead to a deal or another truce extension. Muddling through at 6% growth still sounds exciting to investors. The CNY appears to be in a winning position but the cost of too strong a currency to keep money at home and attract foreign flows for bonds and stocks maybe a harder issue for Beijing. The trade conflict has plenty of blame for moving growth expectations lower into 2019.  The Nikkei Asian Review cover story on winners and losers is worth considering as it lists the flow of relocating production with Taiwan clearly thinking differently. Direct and indirect impacts are making the supply chains in Asia shift with the winners in other regions notable.  

While the focus is on China and the trade negotiations, if you talk with global CEOs it’s about FX (USD strength), raw materials, wages and labor market tightness and then perhaps trade policy which is right next to European weakness and energy costs. The point is that China/US trade isn’t sufficient to lift up investment and other plans for 2019. The confidence game in play for growth globally rests on the credibility of the central bankers still. This is where the value of FX kicks in and the work on FX valuation from DB is worth highlighting into the next quarter. If you want to believe in China 6% plus growth you will need to see the CNY move back to 7. 

Market Recap:

The extension of the global risk rally led by Asia and China/US trade talk hopes was the key story for the last week. The US government shutdown and USD weakness was also in play supported by dovish enough sounding FOMC comments and minutes. The data was weaker almost everywhere but ignored. The US Services ISM fell more than expected and suggests industrial weakness maybe spreading. The CPI in the US was in line with core at 2.2% y/y. Powell remains “patient” on further rate hikes.

Trump canceled his WEF Davos trip due to the government shutdown slashing hopes for a Xi/Trump handshake on trade. The FOMC minutes support the view of a 1Q rate pause with data dependency still key, and some nod to market stability (financial conditions). The announcement by Ford that it was cutting jobs in Europe and the expectations for a Brexit delay plan B also mattered last week – lifting GBP, hurting auto sector despite tariff relief hopes. 

Equities:

The MSCI all-country World Index rose 2.89% to 473.26 on the week. The MSCI EM index rose 3.75% to 1,001.11 on the week. Asia led the rebound. 

• The S&P 500 rose 2.54% to 2,596.26 on the week. Thursday, the S&P 500 was up over 10% from its Dec 24 correction lows.  The industrials led the rally with energy a close second. The DJIA rose 2.4% to 23,995.95 on the week – also up over 10% from its lows - while the NASDAQ rose 3.45% to 6,971.48 on the week. The Cboe VIX fell 14.92% to 18.19% on the week – its almost 50% down from the Dec 24 36.07 highs. 
• The Stoxx Europe 600 rose 1.69% to 349.20 on the week. Friday highs just over 350 make clear the technical resistance matters while focus remains on banks, oil and Autos for trouble. The German DAX rose 1.11% to 10,887.46 on the week. The French CAC40 rose 0.93% to 4,781.34. The UK FTSE rose 1.18% to 6,918.18 on the week. The Italian FTSE MIB rose 2.43% to 19,290.09 on the week. 
• The MSCI Asia Pacific Index rose 4.08% on the week. The Japan Nikkei 225 rose 4.08% to 20,359.70 on the week. The Hong Kong Hang Seng rose 4.06% to 26,667.27 on the week. The China Shanghai Composite rose 1.55% to 2,553.83 on the week. The India S&P/CNX Nifty rose 0.63% to 10,794.95 on the week. The Korea Kospi rose 3.25% to 2,075.57 on the week and the Australia ASX rose 2.78% to 5,834.80 on the week. 

Fixed Income:

Between higher equities, supply globally and at hope with corporate issuances mattering – US bonds ended the week lower with many wondering if the best prices for 2019 have already been seen in many government bond markets. Better equities have supported credit with HY up on oil and the return to yield chasing as portfolios are rethought and reallocated. The focus in Europe was back on safe-havens with UK/Italy troubles leading to German gains. 

• US bonds sold with curve kinks after supply, FOMC minutes: 2Y up 5bps to 2.55%, 3Y up 4bps to 2.52%, 5Y up 3bps to 2.53%, 10Y up 3bps to 2.70%, 30Y up 6bps to 3.04%.
• Canadian 10-year bond yields rose 3bps to 1.96% on the week– BOC holding as expected, oil and data supportive for more action.
• Japan JGB yields rose 6bps to 0.02% on the week– supply, equities and BOJ moving back to “normal” even as data drags. 
• Australian 10-year bond yields off 2bps to 2.30% on the week with focus on China, supply and weaker data. 
• UK Gilt yields rose 1bps to 1.29% on the week with Brexit delay thinking in play – politics vs. data. 
• German Bund yields fell 3bps to 0.18% on the week with data weaker, ECB next key.
• French OAT yields fell 6bps to 0.66% on the week with weaker data/Macron political trouble focus.
• Italian BTP yields rose 2bps to 2.91% on the week with focus on politics/immigration deals/weaker growth and banks. 
• Spanish Bono yields fell 2bps to 1.46% on the week– politics and growth keys.
• Portugal 10-year bond yields fell 10bp to 1.71% on the week with focus on growth/budget.
• Greek 10-year bond yields fell 10bps to 4.30% on the week– vote of confidence key – election risks rising.  

Foreign Exchange:

The US dollar index fell 0.5% to 95.68 on the week. The 94.50-96.80 levels look important into the week ahead. In Emerging Markets, the USD was mixed with LATAM leading – EMEA: ZAR up 1.05% to 13.809, RUB up 1.1% to 66.902, while TRY fell 2.05% to 5.4405 with oil key; ASIA: CNY rose 1.5% to 6.76, KRW fell 0.3% to 1118.90, INR fell 1.2% to 70.365; LATAM: MXN rose 1.5% to 19.13 on reform, BRL rose 2.1% to 3.7105 on pension reform, ARS rose 1% to 36.97. 

• EUR: 1.1465 up 0.65% on the week with 1.13-1.15 broken but not sustained leaving many wondering if 1.1350-1.1635 is the larger prison.
• JPY: 108.45 flat on the week with 107.50-109 the keys and EUR/JPY up 0.7% to 124.40.  BOJ policy and the data key vs. US rates/risk mood.
• GBP: 1.2835 up 1% on the week with EUR/GBP .8930 off 0.2%. The multiple scenarios for Brexit and politics next week leave many thinking its overdone and overpriced with data supporting 1.29 before 1.26. 
• CHF: .9835 off 0.25% on the week with EUR/CHF up 0.4% to 1.1350. Safe-havens dwindling with equity rebound but 1.14 and .9880 look important. 
• AUD: .7215 up 1.5% on the week. NZD .6830 up 1.5% on the week. More about China hopes and commodities than domestic data or rates. .7050-.7350 key. 
• CAD: 1.3265 off 0.8% on the week. BOC on hold but sounding hawkish enough, oil and data helping but still lags A$ gains and 1.32-1.34 looks key. 

Commodities:

GSCI total return index rose 4.04% to 2,369.53 on the week. Beyond energy gains last week, commodities focused on Palladium, Rice and Coffee bouncing while Orange Juice, Corn, Soybeans lagged. The trade hopes don’t translate into confidence as supply persists globally. 

• Oil: $51.59 up 7.6% on the week (Feb futures) with $52 tests and $50 break key opens $55 target again. Brent up 6% to $60.48 (Mar futures) with $60 break and $62 keys – US inventory build offset on global trade/growth hopes/OPEC output cuts. 
• Gold: $1289.50 up 0.3% on the week (Feb futures) with $1300 in play but holding and $1382-$1368 base. USD weakness vs. equity bounce driving. Palladium led the precious metals with auto link – up 3.6% to $1278.70 on the week. Silver fell 0.8% to $15.65 failing at $15.85 resistance. Platinum fell 1.1% to $818. 
• Corn:  $378.20 off 1.25% on the week (Mar) with Soybeans off 1.2% to $910.20 – talks better not enough, weather and other suppliers driving.  Wheat up 0.5% to $519.40 (Mar futures). 
• Copper:  $2.7085 up 2.09% on the week- with March futures $2.6620 up 0.55% on the week – tracks equities/China hopes. The iron ore futures (Feb) $72.33 up 2.4% on the week.  Trade supported but other data mixed and outlook less supportive. 

Calendar for the Week Ahead:

China trade and M2, Brexit vote, Draghi speech, US industrial production, Michigan survey, and Philly Fed; Eurozone HICP final and industrial production, Sweden CPIF, India WPI, UK CPI/PPI/Retail Sales, central bank decisions for Turkey, Indonesia, South Africa;  OPEC and IEA monthly reports on oil, 

Monday, January 14: China trade, M2, Sweden CPIF, India WPI

• 0700 pm Australia Jan Consumer CPI expectations 4%p 3.9%e
• 1000 pm China Dec Trade surplus $44.7bn p $51.5bn e / exports 5.4%p 3%e / imports 3%p 5%e
• 0130 am India Dec WPI (y/y) 4.64%p 4.42%e
• 0200 am Germany Dec WPI (y/y) 3.5%p 3.4%e
• 0330 am Sweden Dec CPIF (y/y) 2.1%p 2.1%e (m/m) -0.1%p +0.4%e / CPI 2%p 2%e
• 0400 am China Dec M2 8%p 8.2%e / New CNY loans 1.25trn p 800bn e / TSF CNY1.5trn p 1.2trn e
• 0500 am Eurozone Nov industrial production (m/m) 0.2%p -1.3%e (y/y) 1.2%p -2.1%e
• 1100 am US Dec NY Fed CPI expectations 2.97%p 2.9%e

Tuesday, January 15: Brexit vote, Draghi speech, US PPI, German budget and 2018 GDP

• 0100 am Japan Dec machine tool orders -16.8%p
• 0245 am French Dec final HICP (m/m) -0.2%p 0.1%e (y/y) 2.2%p 1.9%e / CPI 1.9%p 1.6%e
• 0300 am Spanish Dec final HICP (m/m) -0.2%p -0.5%e (y/y) 1.7%p 1.2%e / CPI 1.7%p 1.2%e
• 0400 am German 2018 GDP 2.2%p 1.5%e / Budget 1%p 0.6%e
• 0500 am Eurozone trade surplus E14bn p E13.7bn e
• 0830 am US Dec PPI (m/m) 0.1%p -0.1%e (y/y) 2.5%p 2.5%e / core PPI 2.7%p 3.0%e
• 0830 am US Jan NY Empire Manufacturing 10.9p 12e
• 1000 am ECB Draghi speech 
• 1000 am US Jan IBD/TIPP economic optimism 52.6p 51.8e
• 1130 am Minn Fed Kashkari speech
• 0100 pm Kansas Fed George speech
• 0200 pm UK parliament Brexit vote
• 0430 pm US weekly API oil inventories -6.27mb p

Wednesday, January 16: UK CPI/PPI, final German HICP, Turkish rate decision, Fed Beige Book

• 0650 pm Japan Nov machinery orders (m/m) 7.6%p 3.5%e (y/y) 4.5%p 0.4%e
• 0650 pm Japan Dec PPI (m/m) -0.3%p -0.3%e (y/y) 2.3%p 1.8%e
• 0830 am China Dec house prices (y/y) 9.3%p 8.1%e
• 0200 am German Dec final HICP (m/m) 0.1%p 0.3%e (y/y) 2.2%p 1.7%e / CPI 2.3%p 1.7%e
• 0430 am UK Dec CPI (m/m) 0.2%p 0.2%e (y/y) 2.3%p 2.2%e / core 1.8%p 1.8%e / RPI 3.2%p 2.9%e
• 0430 am UK Dec output PPI (m/m) 0.2%p 0.1%e (y/y) 3.1%p 2.9%e / core output 2.4%p 2.4%e / input PPI 5.6%p 3.5%e
• 0500 am Italy Dec final HICP (m/m) -0.3%p -0.1%e (y/y) 1.6%p 1.2%e
• 0540 am German 30Y Bund sale
• 0600 am Turkish central bank rate decision – unchanged at 24% expected.
• 0830 am US Dec import prices (m/m) -1.6%p -1.2%e / exports -0.9%p -0.6%e
• 1000 am US Jan NAHB housing index 56p 56e
• 1030 am US weekly EIA oil inventories -1.68mbp
• 0200 pm US Fed Beige Book

Thursday, January 17:BOJ Kuroda, Indonesia, South Africa rate decisions, final Eurozone HICP, Philly Fed

• 0630 pm Australia Jan consumer confidence 104.4p 104.0e
• 0730 pm Australia Nov home loans (m/m) 2.2%p -1.5%e
• 1020 pm BOJ Kuroda Speech 
• 0200 am Indonesia central bank rate decision – no change from 6% expected.
• 0440 am Spain sells 3-5Y Bonos
• 0500 am Eurozone Dec final HICP (m/m) -0.2%p 0%e (y/y) 1.9%p 1.6%e / core 1%p 1%e
• 0500 am Eurozone Nov construction output (y/y) 1.8%p 1.5%e
• 0545 am UK sells 5Y Gilts
• 0800 am SARB rate decision - no change from 6.75% expected
• 0830 am US weekly jobless claims 216k p 220k e
• 0830 am US Jan Philly Fed manufacturing 9.4p 10e
• 0100 pm US sells 10Y TIPS

Friday, January 18: Japan CPI, OPEC monthly, IEA monthly, UK retail sales, US industrial production, US Univ. Michigan consumer expectations, G20 meetings in Japan

• 0430 pm New Zealand Dec Business NZ PMI 53.5p 52e
• 0630 pm Japan Dec CPI (m/m) -0.2%p 0%e (y/y) 0.8%p 0.6%e / core 0.9%p 0.8%e
• 1130 pm Japan Nov final industrial production (m/m) 2.9%p -1.1%e (y/y) 4.2%p 1.4%e
• 0430 am UK Dec retail sales (m/m) 1.4%p -0.7%e (y/y) 3.6%p 3.5%e / ex fuel 3.8%p 4%e
• 0830 am Canada Dec CPI (m/m) -0.4%p -0.4%e (y/y) 1.7%p 1.7%e / core 1.5%p 1.5%e
• 0905 am NY Fed Williams speech 
• 0915 am US Dec industrial production (m/m) 0.6%p 0.2%e (y/y) 3.9%p 3.0%e / manufacturing 2%p 1.8%e
• 1000 am US Jan preliminary Univ.Michigan consumer sentiment 98.3p 97e

Conclusions: Is the US inflation scare over?  

The key to FOMC patience and the return of a Goldilocks trading environment is tame inflation.  Boring economic data just over potential growth with no sign of inflation means equities up, bonds stuck and FOMC waiting for global clarity. The Advisor Perspectives CPI analysis is worth considering here as it shows the key turns over the last 2 decades using the underlying inflation set as a predictor.  

The key problem for investors also comes from the drop in confidence and the feedback to the business cycle. The ECRI weekly highlights this collision with its own indicator suggesting the 2015 call is like that of 2018.  

The problem for next week and beyond rests with the increased noise in the economic data that central bankers are using for guiding their policy.  Reactive policy with increased uncertainty breeds volatility. Higher volatility with out higher returns punishes investors. Theoretically we should see pain trades in passive and better returns in active managers. 1Q will be a key test for this as the expectations for yields in bonds and stocks trend lower again. Perhaps the best week of 2019 was last week or perhaps this is just another pendulum moment and we can swing more widely back and forth in the year ahead.