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A holiday-shortened week will see dwindling participation. The lighter activity could make for either subdued price action or volatile activity. Brexit is a gift that keeps giving, and despite posturing to the contrary, neither side appears to want to be seen as the party that walked away.

After much teeth-gnashing and finger-pointing, the US still appears set to provide modest fiscal stimulus that will help overcome the cliff of expiring income support programs. The scaled-down initiative keeps the door open to a larger package next year depending on the two Senate races in Georgia. Early in-person voting for the January 5 election has already begun, and the polls and betting markets show both are tight races. 

The economic calendar in the week of Christmas is thin, but there are a few highlights. They should be understood, though, in the context that Q4 20 and the first part of Q1 21 will remain challenged by the surge in the coronavirus and social and official responses that dampen, if not reverse, the recoveries seen in Q3. As investors and policymakers scrutinize the latest economic entrails, the vaccine roll-out continues and will now be joined by Moderna (MRNA)'s vaccine. 

While the near-term tragedy continues to unfold, the optimism of a strong and sustained recovery once the vaccine propels herd immunity is running higher. When people can move around safely, pent-up demand for services will be unleashed. A boom in tourism and hospitality services, in general, is a common investment meme.

The reflation trade is being expressed in different ways throughout the capital markets. Notable in US equities has been the outperformance broader market. The Russell 2000 has rallied about 15%, while the S&P 500 and the NASDAQ have gained around 5.6% and 7.2%, respectively, since the vaccine was announced. 

The currency markets have given an extra fillip to the Antipodeans and Scandis. It also helps explain the yen's lag and the broad dollar's weakness. The JP Morgan Emerging Market Currency Index has appreciated for the past seven weeks. The Institute for International Finance estimates that emerging markets drew a record amount of portfolio capital last month of more than $76 billion.

The rise in copper to seven-year highs and soy to its highest level in four years reflects demand from China and East Asia more generally and boosts Latam. Since the Pfizer (PFE) announcement on November 9, the two strongest currencies in the world have been the Colombian peso (~6.7%) and the Brazilian real (~5.8%).

The high-frequency data in the week ahead will be more for economists than investors. Forecasts for Q4 GDP may solidify. For December, the preliminary PMIs showed Europe not quite as weak as expected, and the US not quite as strong. Japan's flash composite PMI slipped further below the 50 boom/bust level in December, as the world's third-largest economy continues to struggle.

The November US retail sales report's weakness warns of downside risks to the November personal consumption expenditures. The 1.1% decline was more than three times larger than economists generally expected, and the Retail sales account for less than half of PCE, which, of course, drives US GDP. The Bloomberg survey's median forecast saw a 0.3% increase after a 0.5% increase in October. Recall it averaged 1.3% in Q3.

Consumption has three drivers: wealth, income, and credit. Wealth, in turn, is largely a function of equity and house prices. Income is mostly about wages, but also transfer payments. Of the three, consumer credit has been the weakest. Consider that consumer credit, which excludes mortgages, but includes student loans, was between about $14 and $16.5 billion a month in H2 19. In Q3 20, it averaged almost $6.6 billion.

Alongside the personal consumption figures, the government will report personal income. In October, wages and salaries rose by 0.7% (0.9% in September), the least since the spring's lockdowns eased. However, the reduction in transfer payments (unemployment insurance and supplemental payments fell) offset the aggregate increase in wage income. Economists look for an additional 0.2% decline in November income.

The deflator association with the PCE always attracts attention, and this may be doubly true now, given that rising inflation is part of the reflation story. However, most of it is about the future, not the present. The PCE deflator was flat in October for a 1.2% year-over-year pace. Given the base effect, a 0.1% increase in November will leave the year-over-year rate at 1.2%. This is the single most important inflation measure as the Fed formally targets it. The core rate, which it talks about, is expected to be steady at 1.4%.

The November durable goods orders will be released in addition to the income, consumption, and deflator reports. The more moderate pace of Q4 growth, compared with a 33.1% surge in Q3, is not only because consumption slowed, but so did business investment, for which durable goods offer a proxy. They rose by an average of 4.8% a month in Q3 20. After slowing to a 1.3% gain in October, growth in durable goods orders is expected to have been halved in November to 0.7%.

Japan reports November employment figures and retail sales. As we noted, the Japanese economy continues to struggle. A new cyclical high of 3.1% unemployment was recorded in October. The risk is that it has not peaked yet. Japan's labor market was changing before the pandemic, and the number of jobs per applicant began trending lower in H1 19 at a little more than 1.6. In October, it was at 1.04. Household spending rose on a year-over-year basis for the first time since September 2019. Retail sales essentially recouped the drop in March and April in the following two months and have subsequently risen slightly.

The government's third stimulus budget will help support the economy in Q1 21. Foreign demand may improve a bit later for the US and Europe. The BOJ extended its emergency facilities last week, which is only prudent but does not appear to be in a hurry to more.

Although both the Prime Minister and the central bank Governor spoke out when the dollar initially fell below JPY104.00 in early November, cautioning about excess volatility, there is a steely silence now as the dollar tests the JPY103 area. Yet, officials can hardly object to the volatility. The dollar has been largely confined to the range set on November 9, when the vaccine was announced (~JPY103.20-JPY105.65).

Here in H2, it appears the dollar may be walking a staircase lower against the yen. And the steps take around six weeks or so before the next step lower. The timing lines up as the dollar struggled to sustain gains above JPY104 last week before slipping below JPY103.

Still, yen gains should not be exaggerated. It has risen by about 5% against the dollar this year, less than its main regional competitors, like South Korea, Taiwan, and China. Against the majors, the yen has trailed behind the euro and Australian dollar. A move to par (JPY100) and below in 2021 seems reasonable.

Australia's job growth has been nothing short of spectacular in October and November. It boosted jobs by 270 thousand in that period, and more than 180k thousand were full-time posts. As the lockdowns ended, the participation rate jumped to 66.1% in November from 64.8% in September, and is above where it was in Q4 19 (steady at 65.9%).

More people working and the lighter social restrictions should help retail sales recover. After falling 4% in August and 1.1% in September, retail sales gained 1.4% in October. More consumption likely took place in November. Bloomberg's survey's median forecast looks for a 2.3% increase, and we suspect the risk is on the upside.

This month, the Australian dollar is the strongest major currency, appreciating about 3.8% against the US dollar to reach levels not seen since Q2 18. Several investment themes converge with the Aussie, including robust risk appetites, the strength of East Asia economies and especially China, the demand for commodities, and the US dollar's broad weakness. A move to at least $0.8000 in 2021 seems reasonable.

Canada reports October GDP in the middle of next week. The surging virus likely slowed growth after the 0.8% expansion in September. Still, the labor market's strength (employment rose by 0.5% and the index of hours worked rose by 0.8%) and manufacturing sales increased. The risks may lie on the upside of the Bank of Canada's 0.3% forecast. 

With Norway's Norges Central Bank sounding less dovish (see the first hike in H2 22) helping lift the krone by nearly 1% on December 17, it leaves the Canadian dollar, which is trading near its best levels since April 2018 as the weakest of the major currencies this year. It has gained a modest 1.6% against the US dollar this year.

We would pencil in Canada to be another candidate that will likely be among the first to taper its emergency measures, including QE. On the other hand, the risks of an election in Canada as the contagion and vaccine approach herd immunity can begin being felt. We suspect there is potential for the US dollar to fall toward CAD1.22 in 2021.