US Jobs, EMU CPI, And BOE/RBA Meetings Highlight Week Ahead

Businessman, Internet, Continents

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The high-frequency data cycle starts anew. The investment climate continues to be shaped by the virus that is depressing economic activity and fueling pressure for policy responses.

In parts of Europe and the US, the pandemic surge from the holidays is breaking, and a third vaccine (Johnson and Johnson (JNJ)) appears to be a few weeks from being approved. Meanwhile, after rallying strongly in the first few weeks of the New Year, equities saw dramatic profit-taking into the month's end.

The flash January PMI readings hinted at it, but last week's Q4 GDP reports (US, Germany, France, and Spain) confirmed a new divergence is opening between the US and Europe. Not including the fiscal debate currently in the US, but encouraged by the $900 billion-package approved last year, the IMF revised its forecast for US growth to 5.1% from the 3.1% projection made in October.

Due in part to the slow rollout of the vaccine and the extension of social restrictions, the forecast for eurozone growth was cut from 5.2% forecast for the eurozone to 4.2%. The IMF took Japan's new stimulative efforts onboard and boosted its projection for growth in the world's third-largest economy to 3.1% from 2.3% this year.

The new divergence will hit home next week as final January PMI reports. We recognized that an upside correction was likely after the losses in November and December within our larger dollar bearish view. The risk is that the divergence extends this corrective/consolidative phase. We note that a divergence has not translated into wider bond differentials.

In fact, over the past two weeks, the US 10-year premium over Germany narrowed by around a dozen basis points, unwinding more than half the widening for the first half of the month. Similarly, the premium over Japan rose by a little more than 20 bps in the first half of January and subsequently returned about three-quarters. 

However, the same forces that facilitate the divergence and provide for the greenback's resilience in the first part of this year strengthen the bearish case. The expansion of the US fiscal policy is going to fuel more growth.

The IMF estimates that President Biden's $1.9 trillion package would boost growth by another 1.25 percentage points and 5% over the next three years. The subsequent growth differentials will boost the US external deficits, all else being equal. The forces represented by the twin-deficits are a common element of many negative dollar-scenarios, even if not in so many words.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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