The Week Ahead: Keep calm and carry on…

It’s been a gripping first week of the new year with markets tossing aside their lethargy, Christmas pies and excessive alcohol intake in favour of high volatility in headlines, oil and safe haven assets. Stock markets, however, have been utterly resilient seemingly non-plussed by talk of world war three, making new highs once again.

With Wednesday’s high-to-low swing of almost 9% in crude, traders have been heavily whipsawed, especially the many who thought the move through $70 was critical. Tension in the Middle East has also naturally focused attention on oil shocks amid fears of greater escalation. General wisdom has it that oil demand rather than supply shocks are bigger drivers in FX markets, so we think it’s important to remember the bullish re-assessment of global demand late last year.

The week ended with a respectable headline print in the US non-farm payrolls report, even if the figure was the lowest in seven months. Last year was the tenth straight year of payroll gains although the annual figure represents the slowest average growth since 2011. More interestingly, the unemployment rate stuck at the 50-year low of 3.5% while average hourly earnings ticked down, below 3% to the lowest reading since July 2018.

Many are now asking why wage growth is not trending higher if the economy is running hot? Maybe this is because market expectations for inflation are historically de-anchored from actual inflation pressures and long-term commodity trends. We can leave this debate to the academics perhaps but the key takeaway from the labour report in general was certainly that the continuation of a supportive Fed policy is a given, amid a very mild landing for the US economy.

This week’s highlight will be the signing ceremony of the phase one trade deal between the US and China on Wednesday. The actual substance of the agreement is somewhat debatable, which we have touched on before. Will China really undertake the massive two and a quarter fold increase in total US exports within a two-year period, and around a fourfold increase in US agricultural goods, after which there is no agreement? There is deep scepticism aboutthe deal details, but markets are content around the general descalation of tensions and will look forward to further information on the next phase two of negotiations.

Otherwise, the week ahead will provide us with a review, in effect, of 2019 and if world activity managed to close on a stronger note. The UK monthly GDP figure released today will give us a sense of whether the Bank of England will ease or not in the near-term, which is gaining increased attention as we approach the January 31 Brexit date. Last week, we heard dovish remarks from Mark Carney, which have been backed up by another Bank of England official over the weekend. UK growth has slowed below potential and the MPC is now seriously debating the merits of near-term stimulus. 

Meanwhile, China will report its fourth quarter GDP figures at the end of the week, which are likely to show the economy expanding at a similar pace to the prior quarter at 6.2%. This has been the case for every quarter for the past four years andis never revised. As they say, keep calm and carry on!