FX Week Ahead - Nonfarm payrolls eyed ahead of FOMC

The November nonfarm payrolls report will likely be the highlight of the coming week as it will be the last before December’s FOMC meeting. There will be plenty of other major data for the US, while Japanese indicators will also attract some attention. The European calendar will be relatively quieter with flash inflation for the Eurozone being the more important release.

Eurozone prices on an uptrend

The week will start with economic sentiment indicators out of the Eurozone on Monday. The economic sentiment index has risen sharply from the post-Brexit plunge and is expected to improve further, increasing from 106.3 to 107.0 in November. Also released the same day is the final reading of the consumer confidence index, which is forecast to stay unrevised at -6.1. On Wednesday, the flash estimates of November CPI are due and are expected to show the Eurozone making further progress in moving away from sub-zero price increases. Headline inflation is forecast to edge up from 0.5% to 0.6% y/y in November’s preliminary reading. Finally, unemployment and producer price figures will round up the week on Friday.

Japanese consumer spending in focus

Household spending in Japan has been on a downward trend since 2015 but data out next week could provide signs that it is bottoming out. Figures out on Tuesday are forecast to reveal household spending rising by 0.1% m/m in October, sharply down from the 2.8% jump of the prior month but managing to expand for the second straight month. Retail sales and unemployment figures are also out the same day. October retail sales are forecast to fall by an annual rate of 1.2%, while the unemployment rate is expected to stay unchanged at 3%.

On Wednesday, industrial production numbers are due and are expected to show output falling by 0.1% m/m in October’s preliminary reading. This compares with a 0.6% m/m gain in September’s final reading. Industrial output in Japan has been on an upward trend for most of 2016 despite a stronger yen and weak domestic demand. The yen’s more recent decline therefore will likely provide an additional boost for Japanese manufacturers over the coming months.

UK manufacturing PMI to stay in positive territory

Major data will be scant in the UK next week with only the Markit/CIPS manufacturing and construction CPIs to preoccupy traders. The manufacturing PMI is released first on Thursday and is expected to increase slightly from 54.3 to 54.5 in November. The construction PMI will follow on Friday and is forecast to increase from 52.3 to 52.6. All three UK PMIs (manufacturing, services and construction) rebounded quickly from the post-Brexit slump and the UK has yet to show signs of a material slowdown. The weaker pound has also helped British businesses overcome any Brexit blues.

Canadian data to be watched as BoC ponders whether to ease

The Canadian dollar has had a bit of a rollercoaster ride against its US counterpart since the US election as a stronger greenback and higher oil prices have been pulling the loonie in opposite directions. Apart from a more bullish US dollar, the possibility of a rate cut by the Bank of Canada has also been weighing on the loonie as economic growth in Canada has been hit by lower oil revenues. GDP data out next week is expected the show the Canadian economy rebounding sharply in the third quarter. Growth in the second quarter was dealt a blow by the wildfires that damaged oil production facilities. Annualized growth in the third quarter is forecast to be 3.4% versus -1.6% in the prior quarter.

Also important will be the latest employment numbers. Employment is expected to fall by 2.5k in November after an impressive 43.9k gain in October. The unemployment rate however is likely to remain unchanged at 7%.

Last NFP before December FOMC under the spotlight

The US will have the busiest calendar next week, starting with the second estimate of GDP growth in the third quarter on Tuesday. US economic growth will likely be revised up slightly from 2.9% to 3.0% in the second reading, reinforcing expectations that growth is gathering steam in the second half of the year after a slow first half. Also out on Tuesday is the Conference Board consumer confidence index, which is forecast to rise from 98.6 to 100 in November.

Further signs of improvement in consumer confidence is expected to come from personal consumption expenditure data due on Wednesday. Personal income growth is estimated to quicken from 0.3% to 0.4% m/m in October, while personal spending is forecast to strengthen further from 0.5% to 0.6%. Also included in the personal consumption report is the PCE price index, which is the Fed’s preferred measure of inflation. The core PCE price index has been stuck at 1.7% y/y for the past two months, not too far from the Fed’s 2% objective, so any signs of a pick-up will be seen as adding further pressure on the Fed to raise rates. Also to watch on Wednesday is the Chicago PMI and pending home sales.

On Thursday, the main focus will be the ISM manufacturing PMI. The closely watched business survey for manufacturing activity is expected to show a third straight month of expansion, with the index increasing slightly to 52.1 in November. The highlight will come from Friday’s nonfarm payrolls report however, as it will be the last jobs report for the Fed to assess before it meets on December 13-14 for a scheduled policy meeting.

Nonfarm payrolls are expected to increase by 174k in November, up from 161k in October. The unemployment rate is forecast to hold steady at 4.9%, while average earnings are expected to increase by 0.3% m/m in November versus 0.4% in the prior month. A weaker-than-expected reading is unlikely to deter the Fed from raising rates next month but a much stronger reading could signal faster rate increases in 2017, fuelling the dollar rally further.