After a quiet last week of 2021, the first week of the new year gets busier again, with the main event perhaps being the US employment report for December, due out on Friday. That said, this is not the only top-tier release on the agenda.
We also get jobs data for Canada, as well as Eurozone’s preliminary CPIs, and the final PMIs from around the globe. Apart from those releases though, major OPEC and non-OPEC producers meet to decide on oil output.
On Monday, the calendar is relatively light, with markets in New Zealand, Australia, Japan, the UK, and Canada staying closed. The only data worth mentioning are the final manufacturing PMIs for December from the Eurozone and the US.
Although these numbers usually confirm their preliminary estimates, and indeed this is what is expected this time as well, we cannot rule out small downside revisions due to the surging coronavirus cases around the globe in the last days of the month, after the preliminary estimates were released.
On Tuesday, most markets return to normal trading, except New Zealand. We get more manufacturing PMIs throughout the day, like China’s Caixin index for December, the UK’s final Markit print, and the US ISM index.
The Chinese index is forecast to have ticked up to 50.0 from 49.9, while, similarly to Monday’s data, the UK Markit index is forecast to confirm its preliminary estimate. The ISM index is expected to have slid somewhat.
Switzerland’s CPI is also coming out, with the YoY rate expected to have ticked up to +1.6% from +1.5%. However, the MoM rate is anticipated to have slid to -0.1% from +0.3%. Therefore, with that in mind, but more importantly, taking into account that the SNB maintains the view that the Swiss franc remains highly valued, we don’t expect an uptick to raise speculation of a rate hike by this bank.
We don’t believe that officials will even be tempted, as the franc has strengthened notably against the euro in the last few months. So, we don’t believe that there will be any market reaction to this data set.
Besides the economic data, we also have a meeting between major OPEC and non-OPEC oil-producing nations. Despite the fast-surging COVID cases lately, the group is not expected to alter its existing policy, as most governments around the globe dismissed the chance of a full-scale lockdown due to the new variant being less deadly than the previous ones.
On Sunday, the group said that it expects the impact on the oil market from the Omicron strain to be mild and temporary, keeping the door open for a further increase in output. Therefore, we expect the alliance to continue raising output targets by 400k BPD each month, as previously agreed.
Oil prices could gain somewhat if indeed the group officially confirms the view that demand will probably not be affected. The Loonie could gain as well, but its traders may also wait for Canada’s employment data, due out on Friday, before deciding on bigger positions.
On Wednesday, we have the final services and composite Markit PMIs for December from the Eurozone, and the the US, which, as the manufacturing prints, are expected to confirm their initial forecasts.
The US ADP report for the month is also due to be released, with the forecast suggesting that the private sector has gained 413k from 534k in November. However, as we noted several times in the past, we prefer to refrain from using this figure as a gauge for the NFP number, as recent history has shown that it is not very reliable.
Later in the day, we get the minutes from the latest FOMC meeting, when officials dropped the “transitory” wording with regards to inflation from their statement and doubled the pace of its QE tapering process, which means that, conditional upon maintaining that pace for the months to come, the process will end in March.
Most importantly though, the new “dot plot” pointed to three quarter-point rate increases in 2022, and three more for 2023, at a time when the financial community was fully pricing in only two lift-offs for this year. Now, given this was one of the bigger meetings, with a new “dot plot” and updated economic projections, we don’t expect the minutes to reveal any new important information.
We believe that USD traders will stay more focused on the US employment report for December, which is scheduled to be released on Friday.
On Thursday, during the Asian session, China’s Caixin services PMI for December is coming out, but no forecast is currently available, while later in the day, the final UK services and composite indices are forecast to confirm their preliminary estimates. Later in the day, we get the ISM non-manufacturing PMI for December, which is forecast to have declined to 66.8 from 69.1.
Besides the PMIs, we also have Germany’s preliminary inflation numbers for December. The CPI rate is forecast to have ticked down to +5.1% YoY from +5.2%, and the HICP one to have slid to +5.6% YoY from +6.0%. This could raise speculation that Eurozone’s headline CPI rate, due out on Friday, may slide as well.
Finally, on Friday, the main event on the agenda may be the US employment report for December. Nonfarm payrolls are expected to have accelerated to 400k from 210k in November, while the unemployment rate is forecast to have ticked down to 4.1% from 4.2%.
Average hourly earnings are expected to have slowed to +4.1% YoY from 4.8%. Despite a potential slowdown in wage inflation, the rate remains well above 2%, and thus, with the other numbers pointing to further improvement in the labor market, we believe that the report could add credence to the case for three rate increases by the Fed in 2022, and thereby support the US dollar.
At the same time with the US employment report, we get jobs data for December from Canada as well. The unemployment rate is forecast to have held steady at 6.0%, but the employment change is expected to show that the economy added significantly fewer jobs than in November.
At its latest meeting, the BoC kept interest rates untouched at 0.25%, and in the statement accompanying the decision, the language was more cautious than previously, with officials expressing concerns over the economic impact of the new coronavirus variant.
That said, the Omicron strain proved to be milder than initially estimated, and thus, traders are currently pricing in five quarter-point rate increases by the BoC this year. Therefore, even if a potential slowdown in jobs growth results in a pullback in the Loonie, we expect it to be short-lived.
We believe that expectations over the BoC being the most aggressive major central bank in terms of tightening may continue to benefit the currency.
Ahead of those two employment reports, we get the Tokyo CPIs for December from Japan during the Asian session, and Eurozone’s preliminary CPIs for the same month, later, during the EU trading. No forecast is available for the headline Tokyo rate, but the core one is expected to tick up to +0.4% YoY from +0.3%.
Although a move in the desired direction, all Japan’s main inflation metrics are well below the BoJ’s objective of 2%, and thus, we don’t expect this Bank to abandon its ultra-loose monetary policy anytime soon. We still believe that the yen will stay more subject to developments surrounding the broader market sentiment, rather than the policy decisions of the BoJ.
Now, flying to Eurozone, both the headline and core CPI rates are expected to have declined, to +4.7% YoY and +2.5%, from +4.9% and +2.6%, respectively. At its latest meeting, the ECB decided to keep all three of its interest rates unchanged as was widely anticipated and announced that it will end the pandemic emergency purchase program (PEPP) in March.
However, they decided to extend the reinvestment horizon for the PEPP, and also to compensate by doubling the monthly pace of the asset purchase program (APP) for the second quarter. In our view, the outcome, combined with President Lagarde’s view that they are “very unlikely” to start raising interest rates in 2022, suggests that the ECB remains very accommodative.
So, a slowdown in inflation could confirm that there is no rush in lifting interest rates and may bring the euro under renewed selling interest.
