Drivers for the Week of November 28, 2021

• We believe the U.S. is well-positioned to deal with the potential fallout from the omicron variant; data highlight this week will be November jobs data Friday; besides the ISM readings, we will get some other key survey readings; the Fed releases its Beige Book report Wednesday for the upcoming December 14-15 FOMC meeting; there are plenty of Fed speakers as well; the omicron variant has done little to impact Fed tightening expectations so far; Canada also reports November jobs data Friday
  
• Eurozone has a very busy week; there are rising headwinds for the eurozone economy in Q4; there are many ECB speakers this week; there have been two confirmed U.K. cases of the omicron variant; the debate about BOE policy continues
• Japan reports some key data this week; Australia also reports some key data; RBA has maintained its dovish tone, with forward guidance still emphasizing 2024 as likely timing for liftoff
  

AMERICAS

Markets ended last week on a sour note due to the discovery of the omicron variant. The heightened uncertainty that was introduced led to a significant selloff in risk assets. The S&P 500 fell over 3% from last Monday's peak, while MSCI World was down a similar magnitude for the week and MSCI EM was down nearly 4%. While the WHO is urging caution, it noted that symptoms linked to the new strain so far have been mild. Because it will take some time to determine the likely impact on the global economy, we believe risk aversion will continue this week. The only good news to come from this is that sharply lower energy prices (WTI was down over 10% last week) are likely to help ease the inflationary pressures that had been hurting the markets in recent weeks.

When all is said and done, we believe the U.S. is well-positioned to deal with the potential fallout from the omicron variant. Lockdowns are highly unlikely here even as Germany, Austria, and the Netherlands have been forced to introduce new movement restrictions. We were quite frankly puzzled by the euro's strength Friday and so we would look to fade that move as headwinds to the eurozone are building as we move through Q4 and into 2022. On the other hand, the dollar, yen, and Swiss franc are likely to outperform this week at the expense of the dollar bloc and Scandies. EM FX is likely to remain under severe pressure.

The data highlight this week will be November jobs data Friday. Consensus sees 535k jobs added vs. 531k in October, with the unemployment rate see dropping a tick to 4.5%. Average hourly earnings are expected to pick up a tick to 5.0% y/y. Ahead of that, we will get some final clues. ADP private sector jobs estimate will be reported Wednesday, with a consensus at 525k vs. 571k in October. November ISM manufacturing PMI will also be reported Wednesday, with the headline expected at 61.1 vs. 60.8 in October. Keep an eye on the employment component, which stood at 52.0 in October. Weekly initial jobless claims Thursday are expected at 250k vs. 199k last week, while continuing claims are expected at 2.0 mln vs. 2.049 mln last week. ISM services PMI will be reported Friday after the jobs data, and is expected at 65.0 vs. 66.7 in October. Here, the employment component stood at 51.6 in October.

Besides the ISM readings, we will get some other key survey readings. Dallas Fed manufacturing index will be reported Monday and is expected at 17.0 vs. 14.6 in October. Chicago PMI will be reported Tuesday and is expected at 67.0 vs. 68.4 in October. Final November Markit manufacturing PMI (59.1 expected) will be reported Wednesday, followed by final services (57.0 expected) and composite PMIs Friday. Of note, virtually all of the survey readings for the U.S. remain at or near record highs. Thus, it should be no surprise that the Atlanta Fed GDPNow model is tracking 8.6% SAAR growth for Q4 currently.

The Fed releases its Beige Book report Wednesday for the upcoming December 14-15 FOMC meeting. Since the last meeting November 2-3, we've gotten a very good jobs number and higher inflation readings. Jobless claims have fallen to new lows, which suggests the labor market continues to heal. Indeed, wage readings have also crept higher since the last FOMC meeting. Reports suggest that the manufacturing sector remains strong, but we expect the Fed to acknowledge that supply chain issues to remain in place. We expect this Beige Book to acknowledge all of these upside risks, which would support the case for a faster pace of tapering if warranted. Minutes to the November meeting were released last week and showed that "Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher." The omicron variant came too late to be considered in this report, which clearly poses some downside risks to the economy.

There are plenty of Fed speakers as well. Williams, Powell, and Bowman speak Monday. Powell and Yellen testify Tuesday before the Senate Tuesday, while Williams and Clarida speak. Powell and Yellen testify before the House Wednesday. Bostic, Quarles, Daly, and Barkin speak Thursday, followed by Bullard Friday. At midnight Friday, the media embargo takes effect and we will get no Fed speakers until Chair Powell's post-decision press conference December15. Of course, we welcomed his reappointment last week. Given all the various risks facing the global economy right now, we believe that it would be foolish to change horses mid-stream and believe that his crisis-honed experience will serve us well in his second term.

The omicron variant has done little to impact Fed tightening expectations so far. Liftoff in Q3 22 is still fully priced in by Fed Funds futures, as is a follow up 25 bp hike in Q4 22. Last Friday, Bostic played down the risk of the omicron variant and said he was still open to a faster pace of tapering. While we tend to agree with Bostic, the added uncertainty is likely to keep the bar fairly high to a faster taper. Odds of Q2 liftoff remain near 50-50, which we think is too aggressive. That said, we believe that the monetary policy outlook continues to favor the dollar over the euro, yen, and Swiss franc. None of those central banks are likely to hike rates until 2023 at the earliest. As such, the 2-year yield differentials should continue to move back in the dollar's favor this week.

Other minor data are expected to show continued strength in the U.S. economy. Pending home sales (0.8% m/m expected) will be reported Monday. September S&P CoreLogic home prices and November Conference Board consumer confidence (110.7 expected) will be reported Tuesday. October construction spending (0.4% m/m expected) and November auto sales (13.35 mln annual rate expected) will be reported Wednesday. November Challenger job cuts will be reported Thursday, followed by October factory orders (0.5% m/m expected) Friday.

Canada also reports November jobs data Friday. Consensus sees 37.5k jobs added vs. 31.2k in October, while the unemployment rate is seen falling a tick to 6.6%. Ahead of that, Q3 current account data (CAD5.7 bln expected) will be reported Monday. Q3 GDP data will be reported Tuesday, with annualized growth of 3.3% expected vs. -1.1% in Q2. October building permits (0.8% m/m expected) and November Markit manufacturing PMI will be reported Wednesday.

Bank of Canada liftoff expectations have barely budged in recent days. WIRP still suggests 50-50 odds of a hike January 26, moving up to being fully priced in for March 2. Elsewhere, the swap market is still pricing in about 125 of tightening over the next twelve months. This seems too aggressive to us, especially given the heightened risks from omicron. Will the BOC push back a bit at its next meeting December 8? Stay tuned. Lower oil prices, if sustained, would be a big headwind to the Canadian economy and should warrant a cautious stance from the BOC.

EUROPE/MIDDLE EAST/AFRICA

Eurozone has a very busy week. Germany and Spain report November CPI Monday, with headline EU harmonized inflation expected at 5.5% y/y and 5.6% y/y, respectively. France reports November CPI (EU Harmonized 3.2% y/y expected) and October consumer spending (flat m/m expected) Tuesday, while Spain reports October retail sales. Eurozone reports November CPI data Tuesday, with headline expected at 4.5% y/y vs. 4.1% in October and core expected at 2.3% y/y vs. 2.0% in October. Eurozone October PPI will be reported Thurs and is expected to rise 19.0% y/y vs. 16.0% in September, which suggest upside risks for CPI going forward. Germany also reports November unemployment (-25k expected) Tuesday. Germany reports October retail sales Wednesday, expected to rise 0.9% m/m vs. -1.9% in September. Final November manufacturing PMI (58.6 expected) will also be reported Wednesday, followed by final services (56.6 expected) and composite (55.8 expected) PMIs Friday. Eurozone also reports October retail sales Friday, which are expected to rise 0.3% m/m vs. -0.3% in September.

There are rising headwinds for the eurozone economy in Q4. Several countries have already introduced movement restrictions, and that was before the omicron variant was discovered in Germany, Italy, and the Netherlands. Meanwhile, the energy crisis looks set to worsen as prices rise to record highs even as temperatures drop. On the positive side, these developments should allow Madame Lagarde and the doves to extend QE beyond the end of PEPP in March. It would be madness to withdraw accommodation now. Period.

There are many ECB speakers this week. Villeroy, de Cos, Guindos, Centeno, Schnabel, and Lagarde all speak Monday. Villeroy and de Cos speak again Tuesday. Panetta chairs the ECB Fiscal Conference Thursday. Lagarde and Lane speak Friday. OF note, pretty much all of these scheduled speakers are in the dovish camp and so market should expect dovish comments to emerge. Next policy meeting is December 16 and we fully expect some sort of extension for QE to be announced then. Of note, the swap market only sees 3 bp of ECB tightening over the next twelve months, down from nearly 25 bp after the last ECB decision October 28.

There have been two confirmed U.K. cases of the omicron variant. However, Health Secretary Javid stressed that there's no need to impose new work from home or movement restrictions. However, ten southern African countries are now on the U.K.'s so-called "red list" that requires any travelers returning from those countries required to undergo a 10-day quarantine at a hotel at their own expense. That said, the U.K. economy continues to face headwinds from Brexit and energy shortages.

The debate about Bank of England policy continues. Recent BOE comments have been less hawkish but still suggest a bias to tighten in the coming months. Of note, WIRP suggests only about one in three odds for liftoff at the next policy meeting December 16, down from 50-50 at the start of last week. However, liftoff February 3 remains fully priced in. Swap market sees around 100 bp of tightening over the next twelve months, down from 125 bp at the start of the month but still striking us as way too aggressive. The U.K. has a quiet week in terms of data. Final November manufacturing PMI will be reported Wednesday, followed by final services and composite PMIs Friday.

ASIA

Japan reports some key data this week. October retail sales were already reported and rose 1.1% m/m vs. 1.0% expected and 2.8% in September. IP and labor market data will be reported Tuesday. IP is expected to rise 1.9% m/m vs. -5.4% in September, while the unemployment rate is expected to remain steady at 2.8%. Final November manufacturing PMI will be reported Wednesday, followed by final services and composite PMIs Friday. Data suggest the economy is a bit sluggish so far in Q4, which makes the recently announced JPY36 trln extra budget all the more important. With significant fiscal stimulus in the pipeline, the Bank of Japan is on hold for the foreseeable future. Next policy meeting is December 16-17 and no change is expected then. However, expect some jawboning if the yen continues to strengthen.

Australia also reports some key data this week. Q3 current account data will be reported Tuesday, where a surplus of AUD30 bln is expected vs. AUD20.5 bln in Q2. Q3 GDP data will be reported Wednesday and is expected to contract -2.5% q/q vs. 0.7% growth in Q2. Final November manufacturing PMI will also be reported Wednesday, followed by final services and composite PMIs Friday. October trade data will be reported Thursday, with exports expected at -1% m/m vs. -6% in September and imports expected at 2% m/m vs. -2% in September. Iron ore prices have continued to fall in November and so the export outlook remains weak as China continues to slow.

The RBA has maintained its dovish tone, with forward guidance still emphasizing 2024 as likely timing for liftoff. However, the swap market sees 75 bp of tightening over the next twelve months. This still strikes us as too aggressive. Next RBA meeting is December 7 and we expect the bank to push back against market expectations. AUD should remain under pressure as it nears a test of the August low near .7105. A break below would set up a test of the November 2020 low near .6990.

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