The New Year may have begun in fact, but in practice, full participation may return only after the release of US employment data on January 5. The macroeconomic and policy tables have been set, though interpolating from the Overnight Index Swaps market, there is 45% chance the Bank of Canada hikes rates at its policy meeting near the middle of the month.
In the currency markets, sentiment appears to be as uniformly dollar negative as it had been positive a year ago. More important for the near-term price action, there have been powerful but extended trends over the past two-three weeks as participation thinned. Consider that the Canadian dollar appreciated nine of the past 10 sessions. The Australian dollar rose in 13 of the last 15 sessions.
It is too difficult to find a consistent narrative of what the market is saying. The rally in industrial metals and equities suggest an economically optimistic outlook. However, the rally in the US Treasuries and the flattening yield curves in most advanced economies would seem to be consistent with downside risks. There is no sign in recent data that the synchronized upturn is slowing. In fact, on balance, data from Q4 suggests, growth may have accelerated.
The flash PMI for the eurozone is expected to be confirmed in the coming days. The composite firmed to a new cyclical high 58.0 from 57.5 in November. It averaged 56.0 in Q3. The composite PMI was at 54.4 at the end of 2016. Not only has economic activity quickened but it also broadened. Italy and France, and no less than Greece are participating.
Data over the last couple of weeks suggests that what might have begun as an export-led growth in industrial output and capital investment has spread to consumption. Overall household spending rose 1.7% year-over-year in November. This is the second strongest pace in more than two years.
China, the world's second-largest economy, is also finishing the year on a firm note. The official manufacturing PMI slipped to 51.6 in December from 51.8 in November. The Q4 average was 51.7 after 51.8 in Q3 and 51.5 in H1. The non-manufacturing PMI edged up to 55.0 from 54.8. It averaged 54.7 in Q4 and 54.4 in Q3, following a 54.5 average in H1.
Of the large countries, India's economy may be the most concerning. After a good H1 2017, the economy struggled in Q3. The composite PMI posted the year's high of 51.7 in June before falling below the 50 boom/bust level in July and August. The recovery in September and October (51.3) fizzled out in November (50.3). The December reading is due January 4.
The minutes from the December FOMC meeting that delivered the third hike of the year will be scrutinized for clues into the bar for a March move. Assuming that there is no practical chance of a hike at the next FOMC meeting, the market appears to have discounted a little less than a 60% chance of a March hike.
The US jobs data is the economic highlight of the holiday-shortened first week of the New Year. Even modest disappointment with the December report will not prevent 2017 from being the seventh consecutive year the US economy created more than two million jobs. A little more than 8.5 mln jobs were lost 2008-2009 and 18 million jobs have been created since.
Job growth is expected to have cooled in December after two months in which 472k net new jobs were created. Newswire survey put the median guesstimate near 190k. Manufacturing has been on a hiring binge, with 54k new positions in October and November. Another 20k are expected to have joined the payrolls in December Through November, the manufacturing sector jobs have risen by 16k on average. Last year, there was an average loss of 1k manufacturing jobs.
In November, the work week ticked up to 34.5 hours. It is the third time in 2017 it has risen there, but each time it was quickly turned back. Some observers suggest there needs to be a sustained increase in the work week to boost the likelihood of wage pressure. Average hourly earnings need to rise by 0.3% in December to keep the year-over-year rate steady at 2.5%.
US auto sales are not particularly interesting presently. Sales had slowed in the March through August period. The terrible destruction of a couple of storms helped boost auto sales, and arguably, save the year. Through November the pace has averaged 17.11 mln (annualized pace) vehicles. This is the lowest in three years (17.45 mln in 2016 and 17.40 mln in 2015). December auto sales are expected to be around the 17.5 mln unit pace.
Geopolitical developments in recent days will be part of the talking points to start the New Year.....
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