Fed's Dovishness Confirmed - Focus Shifts To Brexit And Earnings Season

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by: Dean Popplewell
Summary

The US dollar continues to weaken in 2019, this week's decline was supported by the Fed's minutes and a busy week of FOMC talk that cemented views that the Fed can wait on the next interest rate hike.

The narrative now shifts from central bank focus to Brexit and earnings season.

There is no strong consensus as to what is next for Brexit, but after Tuesday, we will learn a lot more.

By Ed Moya

The US dollar continues to weaken in 2019, this week's decline was supported by the Fed's minutes and a busy week of FOMC talk that cemented views that the Fed can wait on the next interest rate hike. The narrative now shifts from central bank focus to Brexit and earnings season. Prime Minister May's Brexit deal is expected to be voted down in Parliament on Tuesday. There is no strong consensus as to what is next for Brexit, but after Tuesday, we will learn a lot more. The other key driver for the next big move in risk appetite could come at the beginning of a very long earnings season. We have seen many technology and consumer discretionary companies warn on their outlooks already.

  • May expected to lose Parliament Brexit Vote on Tuesday, January 15th.
  • Earnings season kicks off.
  • G20 Finance Ministers and Central Bank Governors meeting, January 16-18th.

Cable remains firm ahead of Brexit Vote

Looking at cable, some might find it hard to believe that the end could be near for PM May. She is widely expected to lose the Parliament vote on Tuesday and many are expecting the exit day or March 29th to be postponed, despite her office refuting any possibility of that happening. After losing the Tuesday vote, there are 5 scenarios that could occur. The scariest scenario for the UK is if nothing else happens and we see a no-deal Brexit. Cable could fall anywhere from 5 to 10 percent, and while it is the least likely result, it is still possible and should not be ruled out. If she loses the vote by a close margin, she could renegotiate with the EU, but she will have only a few days to try to come up with a Plan B and get EU concessions. A general election is another potential scenario, but that would require May getting two-thirds of MPs supporting the call. A vote of no confidence has a good chance of occurring as Labour has been very clear in stating they will call a formal vote of no confidence in the government following May's defeat. If the government loses the vote, we may not see a clear alternative choice and we could see a general election. Another referendum could be a fifth scenario, albeit a long shot, that would require an extension of Article 50, this, however, is unlikely to occur before the March 29th deadline.

Oil winning streak snapped on profit taking

Oil had its best week in two years on a soft dollar and as the OPEC+ production cuts are being implemented. Friday's round of profit taking saw West Texas Intermediate crude snap the longest streak of consecutive session gains in nine years. This week's rally took oil out of bear market territory and the backdrop of a patient Fed and progressive trade talks among the US and China have been very supportive for oil markets.

Powell seals dovish stance

Fed Chair Powell's latest interview on Thursday was a reiteration of the minutes of the December 19th meeting, noting that policymakers regard the economic outlook as solid, despite intensifying downside risks. The Fed is clearly going to be patient on the next hike and will wait for further clarity on risks to global growth and the affect to the US economy. For the US, rebounds are expected in New Home Sales, Empire Manufacturing, factory orders, housing starts and the Philly Fed Business Outlook, while declines are expected with the PPI Final Demand, Building Permits, University of Michigan Sentiment, and Industrial Production. Softer data prints could further support the Fed's dovish bias.

Earnings Season kickoffs

Two reasons stock markets have been roaring higher are from reassurances that the Fed is in a place where it can be patient and flexible, and secondly, optimism from mid-level trade talks between the US and China. Investor appetite for the next major move in stocks is likely to take a queue from the beginning of earnings season. Citigroup (NYSE:C) kicks the season off on Monday. Tuesday we will see results from Delta (NYSE:DAL), United Continental Holdings (NASDAQ:UAL), and JPMorgan (NYSE:JPM). Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC) report on Wednesday. Thursday we will hear from Netflix (NASDAQ:NFLX) and several other financial companies. Schlumberger (NYSE:SLB) and Kansas City Southern (NYSE:KSU) report on Friday.

The government shutdown could also start having a greater impact on economic data. A prolonged shutdown could end the longest streak of continuous job growth, which currently stands at 99 months.

The G20 Finance Ministers and Central Bank Governors meeting will take place between January 16th and 18th in Tokyo. This is not to be confused with the major G20 Osaka Summit that will take place at the end of June. The first day will focus more on technological innovation and development. Bank of Japan Governor Kuroda will deliver a key speech on the second day, which focuses on monetary policy and financial system during demographic changes. The third day is meetings amongst the governors and ministers.

Monday, January 14

Earnings season begins
CNY China Trade Balance
5:00 am EUR Euro Zone Industrial Production

Tuesday, January 15

GBP Parliament Brexit Vote
8:30 am USD Empire Manufacturing & PPI
6:50 pm JPY Core Machine Orders

Wednesday, January 16

4:15 am GBP BOE Gov Carney Testifies on FSR
4:30 am GBP Consumer Price Index (CPI)
6:00 am TRY CBRT Rate Decision
8:30 am USD Retail Sales

Thursday, January 17

8:30 pm USD Philadelphia Business Outlook
8:30 pm USD Building Permits & Housing Starts
6:50 pm JPY National Consumer Price Index (CPI)

Friday, January 18

G20 Finance and Central Bank Deputies Meeting
4:30 am GBP Retail Sales
4:30 am GBP Manufacturing Production m/m
8:30 am CAD CPI m/m
10:00 USD University of Michigan Sentiment

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors