With only a couple of data releases amidst the Fed's communication blackout period, this holiday-shortened week looks to be relatively lackluster from the U.S. economics perspective.
Thursday's jobless claims are likely to receive a bit more scrutiny than usual, given both the scarcity of other data releases this week as well as how central an active labor market — and by extension the consumer — is to the Fed's narrative.
However, with traders now pivoting back to data, the lack of any significant data impulse this week may hold the markets bullish ambitions in check. Traders usually hate having too much time on their hands as they could start to second guess the lofty risk markets. I will admit to feeling somewhat conflicted when it comes to markets at the moment, on the one hand, I want to stay with the flows, but I don't want to get caught on a stampede into the downside. And while it's has been a great ride on the rally bus, it might be a good idea not to stray too far from the exit door.
Discretionary positioning that typically follows growth indicators has moved sharply higher, suggesting these positions are running miles ahead of the economic realities. And while the data hasn't gotten worse, at the same time, it doesn't point to a significant reassessment of the economy.
The Pound
In the UK, the market pricing for a January rate cut has shifted notably over the last few weeks to just above 70% as uncertainty around the Bank of England's economic forecasts has risen.
The pound traded sharply lower after much weaker than expected UK retail sales during December last week and has finally started to react like a currency that's positioning for a rate cut. However, possibly limiting downside moves this week is the perception that if the Bank of England does cut, it will be a one-and-done insurance move before Mark Carney punches out.
But the options markets suggest the next few data points will be critical for the BoE meeting in January. This Friday's PMI - the gap move priced in is now + 35 bp up from 17bp last Thursday - and buyers of the BoE meeting itself on Jan 30 - the combined gap move for the FOMC/BoE is at +52, from 35 last Thursday.
The Yuan
USD/CNH has headed lower early despite the broadly firm dollar. Equity inflows and tight funding are both weighing on the spot markets this morning. But to each there own. CNH continues to look rich given the current level of tariff rollback, and even more so when you start to factor in that come of the improvement in the China data could be related to the upcoming New Year holiday as companies ramp up production ahead of the shutdown. Like I implied, too much time on our hand leads to analysis paralysis.
Gold
With so much data and news flooding our screens and ears, we often misinterpret what it all means. The stock market is but one indicator of the economy; however, too often, we tend to obscure the relationship into one giant morass. But its the lofty equity market that provides an excellent reason to own gold, especially when those very same markets are arguably pricing in an over-inflated view of the U.S. economy. Sure, the economy continues to chug along, but there is nothing in the data so far to warrant a significant rerating
Also, the market needs to start to factor in what happens at the Iowa caucuses (Feb 3) and New Hampshire primaries (Feb 11), and if the markets take a shift to the left before 'Super-Tuesday,' how big of a change are they willing to price? If Sanders lives up to recent polling and does very well in Iowa and New Hampshire, the market will likely sell risk assets and dive into gold.
Oil
It was always improbable that Middle East political risks will recede, but the impacts on oil markets are impossible to predict. However, as we saw after the September attacks on Saudi facilities, prices were quick to adjust back down once it became clear that supply buffers were adequate, and market supplies could be sustained.
In a similar fashion, while oil prices pushed higher in Asia following supply disruptions amid political disquiet in Libya and Iraq, given the market propensity to fade geopolitical risk quickly, intersession prices were capped.