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The Tone of 2018 Sharpens: Global Week Ahead

John Blank
The BoJ, ECB and other central bankers must weigh strengthening global growth against the probability of more U.S. rates hikes.

In the Global Week Ahead, I see five veins to mine -- for insights into the future direction -- of these highly valued, momentum trading global equity markets.

We haven’t yet felt a new tone in 2018, at least one that is fundamentally different from the heady, low volatile markets of 2017.

Hitting on multiple fronts, that heady bullish tone faces its first major challenges.

(1) This will be a big week for earnings. The U.S. S&P 500 Q4 season kicks into higher gear and broadens out.

Eighty-nine firms listed on the S&P 500 release results. This includes names like Netflix, State Street, Johnson & Johnson, Procter & Gamble, GE, Ford, American Airlines, Southwest Airlines, Caterpillar, Intel, Starbucks, 3M, Colgate-Palmolive and Lockheed Martin.

Certain reports will be parsed for guidance on critical macro outlooks, such as capital spending (Caterpillar), demand for autos (Ford) and other consumer products (Procter & Gamble).

(2) What comes out of Davos’ World Economic Forum?

The annual World Economic Forum meeting starts on Tuesday and goes through Friday.

India’s Prime Minister Narendra Modi will kick it off with the opening address and U.S. President Trump should get in the final word in the closing keynote address, barring a shutdown cancellation.

The leaders of Canada, France, the U.K. and Italy plus E.U. President Juncker will be there; along with top party officials from China -- but not President Xi Jinping, who dominated attention last year.

Leaders from emerging/developing/rising markets will be represented. Brazil’s President Temer and Argentina’s Macri will be there.

The heads and top officials from international organizations like the IMF, World Bank, the UN and World Trade Organization will be there, too.

(3) On Tuesday, NAFTA talks kick off again, after a long hiatus -- in Montreal, Canada.

Even without an agreement in the budget standoff, the U.S. Trade Representative's Office said last Friday the United States will participate in the NAFTA negotiations as scheduled. 

While progress has been made on updating the 25-year-old agreement, earlier trade talks between the three longtime trading partners have been fraught with tension. 

The United States has slapped heavy penalties on imports of Canadian softwood lumber -- over what it calls unfair trade practices -- such as subsidies. 

Canada has filed a broad case with the World Trade Organization -- over those and other tariffs the U.S. has levied -- against Ottawa and other countries. 

(4) A number of central banks meet.

Though little action is expected, keep a close eye on the Bank of Japan and European Central Bank leaders' actions.

They and other central bankers must weigh strengthening global growth against the probability of more U.S. rates hikes.

There will be plenty of scrutiny on these dialogues by stock and bond traders alike.

(5) Reuters wrote to us about an already tightening bond market backdrop.

“The hits just kept on coming for bond markets last week. First, it was a tweak in the Bank of Japan’s purchases of Japanese government bonds which pushed yields higher and then it was a report of a possible scaling back of U.S. Treasury purchases by China, rounded off by speculation over possible policy tweaks from the European Central Bank and finally better-than-expected U.S. inflation data.”

Higher long-term rates could be the bane of rising global stock markets!

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So should you.

Key Global Macro—

On Tuesday, the Bank of Japan’s policy decisions will be carefully scrutinized for evidence of where the balance lies between early exit talk versus accelerated bond purchasing tactics.

On Thursday, the ECB could signal policy tapering on its “QE” program, while leaving its heterodox rates policy unchanged.

On Friday, the main — perhaps only — piece of U.S. macro fundamental risk lands. That would be the preliminary GDP reading.

U.S. Q4 real GDP growth could be a “3-handle” for the third consecutive quarter. Regional Fed District Banks have weighed in with ‘NowCast’ estimates that range from +3.1 to +3.9%. Bloomberg consensus looks for growth at +2.7%. Financial Times consensus is at +2.8%.

On Monday, the Bank of Japan holds a monetary policy meeting. The overnight rate is still -0.10%.

The unemployment rate in Taiwan is 3.69%. A new reading comes out.

On Tuesday, the important German ZEW indexes come out. German Current Conditions should go from 89.3 to 88, Eurozone Current Conditions from 50.7 to 51.

Brazil’s IBGE inflation rate comes out. It should go from 2.94% to 3.11%. Note: this low a Brazil consumer inflation rate is an achievement.

An appeals court also starts the trail of former Brazilian President Lula da Silva.

On Wednesday, France’s composite PMI index comes out. It was high at 59.4. In comparison, the Eurozone composite PMI may go from 58.1 to 58.4. Numbers near 60 are great expansionary readings.

Mexico’s bi-weekly CPI reading should fall from 6.85% to 5.68%. Perhaps this is the weakening peso driving import costs up? NAFTA stress is apparent, nonetheless.

The U.S. manufacturing PMI comes out. It was 55.1. Not as strong as Europe, but still strong.

On Thursday, the European Central Bank (ECB) head Mario Draghi holds a press conference, after issuing new rate decisions.

The IFO indexes for Germany come out. Business Climate should go from 117.2 to 117. Current Conditions should go from 125.4 to 125.8, and Expectations from 109.5 to 110. Those are mostly improvements from already high readings.

The Norges Bank (aka Central Bank of Norway) also issues a new interest rate decision. Notably, its current policy rate is very low at 0.50%. That goes to show you. Until the ECB ends QE, the rest of Europe’s central banks are stuck.

The Russian unemployment rate is 5.1%.

U.S. initial claims last week were super-low at 220K. This week, we get a fresh reading, with added noise from the possible gov’t shutdown not yet included.

On Friday, the U.K.’s latest GDP reading comes out. The last one was +1.7% y/y.

U.S. durable goods orders come out, along with a first reading of Q4 GDP.

Forecasts complied into a Financial Times Q4 GDP consensus sits at +2.8%, down from Q3 data at +3.2%.

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