[Ceiling and Visibility Unlimited]

"CAVU was the kind of weather we Navy pilots wanted when we were to fly off our carrier in the Pacific," he said. "We had little navigational instrumentation, so we wanted to CAVU, ceiling and visibility unlimited, and because of the five of you whose hugs I can still feel, whose own lives made me so proud, I can confidently tell my guardian angel that my life is CAVU and it will be that way until I die. All because of you."

Letter from George H.W. Bush to his children.

The last week tested many investors as they awaited the outcome of the G20. The bounce back in risky assets, excluding oil, highlights the present confusion bringing the best week for the S&P 500 in seven years and oil had its worst month in a decade. Surely this wasn’t just about US/China trade hopes or OPEC discord, this last week brought more clarity on the UK Brexit, the Italian Budget, the US and global economy – all managed to squeak by with less than feared outcomes but clear signs of a slowing global economy.

The other big event was the FOMC Chair Powell comments on US rates being “near neutral.” He backtracked from 3-4 hikes in 2019. That dovish tone, mixed with the hope for a US/China trade deal, sent markets higher with both bonds and equities benefiting. The Saturday truce between Trump and Xi over US trade tariffs is clearly temporary and a prelude to a long month ahead with more talk and less clarity over the path towards a real agreement. Expect the promise of Trump to not put more tariffs on China and Xi’s to buy more US goods will help Soybeans, NatGas, tech shares and ease some auto manufacturing fears.

Expect the conversations of Saudi, Russia and others at the G20 to set up for a more productive OPEC meeting in Vienna next week. The effect of this will likely clear up the skies for risk further as hope becomes the currency of the season. None of this will likely solve the US political discord at home and abroad, nor the Russia/Ukraine, Saudi/Iran, Saudi/Turkey animosity. The passing of the 41st President George Bush will suggest the end of a political era where republicans could speak and be listened to by Democrats and vice-versa. His death marks an end to US cold-war Presidents and the end of coalitions of the willing – as was seen in the first Gulf War against Iraq.

Also, notable last week, was the bounce back in carry trades. Yields mattered again, particularly in FX with the AUD/JPY and NZD/JPY rally notable despite their own mixed economic data. In emerging markets, the lower oil prices showed up supporting India and Korea along with the Bank of Korea raising rates to stem capital outflows and curtail frothy house prices, while it hurt Russia and Brazil. Rates still matter. The risk rally that started last week rests on whether oil and other commodities believe in the truce and growth stories for 2019.

AUD/JPY becomes the barometer for measuring this faith with 84.80 and 90 targets should a Santa Claus rally ensure while further acrimony or any other geopolitical surprising will likely return us to 80 and 78 stops.

What Happened over the Weekend?

• Georgia protests over election – Vashadze and opposition parties vow to challenge election result in court, while protesters block parts of Capital Tbilisi.
• Macron tells PM to hold talks – after worst unrest in Paris since 1968. Riot police on Saturday were overwhelmed as protesters ran amok in Paris’s wealthiest neighborhoods, torching dozens of cars, looting boutiques and smashing up luxury private homes and cafes in the worst disturbances the capital has seen since 1968.
• Andalusia region votes in test for Spanish PM Sanchez.The election in Spain’s most populous region, a stronghold for Sanchez’s ruling Socialists for decades, is taking place amid a fragmented political landscape in which major parties struggle to secure majorities. Opinion polls show the Socialists winning the most seats but falling short of a majority.

Question for the Week Ahead: Are markets set up for a bigger bounce back in risk?

For most in a bear market, bounces are either to be sold or ignored, but for markets in a correction, bounces lead to FOMO – fear of missing out – and they bring back the dominant themes that drove the bull market. Confidence matters and it will likely be the key for understanding December trade dynamics. For the US, this means a return to US divergence on growth, hopes for a slow and gradual FOMC, ongoing USD strength and continued political noise.

The key point about US markets is that the 3Q earnings were strong and not rewarded while pessimism about 4Q and beyond was some of the worst on record. Factset notes this point in their weekly.

The pain trade around 4Q has been related to China and the Trump/Xi truce maybe the key for watching the bounce back in risk. The CNY is likely a key barometer as the 7.00 line holds against the USD even with some rates in China now below US ones.

The UK Brexit risks remain front and center for December as well with many still assuming the worst case scenario – no deal, no PM and a new election in the UK with a Corbyn victory. The BOE modelled outcomes last week may be the key for understanding the market reactions going forward to new headlines.

The one stand out that makes the market bounce back in the US less convincing is the role of oil prices and the confusion about production from OPEC, US inventories and global demand. The OPEC meeting in Vienna next week may be the key event beyond the US jobs or global PMI reports as they respond to the present price weakness. How Russia and Saudi meetings at the G20 went suggest some deal is likely.

Market Recap:

US economic data was mixed. US new home sales dropped by nearly 9% in October to their lowest level in two and one-half years. The decline was in sharp contrast to consensus expectations for a 3.7% increase, although previous months’ sales were revised higher. Pending home sales also recorded a surprising drop, and home prices rose less than expected in September. Weekly jobless claims recorded their fourth consecutive increase, and another regional manufacturing index came in below expectations. On the positive side, both personal spending and income rose at a solid pace in October and surpassed consensus estimates.

Equities 

The MSCI all-country World Index rose 3.27% to 490.86 last week, but just 0.20% on the month. The MSCI EM index rose 2.63% to 994.72 on the week and 2.05% on the month. The biggest winners were tech while the losers were energy. US markets bounced back sharply leading while China and much of Asia lagged. The 3Q earnings season is all but complete and the result for the US was an impressive 25.9% blended earnings rate with 78% beating expectations on earnings and 61% on revenues. The 4Q outlook continues to moderate.

• The US S&P500 futures rose 4.85% to 2760.17 on the week. For the month, the index rose 1.36%. The DJIA rose 5.16% to 25,538.46 on the week, 1.06% on the month, while the NASDAQ rose 5.64% to 7,330.54 on the week, fell 0.36% on the month. The Cboe VIX fell back to 18.07% off 3.45pp or 16% on the week, off 7.5% on the month.
• The Stoxx Europe 600 rose 0.99% to 357.49 on the week, but fell 1.81% on the month. The Italian FTSE MIB rose 2.53% to 19,188.97 to lead gains last week but fell 1.04% on the month, while the UK FTSE rose just 0.39% to 6980.24 to lag last week, off 1.61% on the month. The German DAX rose 0.58% to 11,257.24 last week and 2.27% in November while the French CAC40 rose 1.15 to 5,003.92 on the week and fell 1.92% on the month.
• The MSCI Asia Pacific Index rose 2% to 153.58 on the week and 2.7% on the month.India led the gainers with the Nifty 50 up 3.32% to 10,876.75 on the week, up 3.07% on the month while Malaysia KLCI fell 0.94% on the week, off 1.98% on the month;  the Australia ASX 200 fell 0.86% to 5667.16 on the week, off 3.11% on the month and the China Shanghai Composite rose just 0.34% to 2588.19 on the week, off 3.3% on the month. The Japan Nikkei rose 3.25% to 22,351.06 on the week, up 0.48% on the month, with the TOPIX up 2.36% to 1667.45 on the week and 0.52% on the month. The Hong Kong Hang Seng rose 2.23% to 26,506.75 on the week and 0.08% on the month. The Korea Kospi rose 1.91% to 2096.86 on the week and up 0.04% on the month.

Fixed Income

The sharp rally in US bonds last week rested less on economic fears and more on FOMC Chair Powell’s moderation. The idea of a December hike holds but just one more in 2019 follows. The fear of a Fed mistake leading to a larger recession risk in 2020 finds support from the lower oil prices leading to a larger drop in inflation pressures and expectations. For Europe, the Brexit and Italy stories remain front and center but the drop in growth and inflation leaves many seeing an ECB waiting further for any normalization other than ending its QE. For Japan, the BOJ seems content to wait it all out, with the Abe/VAT games and longer-end bond issuance the focus. For China, the ongoing fears about growth and deleveraging continue with PBOC very much expected to ease further whether via RRR cuts or more schemes to provide the private sector relief. For the EM world, the BOK rate hike last week joined Indonesia and Philippines earlier – showing the limits to allowing FX weakness to drive import inflation and capital outflows.

• US bonds rally with FOMC Powell, mixed data, but curve bull steepens even with 10Y off 4bps on the week and 13bps on the month focus is on 2.95-3.15% key levels. For the week: 2Y off 1.5bps to 2.786%, 3Y off 3.5bps to 2.80%, 5Y  off 5.5bps to 2.812%, 10Y off 4bps to 2.988%, 30Y off 1.5bps to 3.29%
• Canadian 10-year bond yields drop 6bps to 2.265% on the week, off 21.5bps on the month with 2.55% key – weaker GDP and oil driving.
• Japan JGB yields off 0.5bps to 0.081% on the week,  off 2.8bps on the month with 0.12% key – BOJ and supply key.
• Australia 10-year bond yields off 5.7bps to 2.59% on the week but up 1.2bps on the month with 2.755% key – focus is on commodities, RBA policy, growth data.
• UK Gilt yields off 1.5bps to 1.36% on the week, off 9bps on the month with 1.56% key – deadline for Brexit vote now Dec 11 so waiting and watching BOE responses.
• German Bund yields off 2.8bps to 0.31% on the week, off 8.5bps on the month with 0.50% key – growth data, tame inflation, Brexit and Italy Budget, US tariffs, Ukraine – all key.
• French OAT yields off 3.8bps to 0.68% on the week, off 7.5bps on the month with 0.85% key – yellow shirt protests, fuel and growth all key.
• Italy BTP yields off 19bps to 3.21% on the week, off 17bps on the month with 3.00% and 3.75% key. The 2019 budget talks central with waiting game for EU vs. Italy into 2019.
• Spain Bono yields off 14bps to 1.497% on the week, off 6.5 on the month with 1.65% and 1.20% keys – unraveling Italy comparisons, focus shifting to politics, next years election.
• Portugal 10-year bond yields off 12.5bps to 1.818%  on the week, off 5.5bps on the month with 1.50-2.0% keys – watching Italy and growth stories.
• Greek 10-year bond yields off 29bps to 4.23% on the week, but up 4.5bps on the month with 4.0%-4.5% keys. Italy relief helps but Greek politics, pension reform issues still key.

Foreign Exchange 

The US dollar index rose 0.37% to 97.27 on the week, up 0.2% on the month with 97.69 the Nov 12 highs key.  Emerging Markets were mixed this week

ASIA USD offered: TWD up 0.25% to 30.82 on the week, up 0.4% on the month; KRW up 0.85% to 1120.75 on the week and 1.7% on the month; INR up 1.6% to 69.58r on the week and 6.3% on the month; CNY off 0.2% to 6.9605, up 0.2% on the month – US trade truce key for next week; 

EMEA mixed: ZAR off 0.1% to 13.87 on the week, up 6.6% on the month; TRY up 1.35% to 5.215 on the week, up 7.0% on the month; RBU off 1.3% to 67.09 on the week, off 1.8% on the month; 

LATAM USD bid: MXN up 0.2% to 20.366 on the week, off 0.15% on the month; BRL off 1% to 3.867 on the week, off 3.7% on the month – honeymoon over – and ARS off 3.5% to 37.748 on the week, off 2.2% on the month – G20 rally not enough. Crypto currencies suffered further – even with a rally higher later in the week - BTC off 7% to $4000 and ETH off 10% to $113.

• EUR: 1.1315 off 0.15% on the week, flat on the month – watching 1.12-1.15 with ECB/FOMC divergence key.
• JPY: 113.55 up 0.55% on the week, up 0.5% on the month with EUR/JPY 128.45 off 0.3% on the week. The risk-on in equities opens 112-114 breakout hopes with 115 barrier after that.
• GBP: 1.2750 off 0.50% on the week, off 0.15% on the month with EUR/GBP .8875 up 0.15% on the week and flat on the month. The Brexit story moves to final chapters.
• CHF: .9980 flat on the week, off 1% on the month with EUR/CHF flat on the week and up 0.9% on the month. Safe-haven demand wanes but GDP and worries about Russia/Italy/UK remain.
• CAD: 1.3295 up 0.4% on the week, up 1% on the month with weaker GDP and oil driving 1.3250-1.3400 keys with BOC.
• AUD: .7305 up 1% on the week and 3.3% on the month with crosses and carry back in play, squeezing out shorts.NZD .6875 up 1.3% on the week and 5.45% on the month – same story but with RBNZ losing the easing option.

Commodities

The S&P/GSCI rose 0.78% to 2388.63 on the week with oil bouncing a key factor but fell 12.7% on the month for the same reason.  NatGas led the rally, Palladium and wheat followed while lumber and platinum were the losers.

• Oil: $50.93 up 1.01% on the week, off 22% on the month with focus on $49-$52 consolidation, OPEC with Saudi and Russia deals, US inventories and demand. Brent up 1.12% to $59.46 on the week, off 21.2% on the month with $60 pivotal still watching $58-$62 consolidation. NatGas is the offset in energy up 41% on the month to $4.61
• Gold: $1220.50 off 0.2% on the week, up 0.5% on the month. Focus is on $1215 and $1206 support against $1225-$1236 resistance with USD the key driver still. Silver off 0.6% to $14.20 on the week, off 0.3% on the month with $14.0-$14.50 focus. Platinum off 5.4% to $798.10 on the week. Palladium up 5.4% to $1181.20
• Corn: $377.75 up 2.1% on the week, up 0.9% on the month. Focus is on US/China trade, weather and foreign supply. USD gains offset by Oil weakness. Soybeans up 1.55% to $894.75 on the week, up 6.6% on the month. Wheat up 3.2% to $515.75 on the week, 3.05% on the month. 
• Copper: $2.8270 up 0.45% on the week, March futures $2.7830 up 0.4% on the week and 4.5% on the month. US housing weakness, China growth doubts vs. equities bouncing and rate flip. Iron Ore Dec futures $64.15 fell 5.25% on the week. January off to $63.24.Pressure continues with China growth doubts key.

Calendar for the Week Ahead

There is plenty of news to watch in the week ahead with global PMI reports, US jobs, rate decisions from RBA and Bank of Canada, RBI and Poland along with speeches from FOMC Powell and others.

Monday, December  3: Global Manufacturing PMI, US ISM, US auto sales

• 0430 pm Australia Nov AIG manufacturing PMI 58.3p 56.6e
• 0445 pm New Zealand 3Q terms of trade 0.6%p 0.8%e
• 0730 pm Japan Nov final manufacturing PMI 52.9p  51.8 flash
• 0730 pm Australia 3Q corporate profits 2%p 1.3%e
• 0845 pm China Nov Caixin manufacturing PMI 50.1p 50.0e
• 0315 am Spain Nov manufacturing PMI 51.8p 51.6e
• 0345 am Italy Nov manufacturing PMI 49.2p 48.8e
• 0350 am France Nov manufacturing final PMI 51.2p 50.7 flash
• 0355 am German Nov manufacturing final PMI 52.2p 51.6 flash
• 0400 am Eurozone Nov manufacturing final PMI 52p 51.5 flash
• 0430 am UK Nov manufacturing PMI 51.1p 51.5e
• 0430 am Eurozone Dec Sentix investor confidence 8.8p
• 0930 am Canada Nov manufacturing PMI 53.9p
• 0945 am US Nov manufacturing final PMI 55.4 flash
• 1000 am US Nov ISM manufacturing 57.7p 57.8e
• 1000 am US Oct construction spending 0%p 0.4%e
• 1030 am Fed Brainard Speech
• 0100 pm Dallas Fed Kaplan Speech
• 0330 pm US Nov total vehicle sales 17.57mn p 17.30mn e

Tuesday, December 4: ECJ Opinion on Brexit reversibility, RBA decision

• 0730 pm Australia 3Q C/A balance -A$13.5bn p -A$10.2bn e
• 1030 pm Australia RBA rate decision – no change from 1.5% expected
• 0315 am Swiss Nov CPI (m/m) 0.2%p -0.1%e (y/y) 1.1%p 1.0%e
• 0415 am BOE Carney speech
• 0430 am UK Nov Construction PMI 53.2p 52.6e
• 0500 am UK 10Y Gilt sale
• 0500 am Eurozone Oct PPI (m/m) 0.5%p 0.5%e (y/y) 4.5%p 4.5%e
• 0515 am French 10Y OAT sale
• 0830 am Canada 3Q productivity q/q 0.7%p 0.4%e
• 1000 am US Oct IBD/TIBB economic optimism 56.4p 57.3e
• 0430 pm US weekly Oil API inventory 3.453mb p 1.9mb e

Wednesday, December 5: Global Services and Composite PMIs, Australia GDP, BOC rate decision, US ADP, productivity, Fed Powell speech, Beige Book

• 0430 pm Australia Nov Services PMI 51.1p 51e
• 0730 pm Japan Nov Services PMI 52.4p
• 0730 pm Australia 3Q GDP (q/q) 0.9%p 0.6%e (y/y) 3.4%p 3.3%e
• 0830 pm BOJ Wakatabe speech
• 0845 pm China Nov Caixin Services PMI 50.8p 50.7e / Composite 50.5p 50.5e
• 0300 am Spain Oct unemployment change
• 0315 am Spain Nov Services PMI 54p 53.6e
• 0330 am UK BOE FPC Statement
• 0345 am Italy Nov Services PMI 49.2p 49.2e
• 0350 am France Nov final Composite PMI 54.1p 54 flash / Services 55.3p  55 flash
• 0355 am German Nov final Composite PMI 53.4p 52.2 flash / Services 54.7p 53.3 flash
• 0400 am Eurozone Nov final Composite PMI 53.1p 52.4 flash / Services 53.7p 53.1 flash
• 0400 am RBI interest rate decision no change from 6.5% expected / cash RR 4%
• 0430 am UK Nov Services PMI 52.2p 52.5e
• 0445 am Spain 3-5-10Y Bond Sales
• 0500 am Eurozone Oct retail sales (m/m) 0%p 0.2%e (y/y) 0.8%p 1.8%e
• 0700 am Poland rate decision – no change from 1.5% expected
• 0815 am US Dec ADP employment change 227k p 195k e
• 0830 am US 3Q productivity 2.9%p 2.3%e / ULC -1%p 1.2%e
• 0945 am US Nov final Composite PMI 54.9p 54.4 flash / Services 54.8p 54.4 flash
• 1000 am US Nov Services ISM 60.3p 59.7e
• 1000 am Canada BOC rate decision – no change from 1.75% expected
• 1015 am Fed Powell Testimony to Congress
• 1030 am US weekly EIA oil inventories 3.577mb p 0.769mb e
• 0200 pm US Beige Book
• 0815 pm Fed Quarles speech

Thursday, December 6: OPEC meeting, Spain Holiday, Australia retail sales, trade, German factory orders, US trade, Canada trade, US factory orders, Powell Speech

• 0600 pm Japan Dec Reuters Tankan 26p
• 0730 pm Australia Oct retail sales (m/m) 0.2%p 0.2%p
• 0730 pm Australia Oct trade surplus A$ 3.017mn p A$3.2mn e
• 0200 am German Oct Factory Orders (m/m) 0.3%p -0.3%e
• 0400 am RBA Debelle Speech
• 0500 am French 3-5-10Y OAT sale
• 0545 am UK 30Y Gilt sale
• 0830 am US Oct trade deficit $54bn p $54.9bn e
• 0830 am US weekly jobless claims 234k p 220k e
• 0830 am Canada Oct trade deficit C$420mn p C$720mn e
• 0850 am BOC Poloz speech
• 1000 am US Oct factory orders (m/m) 0.7%p -2%e
• 1000 am Canada Nov Ivey PMI 61.8p 60.3e
• 1215 pm Atlanta Fed Bostic speech
• 0645 pm Fed Powell Speech

Friday, December 7: German CDU party leadership election, German IP, US jobs report, Canada jobs report, US Michigan consumer sentiment

• 0630 pm Japan Nov Household Spending (y/y) -1.6%p +1.6%e
• 1200 am Japan Oct LEI 104.3p 104.8e / coincident 114.4p 114.3e
• 0200 am German Oct industrial production (m/m) 0.2%p 0.3%e
• 0245 am French Oct trade deficit E5.66n p E6.1bn e
• 0245 am French Oct industrial production (m/m) -1.8%p +0.8%e
• 0300 am China Nov FX reserves $3.053trn p $3.03trn e
• 0400 am Italy Oct retail sales (m/m) -0.8%p -0.2%e
• 0430 am UK 4Q inflation expectations 3%p 2.6%3
• 0500 am Eurozone 3Q revised GDP (q/q) 0.4%p 0.2%e, (y/y) 2.2%p 1.7%e
• 0500 am Eurozone 3Q employment change (q/q) 0.4%p 0.2%e (y/y) 1.5%p 1.3%e
• 0830 am US Nov non-farm payrolls 250k p 200k e / earnings 0.2%p 0.3%e / rate 3.7%p 3.7%e
• 0830 am Canada Nov jobs change 11.2k p 15k e / unemployment rate 5.8%p 5.85%e/ participation 65.2%p 65.5%e
• 1000 am US Dec Michigan consumer sentiment 97.5p 97.0e
• 1000 am US Oct wholesale inventories 0.6%p 0.3%e
• 1215 pm Fed Brainard speech
• 0300 pm US Oct consumer credit $10.92bn p $15.1bn e

Conclusions: Does inflation beat growth as the key to the Powell Fed?  

The dual mandate of the FOMC will be in play as the Fed Chair speaks next week.The PCE/CPI comparison shows a clear shift in inflation trend and the drop in oil prices will only makes this more notable going into 1Q. 

The role of price stability will be questioned as housing, auto sales and other rate sensitive sectors suffer even as the US continues with above trend growth and unemployment at near record lows. The balancing act of the next week is in this reaction function of the Fed being understood by the markets. 10-year yields below 2.95% will open up risks for a weaker USD, renew talk of a inverted yield curve and beg the question about Trump pressure on the Powell FOMC. There is plenty of news to watch in the next few days but the conflicts internal to the US remain central to the rest of the world and may still dominate capital flows.