Not Your Normal Hump Day

Wednesday may begin off slowly in Asia though featuring the largest IPO of the year in the form of Japan Post, but it may very well prove to be one of the most important days of the month. Caixin's service and composite PMIs for China are due.  

As the Europe gets under way, the eurozone and UK service PMIs and composites also will be reported.    The risk is on the upside after strong manufacturing reports.   As we have noted, the data from the eurozone suggests fairly stable growth. There is scarce evidence that the risks scenarios that the ECB has warned of are truly materializing.  Core inflation in the eurozone is a little lower than the core rate in the US.  

The US measure also includes a higher weight for rent, and a function for the owner's equivalent, making the comparison not quite apples to apples.  Still, measures of consumer inflation excluding food and energy in the US, eurozone, UK, and Japan are all around 1.0%.  

Norway's central bank, Norges Bank, meets.  It cut its deposit rate in September and lowered the anticipated repo path.  This underscores its easing bias.  With Sweden's Riksbank having recently extended its bond purchase program, and the ECB signaling its willingness to ease further, the Norges Bank will likely continue to feel pressure to ease monetary policy.  However, like several other central banks, it too adopt a wait and watch stance, even if the end of the easing cycle is not at hand.   

The momentum picks up in the North American session.  Although the calendar is chock full, the two key events are the ADP employment estimate, which steals some thunder from the national report, and the speeches/testimony by the Fed's leadership Yellen, Fischer and Dudley.  

The consensus calls for 180k increase in the ADP estimate, slowing from 200k in September. Although the ADP frequently undershot the BLS estimate this year, in August and September it overshot the government's figures.  The average ADP this year is 195k.   Several Fed officials, including Dudley, have suggested that job growth of something less than 200k a month will still be sufficient to absorb slack in the labor market.  This means that slower jobs growth does not preclude a Fed hike.  

To the extent that the Fed's leadership addresses the outlook for monetary policy, they will most likely reiterate the FOMC statement.  There was a subtle shift in the burden of proof.  Rather than the economy having to do something unless there is disappointment, the Fed is prepared to hike rates at the next meeting.   

Governor Brainard speaks on Wednesday in Frankfurt.  She and Tarullo, who speaks tomorrow, have distanced themselves from the Fed's leadership by suggesting that rates should not be hiked this year. Nevertheless, we suspect that many understand that the policy signal comes from the Fed's leadership.  

Given the performance of the two-year US note, and the possibility that Fed funds average something less than the midpoint of the next target range, it appears that something more than that 50% chance that is claimed to be discounted.  Indeed, the two-year note yield has continued to rise even as the December Fed funds futures contract has settled 19.5 bp for the fifth consecutive session.  

The ISM service and composite surveys will be released as well.   The consensus expects a small decline, which in itself is not very worrisome.  The new effort to provide a preliminary reading of the US manufacturing trade figures a week reduces new information contained in the more comprehensive monthly data that will be released tomorrow.  Moreover, the September report is more about Q3 GDP than Q4. 

On balance, hump day might give the dollar a bump.  

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