Last week was the week of records. Bitcoin broke the $10,000 ceiling, the U.S stock markets continued to break records, OPEC reached an agreement to continue the production cuts, and the U.S senate passed the tax reform package.
While economic data continued to dominate the market, politics had the final say. On Friday, former National Security Advisor, Michael Flynn pleaded guilty to lying to the FBI. Since this was expected, the market did not react until ABC’s Brian Ross falsely claimed that Trump had directed Flynn to talk to the Russians during the campaigns. The market’s reaction was immediate. The Dow fell by 350 points, NASDAQ by 110 points, and S&P 500 by 35 points.
This week, while significant global market data will be released, investors will pay close attention to Washington, Berlin, and London.
In Washington, investors will follow closely on the Mueller investigation and the debt ceiling issue. Three months ago, Trump made a deal with Nancy Pelosi and Chuck Schumer to raise the debt ceiling for three months. This week, investors will watch out for a deal or no deal to avoid a government shutdown. Chuck and Schumer have stated that the new deal should include the issue of DACA while Trump has talked about his wall. In private, Trump has said that a government shutdown would be beneficial to him. A government shutdown would be consequential for the stock markets and the dollar.
In Berlin, investors will look for a coalition deal and in London, investors will continue to follow closely the Brexit negotiations.
Aside from politics, the biggest focus this week for investors will be the U.S. employment report. On Wednesday, the ADP Nonfarm Employment Change is expected to show a total of 190K jobs down from 235K in the previous month.
On Thursday, we will get the ADP employment change and the initial jobless claims.
On Friday, the U.S. Labor Department will release the unemployment rate and the non-farm payrolls. Analysts expect the U.S. labor market to add 200K new jobs after adding 261K in October. The unemployment rate is expected to remain steady at 4.1%.
If more jobs are created, and if the unemployment rate continues to fall, the stock market and the dollar are likely to trend higher.
Still, since the U.S. economy is at full employment, investors will likely pay closer attention to the wages. Investors expect average hourly wages to improve by 0.3% following a flat reading in November.
An improving wage environment will be a clear indication that inflation is improving which will be an indication of what to expect when the Fed meets next week. Most investors expect the Fed to raise rates.
Data from the CME FedWatch tool shows that 90.2% of investors expect the Fed to increase rates by between 120 and 150 basis points while 9.8% expects an increase of between 150 and 175 bps.
Away from the United States, investors will wait for interest rate decisions from Canada, Australia and India. The Reserve Bank of Australia will meet on Tuesday. Investors expect the bank to leave the rates steady at the current 1.5%. This will be the 15th straight meeting for the bank to maintain the rates at the current rate. On Wednesday, the Bank of Canada is also expected to leave interest rates unchanged at 1%. The Indian Central Bank is also expected to leave rates unchanged at 6% on Wednesday.
On Wednesday, investors will watch out for the crude oil inventories released by the EIA. This data will be very important because of the OPEC decision to cut production. An increase in U.S. inventories and rig counts could be a signal of lower oil prices in future.
Other important economic data to be released this week are: Germany’s PMI which will be released on Monday, UK’s Services PMI which will be released on Wednesday, U.S. ISM Non-manufacturing PMI, Australia’s QoQ GDP growth, Canada’s IVY PMI, and Japan’s QoQ GDP Growth.