HIGHLIGHTS OF THE WEEK

United States

• Political events and communiqués from the new administration, continued to dominate the headlines - taking some of the attention away from what was a week of upbeat economic data.
• The FOMC held rates steady this week, but remained upbeat about the economy - pointing to continued improvement in the labor market. This narrative was corroborated by this morning's employment report, which blew expectations of 180K out of the water as payrolls rose by 227K.
• In the near term, we expect the Fed to remain on the sidelines in order to observe how the economy behaves under heightened policy uncertainty. If the economic expansion continues at the current moderate but above trend pace of growth, we expect the Fed to hike around the mid-year mark. By that point some of the missing pieces from the policy puzzle should have fallen into place.

Canada

• According to Canada's leading rodent forecaster, we are in for an early spring. And while Canada's economy is not out of the shadows yet, data out this past week showed that it did spring back into action in November.
• Real GDP rose 0.4% in November, led by a rebound in the goods sector. Canada's economy picked up momentum in the second half of the year, as the good sector has improved against a back drop of consistent growth in services.
• In a speech, Bank of Canada Governor Poloz expressed concerns about both the move up in Canadian bond yields and the level of the loonie. This underscored the dovish stance of the Bank, given the risks to growth are primarily to the downside. A significant shock, or series of smaller shocks could see the Bank cut again.

UNITED STATES - UPBEAT ECONOMIC DATA CORROBORATES FED NARRTIVE

Political events and communiqués from the new administration, whether formal or informal, continued to dominate the headlines this week - taking some of the attention away from the upbeat economic data. Equity markets eased off slightly from last week's all-time high, while long-term treasury yields are expected to end the week roughly unchanged. The euphoric post-election momentum appears to have finally plateaued as both equity and fixed income markets remain range-bound near recent highs.

The lack of policy detail in key areas such as tax reform, infrastructure spending and trade is likely to have featured in the FOMC's decision to hold the federal funds rate steady this week - a decision that surprised no one. The committee remained upbeat on the outlook, noting that the economy "continued to expand at a moderate pace", while making reference to solid job gains and an unemployment rate that remains "near its recent low".

This narrative was corroborated by January's employment report, which blew expectations of 180K out of the water as payrolls rose by 227K (Chart 1). Gains were fairly widespread in the private services sector, while on the goods-producing side they were concentrated in construction (+36K) - a highly seasonal sector and thus one where we could see some reversal in the months ahead. The unemployment rate ticked up slightly to 4.8%, but for a good reason, as the continued improvement in labor market conditions is drawing in more workers from the sidelines - evidenced by the 0.2 ppts move up in the participation rate on the month to 62.9%. While this development is welcome and largely anticipated, taken together with the deceleration in wage growth to 2.5% y/y from 2.8% in the month prior, it is likely to hearten Fed doves to argue for continued patience.

Earlier in the week, personal income and spending data for December was also positive, providing a solid handoff for consumer spending growth heading into 2017. Incomes rose 0.3% m/m and spending rose 0.5% m/m. Consumer spending drove growth in the fourth quarter and we expect this momentum to carry into the first quarter of 2017. Manufacturing activity remained solid, as the ISM index rose to the quickest pace of expansion in over two years in January. Comments by survey respondents were generally positive with little evidence that recent domestic and global events had taken a toll on demand. On the other hand, services sector activity held steady on the month with the index still at its highest level since September 2016 (Chart 2).

Overall, the US economy continues to exhibit signs of improvement. In the near term, we expect the Fed to remain on the sidelines in order to observe how the economy behaves under heightened policy uncertainty. If the economic expansion continues at the current moderate but above trend pace of growth, we expect the Fed to hike around the midyear mark. By that point some of the missing pieces from the policy puzzle should have fallen into place, such as infrastructure spending plans. Yet, it looks like the highlyanticipated tax reform bill will not be written until summer. That, coupled with the slow nature of the political process in general, has the potential to lead to some pullback in consumer, business, and market sentiment. In the meantime, markets will continue to hang on every word from the new administration.

CANADA - A GROUNDHOG AND A CENTRAL BANKER WALK INTO A BAR

We heard from two high-profile forecasters this week. A central banker reminded us that economic forecasts are only approximations, and that "models are not crystal balls". A couple of days later, a rodent suggested that we're in for an early-spring. While we will address Governor Poloz's remarks in a bit, the groundhog may be onto something with data released this week indicating that Canada's economy already had a spring in its step as far back as November.

Monthly real GDP rose by a healthy 0.4% in November, recovering from a 0.2% drop in October. After making little progress through 2015 and the first half of 2016, Canada's economy has picked up some momentum in the latter half of 2016 (see chart). The main factor behind the swing from September to November was related to improved fortunes in the goods-producing sector. The sector is growing just below 1% on a yearly basis, after spending much of the last two years in contraction.

In contrast, the services sector continues to chug along at a pace just shy of 2%. Beneath the surface, one industry that has been a key driver of services sector growth is showing distinct signs of cooling. Real estate rental and leasing expanded at a 2.2% year/year pace in November, a marked deceleration from the roughly 3.5% y/y clip at the beginning of 2016. This suggests that the multiple housing regulations that have been put into place alongside rising interest rates are slowing real estate activity.

The healthy GDP figures add to the evidence that the Canadian economy is shaking off some of the setbacks earlier in the year and growth in the fourth quarter of 2016 is likely to come in ahead of the Bank's expectations of 1.5%. Still, these facts are not likely to move the needle very much for the Bank of Canada, given the still significant amount of economic slack that remains. As such, the Bank of Canada will probably be happy to leave its policy interest rate at 0.50% well into the future, helping to support the ongoing absorption of the remaining slack.

In fact, in his remarks this week, the Bank of Canada Governor Poloz seemed to reinforce the risk of further monetary easing in Canada. He indicated the Bank's discomfort with both the run up in Canadian bond yields and the elevated level of the loonie. A rate cut would help on both of these fronts, but at this point we do not expect further easing will come to pass, given an outlook for continued absorption of the remaining economic slack. As Governor Poloz pointed out, however, the risks to the growth outlook remain tilted towards the downside with the threshold for action potentially breached either by a significant shock, or a series of small shocks.

Indeed, the Canadian dollar is the second best performing major currency since the U.S. election (see chart), seemingly at odds with the rising downside risk to Canada's economy stemming from a more protectionist stance by the Trump administration. The loonie has had a helping hand from firmer oil prices, but markets may be somewhat complacent about the potential impact from any thickening of the U.S. border.

Worker pay stagnated as US jobs beat expectations

The U.S. dollar had another difficult week as it depreciated against most major pairs. Central banks remained on the sidelines as the Bank of Japan (BOJ), U.S. Federal Reserve and Bank of England (BoE) all left their monetary policies unchanged awaiting further data. The Reserve Bank of Australia (RBA) is up next on Monday, February 6 at 10:30 pm EST. It is anticipated the RBA will not make any changes on its February meeting.

Brexit cleared another hurdle as the British Parliament approved the bill allowing the Prime Minister to trigger article 50. Up next is a debate in the Commons, before it is voted but the majority win in Parliament sends a strong signal as the exit from the E.U. could be triggered before the end of the month.

Trade has been a hot topic of late, which gives higher priority to global trade data to be released this week. Canadian and American trade balances will be published on Tuesday, February 7 at 8:30 am EST. Given the emphasis U.S. President Donald Trump has put on what is fair and not regarding American trade the release of the figures could spark another round of comments on the subject. China is also due to release its trade balance on Thursday, February 9.

The EUR/USD rose 0.812 percent in the week. The single currency is trading at 1.0790 after the release of the January U.S. non farm payrolls (NFP) report. The U.S. added 227,000 jobs way above the expected 175,000 but the tepid wage growth and its lack of inflationary pressure pushed back the need for the U.S. Federal Reserve to hike rates. The Fed had already delivered a noncommittal statement on Wednesday. A soft wage growth component and comments of a more gradual pace by Chicago Fed President and FOMC voting member Charles Evans on Friday depreciated the dollar.

The lack of focus from the Trump administration on pro-growth policies in favor of fulfilling some of his more divisive campaign promises have hurt the dollar. Friday afternoon's signing of an executive order to reform financial regulation boosted the Financial sector as a laxer regulatory environment is anticipated during Trump's presidency.

European data has improved boosting the EUR, the biggest surprise has been the negative results out of Germany but as a whole inflation in the European Union has improved with encouraging employment numbers.

Gold rose 2.537 percent in the last 5 days. The precious metal is trading at $1,218.94 after U.S. President Donald Trump's comments and diplomatic blunders made investors seek cover. The lack of a solid jobs report in the United States kept the yellow metal bid as it pushes back the monetary policy tightening timetable for the Fed. The strong number of jobs was not matched by growing wages, which has a higher inflationary pressure going forward. The more President Trump sticks with a combative agenda focused on trade and immigration and less on fiscal stimulus and infrastructure spending the higher the price of gold could go as investors sell the dollar.

Oil rose 1.898 percent in a weekly basis. The price of West Texas is $53.9 per barrel in a volatile week. Energy touched weekly lows of $51.70 and ended the week near highs of $53.82. The rise of U.S. inventories did little to offset higher prices resulting from the Organization of the Petroleum Exporting Countries (OPEC) production cut agreement. Trump's comments about Iran sparked a rally in oil prices as the lifting of sanctions had increased global supply only to be curbed by the OPEC deal.

Oil prices are still under threat of an increase of U.S. shale production as there is no agreement to keep production at a certain level, unlike OPEC and non OPEC producers like Russia. U.S. crude inventories rose by 6.5 million barrels nearly doubling the weekly forecast.

The USD/MXN lost 2.502 percent this week. The peso is trading at 20.38 versus the dollar. The Mexican currency bounced back after the market is uncertain how much stock to put on Donald Trump's comments made on twitter. The innovative tactics used by the recently inaugurated President have kept peso traders on their toes. The emerging market currency had been a proxy for others going into the elections and rose in prominence and volatility after then candidate Donald Trump put the building of a Wall between Mexico and the United States as a key promise of his campaign. Compounding risk on the Mexican currency was also Trump's comments about NAFTA and his anti-trade agenda. The Mexican peso have been decoupled from economic fundamentals and were are the mercy of rhetoric, but as the market has made it clear it expects Trump to move forward on fiscal stimulus and infrastructure the dollar has depreciated.

The peso has been one of the strongest currencies since the end of January, but still remains 9 percent lower than on November 5 when Donald Trump was elected.

Market events to watch this week:

Monday, February 6

• 9:00pm NZD Inflation Expectations q/q
• 10:30pm AUD Cash Rate
• 10:30pm AUD RBA Rate Statement

Tuesday, February 7

• 8:30am CAD Trade Balance
• 8:30am USD Trade Balance
• 10:00am USD JOLTS Job Openings
• Tentative NZD GDT Price Index

Wednesday, February 8

• Tentative GBP EU Membership Vote
• 10:30am USD Crude Oil Inventories
• 3:00pm NZD Official Cash Rate
• 3:00pm NZD RBNZ Rate Statement
• 4:00pm NZD RBNZ Press Conference
• 7:10pm NZD RBNZ Gov Wheeler Speaks

Thursday, February 9

• 4:00am AUD RBA Gov Lowe Speaks
• 8:30am USD Unemployment Claims
• 7:30pm AUD RBA Monetary Policy Statement
• Tentative CNY Trade Balance

Friday, February 10

• 4:30am GBP Manufacturing Production m/m
• 8:30am CAD Employment Change
• 10:00am USD Prelim UoM Consumer Sentiment

*All times EST

Non-farm payrolls increased by 227k in January, or well above the 180k expected by the street. Revisions to the previous year indicated that 85k more jobs were added than previously reported, with large upward revisions to spring and summer hiring somewhat offset by downward revisions on the front and back end of the year.

Private payrolls rose by 237k, more than 60k above consensus. Private services hiring was led by retail (+46k), professional & business services (+39k), health care (+32k) and financial services (+32k). Construction (+36k) had a great month, with manufacturing (+5k) and mining (+4k) also adding to the goods sector tally. Government sector (-10k) shed jobs for the third consecutive month.

The unemployment rate ticked up by 0.1 percentage points to 4.8% as household employment pulled back despite some re-entry to the labor force. The influx of people back into the labor force has lifted the participation rate up by 0.2pp to 62.9% on the month - half a point above its low. Most broader measures of unemployment also rose on the increased labor force participation. The employment-ratio also rose by 0.2pp, matching its post-recession high.

Average hourly earnings rose by 0.1% during the month, disappointing expectations, with the year-over-year wage growth decelerating from 2.8% to 2.5% in January.

Average weekly hours were unchanged at 34.4.

Key Implications

This report looks like a blockbuster one on many fronts. Last year's job gains were revised up, with the economy adding the most jobs in four months during January. Moreover, the breadth of hiring strength across industries particularly encouraging as far as the U.S. economic momentum is concerned. Notably, retail trade hiring was the highest in a year while financial services had the best month of hiring since the peak of the housing bubble in October 2005.

The goods sector performance was also quite encouraging, with construction sector hiring picking up to near its fastest pace in a year despite anecdotal evidence of significant shortages of labor. The mining sector also continued to hire for the third month in a row after 25 months of declines, indicating that the sector is turning around. Manufacturing, whose strengthening remains the focus of the new administration's policies, also added jobs but employment in the sector still remains below last year's levels.

The jobless rates rose, but they did so for a good reason as continued strength in the labor market appears to be bringing in more people off the sidelines to look for work. This is a welcome development that economists and policymakers have been anticipating for some time and should provide further arguments for the Fed doves to resist a faster pace of rate hikes. These arguments will be further strengthened by the weak wage gain this month, however we anticipate that much of this is related to the mix of hiring - with temporary and retail jobs accounting for more than a quarter of the total hiring.

Ultimately, despite the strong headline we don't expect this report will nudge the Fed into a faster pace of wage hikes, with our baseline scenario anticipating two hikes this year, with the next one likely to come around the mid-year mark.

• The January employment gain reflected a sharp improvement relative to increases of 157K in December (156K previously) and 164K in November (204K previously). Market expectations had been for a more modest 175K gain in January.
• The more volatile household employment measure soared (on an adjusted basis) 457K though, with the labour force spiking higher by an even greater 584K, the unemployment rate unexpectedly rose to 4.8% from December's rate of 4.7%.

The overall increase reflected an impressive 45K jump in goods-producing employment following the 15K increase in December. This largely reflected construction employment soaring 36K after a 2K gain in December. Manufacturing employment rose a modest 5K which was down from an 11K gain the previous month. Employment among service-producing industries rose 192K after the 150K gain in December.

Though the payroll employment gain implied strength in labour markets this was tempered by the rise in the unemployment rate. However, this rise resulted from a surge in the labour force which could imply optimism about the rising prospect of finding work. Also tempering the impression of tightening labour markets was the minimal 0.1% rise in average hourly earnings that fell well short of the 0.3% gain expected going into the report. The modest monthly increase contributed to the year-over-year rate dropping to 2.5% from the 2.8% that was recorded in December. Annual wage increases have generally been trending higher in recent years rising 2.1%, 2.3% and 2.6% between 2014 and 2016.

Traders are undecided whether to throw the USD a lifeline following the news that the United States added a stunning 227,000 jobs to its economy during the first month of 2017.

While the number on headline is stunning and continues to outline the underlying strength of the US economy there are some initial concerns that wage growth underwhelmed, which has added fuel to the fire that the Federal Reserve will be keeping US interest rates unchanged over the next couple of months. Although the Federal Reserve is likely to continue highlighting their public bias for another three interest rate rises this year, this data is not convincing enough to suggest the central bank will be confident enough to pull the trigger before May at the earliest. The air of uncertainty over what clarity the Trump administration can provide when it comes to their fiscal stimulus plans is contributing towards the consensus that the Fed will wait and see how things develop.

If it wasn't for the underwhelming wage growth figures I do believe that the USD would be strengthening across the financial markets following this release, but the wage numbers do suggest that March is definitely off the table when it comes to a possible interest rate rise from the Federal Reserve. When you combine this with the uncertainty circulating over whether the Trump administration is going to implement their protectionist policies before pushing ahead with their stimulus promises which the financial markets purchased heavily into, you can understand why traders are behaving undecidedly to the NFP release.

Despite traders being unsure of how to react to the USD, it looks like the slump in the Sterling is going to continue for the second day with the Pound/Dollar concluding the week suffering two days of successive losses. The Services PMI that was released from the United Kingdom earlier during trading today suggested that economic momentum is slowing down, complimenting to the selling pressure seen in the Pound since yesterday. While the Bank of England (BoE) upgraded its growth forecast for 2017, the lack of conviction from Governor Carney over which direction UK interest rates could be heading next has reminded traders that the UK is still set to face ongoing uncertainty over the Brexit.

Basically the probability looks high that UK inflation will surpass the 2% threshold that could encourage the BoE to consider higher interest rates, but the prolonged uncertainty over what the impact to the UK economy will be once Article 50 is finally invoked is going to limit the scope of options for Carney to move either direction when it comes to interest rates.

Daily Pivots: (S1) 1.0731; (P) 1.0780 (R1) 1.0804; More.....

Intraday bias in EUR/USD remains neutral as it's staying in tight range below 1.0828 temporary top. Another rise cannot be ruled out yet. However, choppy rise from 1.0339 is viewed as a corrective move. Hence, we'd expect upside to be limited by 1.0872 resistance and bring reversal. On the downside, break of 1.0619 will indicate that such rise is completed and turn bias to the downside for retesting 1.0339 low.

In the bigger picture, whole down trend from 1.6039 (2008 high) is in progress. Such down trend is expected to extend to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

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Daily Pivots: (S1) 1.2460; (P) 1.2582; (R1) 1.2648; More...

Intraday bias in GBP/USD remains neutral for the moment. There is no change in the view that rebound form 1.1198 is seen as the third leg of the consolidation pattern from 1.1946. Hence, in case of another rise, we'd expect strong resistance from 1.2774 to limit upside and bring down trend resumption eventually. On the downside, firm break of 1.2411 minor support will argue that it's completed and turn bias to the downside for 1.1946 low.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. There is no sign of medium term bottoming yet. Sustained trading below 61.8% projection of 2.1161 to 1.3503 from 1.7190 at 1.2457 will target 100% projection at 0.9532. Overall, break of 1.3444 resistance is needed to confirm medium term bottoming. Otherwise, outlook will remain bearish.

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Daily Pivots: (S1) 112.11; (P) 112.73; (R1) 113.42; More...

Intraday bias in USD/JPY remains neutral for the moment and some consolidations could be seen above 112.04 temporary low. Deeper fall cannot be ruled out yet. But choppy decline is from 118.65 is seen as a corrective move. Hence, we'd expect strong support from 38.2% retracement of 98.97 to 118.65 at 111.13 to contain downside an bring rebound. On the upside, above 115.36 resistance will argue that such correction is finished and turn bias to the upside for 118.65. Break will resume whole rise from 98.97 and target 125.85 key resistance.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. The impulsive structure of the rise from 98.97 suggests that the correction is completed and larger up trend is resuming. Decisive break of 125.85 will confirm and target 61.8% projection of 75.56 to 125.85 from 98.97 at 130.04 and then 135.20 long term resistance. Rejection from 125.85 and below will extend the consolidation with another falling leg before up trend resumption.

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Daily Pivots: (S1) 0.9884; (P) 0.9911; (R1) 0.9952; More.....

USD/CHF spikes higher in early US session but upside momentum is unconvincing. Intraday bias remains neutral as the consolidation from 0.9860 temporary low is extending. Overall, outlook remains bearish with 1.0043 minor resistance on hold and deeper fall is expected. Decline from 1.0342 is seen as the third leg of the pattern from 1.0327. Below 0.9860 will target 61.8% retracement of 0.9443 to 1.0342 at 0.9786 and below. On the upside, break of 1.0043 will indicate short term bottoming and turn bias back to the upside.

In the bigger picture, rejection from 1.0327 resistance suggests that consolidation pattern from there is still in progress. Fall from 1.0342 is seen as the third leg and retest of 0.9443/9548 support zone could be seen. But we'd expect strong support from there to contain downside. At this point, we're still expecting the larger rally to resume later to 38.2% retracement of 1.8305 to 0.7065 at 1.1359.

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Dollar spiked higher after much stronger than expected headline non-farm payroll number. But the greenback quickly retreated back into established range after looking at the details. NFP showed 227k growth in the job market in January versus expectation of 175k, up from prior month's 157k. However, unemployment rate rose 0.1% to 4.8%, above expectation of 4.7%. The bigger disappointment is seen in wage growth. Average hourly earnings rose 0.1% mom in January, much lower than expectation of 0.3% mom. Dollar is set to end the week as the second weakest major currency, next to Sterling.

UK services PMI dropped to 54.8 in January, down from 56.2, below expectation of 55.8. Markit noted that "anecdotal evidence widely attributed cost pressure to fuel, salaries, freight charges and imports." And, "the degree to which costs are rising threatens to test the tolerance of some policymakers in terms of their willingness to 'look through' what's likely to be a marked upturn in inflation in 2017." Sterling remains the weakest major currency for the week. One of the reasons is BoE's cautious neutral policy stance. After leaving monetary policies unchanged yesterday, BoE governor Mark Carney warned of the uncertainty over Brexit, cautioning that "there will be twists and turns along the way". He reiterated that "we can see scenarios in either direction" for policy. More in BOE Upgrades Growth Outlook; Yet, Unemployment Slack More than Previously Expected. Also from Europe, Eurozone retail sales dropped -0.3% mom in December. Services PMI was revised up by 0.1 to 53.7 in January. Italy services PMI rose 0.1 to 52.4 in January.

From China, Caixin PMI manufacturing dropped to 51.0 in January, down from 51.9 and missed expectation of 51.8. Caixin noted in the release that "The rate of improvement slowed since December, as output and new orders increased at weaker rates amid a further reduction in employment. And, "the Chinese economy maintained stable growth in January. But the sub-indices showed that the current growth momentum may be hard to sustain. We must remain wary of downward pressures on the economy this year."

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.9884; (P) 0.9911; (R1) 0.9952; More.....

USD/CHF spikes higher in early US session but upside momentum is unconvincing. Intraday bias remains neutral as the consolidation from 0.9860 temporary low is extending. Overall, outlook remains bearish with 1.0043 minor resistance on hold and deeper fall is expected. Decline from 1.0342 is seen as the third leg of the pattern from 1.0327. Below 0.9860 will target 61.8% retracement of 0.9443 to 1.0342 at 0.9786 and below. On the upside, break of 1.0043 will indicate short term bottoming and turn bias back to the upside.

In the bigger picture, rejection from 1.0327 resistance suggests that consolidation pattern from there is still in progress. Fall from 1.0342 is seen as the third leg and retest of 0.9443/9548 support zone could be seen. But we'd expect strong support from there to contain downside. At this point, we're still expecting the larger rally to resume later to 38.2% retracement of 1.8305 to 0.7065 at 1.1359.

Economic Indicators Update

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