The year has begun on a tumultuous note. The Nikkei, DAX and S&P 500 all gapped lower the first day of the year. However, heightened anxiety has calmed as the fire appears to have burnt itself out, and equities have moved higher over the past two weeks.

Three sources of stress have eased. Investors are no longer taking their cues by what happens to Chinese stocks. Nevertheless, both the Shanghai and Shenzhen Composites are posting small gains for the month of February, unlike most bourses. Second, the yuan has stabilized. The onshore yuan is off 0.7% so far this year, while the offshore yuan is up 0.35%.  In February, the onshore yuan is up 0.5%, and the offshore is up 0.7%.  

A third source of anxiety has been the risk of a recession in the US after a dismal Q4 15. However, growth was revised up to a 1.0% annualized pace, which, while disappointingly low, is not a harbinger of a recession. To the contrary, most of the key real sector data, like the employment details, retail sales, manufacturing output and durable goods orders point to an economy that is rebounding in Q1 16. 

Moreover, despite past decline in oil prices and dollar strength, both the core CPI and core PCE deflator have risen to new 2-3 year highs.   Fed hiked rates in December, but it did not knock the US economy into a recession as the doomsday talk suggested. Meanwhile, between Brexit fears, and disappointing eurozone data (PMIs and preliminary February CPI), and new threat of stagnation and deflation in Japan, the contrasting macro picture seems distinctly dollar supportive. 

We identify 13 things that investors will be watching in the week ahead: 

1.  US employment: Slack in the US labor market continues to be absorbed. The consensus calls for a modest improvement from the 151k (158k private sector) increase in January. The trend lower in weekly jobless claims favors another healthy report. Earnings growth may rise 0.2% which is needed to keep the year-over-year rate steady at 2.5%.The combination of continued improvement in the labor market and gradual increases in core inflation will likely support officials to continue to normalize monetary policy. While the market turmoil and the decline in inflation expectations may keep the Fed steady in March, we anticipate hike in Q2. Separately,  auto sales will be reported on March 1. A sequential increase is expected, which may be picked up by the next retail sales report, and points to rebounding consumption, the single largest economic driver, in Q1.  

2.  Super Tuesday: For many, the US presidential contest has thus far been an entertaining distraction. However, things are about to become more serious. On the Democratic side, Sanders may stay until the end, but after the primaries on March 1, Clinton will have probably have secured almost 2/3 of the delegates needed to secure the nomination. On the Republican-side, Trump is ahead in nearly every poll for the states that have primaries or caucuses on Super Tuesday. Investors have yet to respond to the risk that Trump gets the Republican nomination. While many are talking about who can stop Trump, in our experience, the hubris that is on display is often its own nemesis.  

3.  German politics: Even if investors have not reacted to the prospects of a Trump victory, they are talking about it.  In contrast, there is a shift taking place in German politics that the event markets are implying about a one in three chance that Merkel is not in office at the end of the year. In themselves, any one state election in Germany is not particularly significant. However, the trend matters.  Municipal elections will be held in the Hesse on 6 March. A week later, three states (Baden-Wurttemberg, Rhineland-Palatinate, and Saxony-Anhalt.  The AfP party that had been born as an anti-EU party has become among the most vocal critics of Merkel’s refugee stance.  It was not around to participate the last time the states had elections in 2011.  

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