The week was highly eventful in US politics. Although not yet officially declared, the Democrats won the Georgia runoff elections giving President-Elect Biden the slimmest of majorities in the US Senate as well as the House of Representatives. On Wednesday, the riots on Capitol Hill shocked the world but did not prevent the Senate from confirming Biden’s election as President. Markets took the scenes of violence in their stride and focused on the improved chances of more fiscal spending, with the much greater prospect of the Democrats controlling both houses of Congress. The risk of higher taxes for corporations and high-income individuals did not seem to upset investors, given the massive additional pandemic support, which some commentators estimated at anywhere from US$500m to US$1trn (on top of the US$900bn already approved in late December). The calculation is that the total spending would tide the US economy over until vaccines allow the population to get back to normal in the second half of the year. Bank of England Governor Andrew Bailey acknowledged the long-term growth implications of the Brexit agreement, but was positively impressed by the stability in business and trading during the first few days after the signed deal between the UK and EU. Returns for risk markets were therefore remarkably strong last week, with energy, materials and financials leading the positive sectors and technology starting off badly but catching up late in the week. As a result of the relative sector strength, the FTSE 100 ended up as one of the strongest indices in the world, just behind China, but way ahead of the US, Europe and Japan, and ahead of the FTSE 250. Government bond yields surged, with the US 10-year at 1.12% and the 10-year gilt at 0.29%. Oil was very strong, nearing US$56, but gold fell sharply below US$1,900 again. Sterling took profits after its end-of-year run. |
The week ahead |
Thursday: Chinese exports and imports Our thoughts: China has been feeding the manufacturing recovery worldwide through its imports of capital goods and consumer products. It has also managed to keep growing its trade surplus despite a rising currency, in particular against the US dollar. The December imports and exports, both in US dollars and in Renminbi, will be an important bellwether for the continuation of the cyclical recovery globally in light of recent lockdowns and restrictions in many western countries. Friday: UK industrial production, manufacturing production, construction output and index of services Our thoughts: this monthly data dump should give us an excellent picture of the UK economy by sector, albeit only for November, which means the preparation for Brexit might not be properly included in these numbers. The expectation for the services index is quite negative, at -5.5% for the month, whereas manufacturing and construction are projected to be positive by 1% and 0.8%, respectively. The overall net effect, given the size of the services sector, should result in a contraction leading up to the end of the year. It will be important to see whether the UK economy can skirt that fate. Friday: US University of Michigan sentiment index Our thoughts: one important and widely-followed survey for the US economy and the consumer. The recent reading should reflect the post-election sentiment, potential concerns about the transition, split powers in Congress, the Georgia election and the last-minute pandemic fiscal package to help support consumers and companies alike after the new year. Estimates call for virtually no change from last month’s levels, but there could well be some significant movement in light of all of the above. |
Markets for the week |
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Central banks/fiscal policy |
More lockdown support from the Chancellor Chancellor Rishi Sunak announced £4.6bn of emergency support to help UK businesses survive the third lockdown. Retail, hospitality and leisure businesses will be entitled to one-off grants of as much as £9,000 to tide them over until the spring. That’s on top of existing funds of as much as £3,000 per month for those required to shut their doors because of coronavirus restrictions. Bank of England Governor Andrew Bailey struck a note of caution on how Brexit will constrain economic growth, while indicating he was pleased with market stability in the first week after the transition period ended. GDP could be reduced by 4% over the longer term. The financial job shift from London may be less than estimated. He said a certain amount of business is having to migrate to the EU and those transitions have broadly happened. Bailey also said that finance job losses from Brexit may be less than speculated, estimating that 5,000 positions have migrated to the EU so far. |
United States |
No change: industry is thriving but jobs are challenged Surveys: the ISM manufacturing PMI rose from 57.5 to a very strong 60.7 with new orders up from 65.1 to 67.9, prices paid from 65.4 to 77.6 (the highest since May 2018) and employment from 48.4 to 51.5. The Markit services PMI was softer, but still above expansionary levels, sliding from 55.3 to 54.8. The ISM services PMI was weaker than it looked (57.2 vs. 55.9), with the advance mostly due to supply chain slowdowns and problems finding workers. Excluding the positive contribution from supplier delivery delays, the services index was weakest since May. The employment index fell back below 50. Industry: total vehicle sales, as published by Wards, jumped from 15.55 million to 16.27 million (annualised) in December. Factory orders and durable goods orders for November were both strong, up 1% on the month. Durable goods orders non-defence ex aircraft rose 0.5%. Employment: jobless claims were slightly down at 787K vs. 790K for initial claims and 5072K vs. 5198K for continuing claims. The range is still much higher than pre-COVID-19 and the drop in continuing claims reflects only people falling off the unemployment register after six months. Non-farm payrolls for December were down 140K vs. +50K expected and +336K last month, the first decline since April, but the two-month payroll net revision was a positive +135K. Unemployment was unchanged at 6.7%, whereas underemployment fell to 11.7% from 12.0%, with the labour force participation rate remaining at 61.5%. Average hourly earnings were up 0.8% for December and 5.1% year-on-year, both above estimates. As lower paid positions are cut, the average hourly rate goes up. The December jobs report looked weaker on the surface, but the weakness was narrow. Positive revisions in previous months almost offset the decline. Industry and construction are doing well and the slump in services is concentrated in the leisure and hospitality sectors. |
United Kingdom |
Have we seen the last of the housing boom? Surveys: the Markit manufacturing PMI had a great month at 57.5, due to concerns about supply availability post-Brexit, which could be reflected in a fall in the next few months. The Markit/CIPS services PMI eased slightly from 49.9 to 49.4. The Markit/CIPS UK construction PMI was almost unchanged at 54.6. Housing: house prices rose to a record high last month, up 6% from a year earlier in December to an average £253,374, in the Halifax survey. On the month alone, they gained 0.2%, a slower rate of growth that seems to highlight the coming end of the stamp duty holiday. |
Europe |
Weak numbers except for German industry Surveys: in the eurozone, the services PMI fell from 47.3 to 46.4. Eurozone consumer confidence was unchanged at -13.9, economic confidence improved from 87.7 to 90.4 and industrial confidence from -10.1 to -7.2, but services confidence remained stuck at a low -17.4. Prices: no change in eurozone inflation with headline CPI (Consumer Price Index) at -0.3% and core CPI at +0.2%. Industry and sales: German factory orders for November surged 2.3% or 6.3% year-on-year. German industrial production rose 0.9% in November bringing the year-on-year movement to -2.6%. French industrial production fell 0.9% in November and -4.6% year-on-year. Eurozone November retail sales fell 6.1%. French consumer spending fell 18.9% in November, worse than expected. |
China/India/Japan/Asia |
Has China peaked? China: the unofficial Caixin services PMI fell from 57.8 to 56.3, still a high number but showing some sort of peak in the Chinese economic recovery over the last year. Chinese foreign exchange reserves rose from US$3.18trn to US$3.22trn, a record level for the highest foreign exchange reserves in the world. Japan: consumer confidence index slipped further from 33.7 to 31.8. The leading index was better at 96.6 vs. 94.3 and the coincident index off at 89.1 vs. 89.4. |
Oil/Commodities/Emerging Markets |
OPEC+ reached an agreement to curb supply next month, with Saudi Arabia carrying a greater burden of oil output cuts while others hold steady or make a small increase. The global market will get less supply in February than expected. The deal sent crude prices surging to a 10-month high and Brent finished the week at US$56/bbl. On Friday, gold fell sharply to near US$1,850/oz, correlating with government bonds against the risk-on backdrop. The yellow metal had spent most of the week above US$1,900. |
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