Markets last week

President Trump was impeached by the House of Representatives for the second time, the first President ever to enjoy this dubious honour. In the Senate, 67 votes are needed, which is highly unlikely to succeed. Markets shrugged it off, as President-Elect Biden’s inauguration is approaching (scheduled for this Wednesday) and Trump’s ability to throw spanners in the works ahead of the new President is dwindling by the day.

The world passed a sad landmark, with two million dead from COVID-19. The US is unfortunately on target to have 400,000 deaths by the time of Biden’s inauguration this week. The impact of the virus has been mostly felt on retail sales, which have slumped in both the UK and the US during December. Other statistics show continued strength in manufacturing globally. Fiscal spending is being used to tide the economy over until the vaccine confers herd immunity upon the population. President-Elect Biden proposed another US$1.9trn of stimulus support with a focus on getting direct payments totalling US$2,000 for most Americans.

Government bond yields reached a peak last week with 10-year gilts at 32 bps and 10-year US treasuries at 1.15%. Bond yields eased back during the rest of the week. The US 2-10 yield curve (difference between the 10-year yield and the 2-year yield) rose (‘steepened’) to about 1%. This steepening of the yield curve is having an impact on sector performance. Year-to-date the best sectors are energy, financials and materials, benefitting from higher long rates and the risk-on backdrop. The worst performers are interest-rate sensitive sectors (real estate, utilities, consumer staples) and technology which pays low dividends. It’s too early to draw a pattern, but the value rotation is still going on, helped by the Georgia run-off elections and the expectation of additional stimulus from the US Congress after Biden gets inaugurated.

The week was negative for risk markets, with equities falling, copper and oil correcting, the euro taking profits and the sharp rise in government bond yields stalling. During the week, equities fell by 2%, government bond yields were flat to down, the US dollar was somewhat stronger within its downward trend, sterling edged up versus the euro but not the US dollar, Brent oil, copper and gold all fell by 1% to 2%. For the year to date, due to the energy, materials and financials exposure, the FTSE 100 is still one of the strongest indices, behind emerging markets, China and US small caps, but ahead of the FTSE 250, European, Japanese and US large caps equities.

The week ahead

Thursday: US Philadelphia Fed Business Outlook Survey (diffusion index general conditions)

Our thoughts: the “Philly Fed”, as it’s known, is a bellwether survey for one of the main Fed regions and should reflect recent economic and political conditions. The index dropped to 9.10 last month from the 20s and is expected to rebound to 12.0 this month. It often foreshadows changes in the economic picture and is therefore closely followed. The election, the Georgia run-offs and last week’s riots on Capitol Hill could get to impact the mood of the survey, in addition to the enormous fiscal spending package passed in December and a further one expected to be passed by the incoming Biden administration.

Friday: UK retail sales for December

Our thoughts: the BRC like-for-like sales for December last week was a shocker for the British economy, the worst ever December drop and it is therefore vital to confirm or contradict the negative backdrop. The consumer dominates the UK economy and, in the current lockdown environment where no leisure activities are available, retail sales are the cleanest expression of consumer confidence. After -3.8% in November, a positive reading is expected, of around 1.5%, which is in the general range of August to October. December could have upside, though, given Christmas spending.

Friday: Manufacturing and Services PMI globally

Our thoughts: PMIs are the best reading of economic trends on a live basis, summarising new orders, employment, inventories, backlog, imports, exports and a wealth of other data taken directly from purchasing managers at many businesses in a large number of economic sub-sectors. On Friday we should get manufacturing and services PMIs for the UK, the eurozone and its members, Japan and the US (Markit rather than ISM data). Manufacturing PMIs have shown strength and consistency worldwide, but services PMIs have floundered on lockdowns and virus spikes, with the exception of the US and China. The January readings could move market sentiment, notably if they reflect changes in mood after the US election and Brexit.

The numbers for the week

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

More fiscal relief ahead and the Fed remains patient

President-Elect Biden unveiled an additional US$1.9trn relief package, in addition to the US$900bn stimulus passed in December, calling for direct payments of US$1,400 to most Americans, bringing the total to US$2,000 after the US$600 in direct payments in December’s deal are included. Many provisions in the December deal will expire in March and need to be carried forward. Other provisions, like increases in a variety of tax rates and the hike in the minimum wage to US$15 per hour may not be approved by the incoming Congress but there is an expectation that a reduced but still large fiscal relief package will be voted.

US Federal Reserve (Fed) Chair Jerome Powell sought to stamp out talk of a premature reduction in the Fed’s massive quantitative easing (bond-buying) programme, saying ‘now is not the time’. He said the Fed are very careful about not causing another unnecessary taper tantrum in the markets by miscommunicating their intentions. 

United States

Another million jobs lost puts pressure on policymakers

Housing: the MBA mortgage applications, though, soared 16.7% for the week of 8 January, vs. 1.7% the previous week.

Surveys: the NFIB small business optimism welcomed President-Elect Biden with a drop in its index, from 101.4 to 95.9. The Empire State manufacturing survey fell from 4.9 to 3.5, below estimates. The bellwether University of Michigan consumer sentiment index was also somewhat softer, down from 80.7 to 79.2, with both the current conditions and expectations falling equally.

Employment: the JOLTS job openings series was little changed at 6527K vs 6632K. On the other hand, jobless claims spiked sharply last week. Initial claims rose from 784K to 965K and continuing claims from 5072K to 5271K.

Inflation: the CPI (consumer price index) rose from 1.2% to 1.4% but the core CPI ex food and energy remained at 1.6%. Energy went up 4% in December but fell 7% over the last twelve months whereas food rose 3.9% over that period. Real average hourly earnings rose from 3.2% to 3.7% in December and from 4.7% to 4.9% for weekly earnings. Earnings are going up not because people are getting paid more but because low-paying jobs are being lost.

The import price index surged by 0.9% in December vs. 0.2% the previous month. Ex petroleum it was only up 0.4%. The export price index rose 1.1% vs. 0.7% previously.

Surprisingly, the University of Michigan expected 1-year inflation rate soared from 2.5% to 3.0%.

Retail Sales: fell 0.7% in December, below expectations, with the retail sales control group slumping 1.9%, following up on a negative November too.

Production: industrial production rose 1.6% in December, up from 0.5% the previous month, with manufacturing production up 0.9%. Capacity utilisation rose from 73.4% to 74.5%.

United Kingdom

Worst BRC sales on record

Retail sales: the BRC (British Retail Consortium) sales like-for-like fell sharply in December, the worst on record, with a year-on-year of 4.8% vs. 7.7% in November. Food sales were up 5.4% but non-food fell 5%.

Housing: the RICS house price balance eased from 66% to 65%.

GDP Growth: UK November GDP was down 2.6%, driven by services down 3.4%, with manufacturing up 0.7% and construction up 1.9%. Not good, but better than estimates!

Europe

Manufacturing still doing well

Surveys: the eurozone Sentix Investor Confidence index rose from -2.7 to +1.3, below estimates.

Industry: eurozone industrial production was up 2.5% in November and the Bank of France industrial sentiment indicator edged up from 96 to 97, all in line with a stronger manufacturing backdrop.

2020 Numbers: the final 2020 growth and deficit numbers were announced for Germany. Its GDP fell by 5% during the year and the budget deficit was 4.8% of GDP vs. a surplus of 1.5% in 2019.

China/India/Japan/Asia

Chinese exports unaffected by US trade war

China: the Chinese trade balance expanded again, with exports rising 18.1% year-on-year and imports 6.5% only. M2 money supply was up 10.1% in December for the year, vs. 10.7% the previous month.

Japan: the eco watchers current survey collapsed from 45.6 to 35.5 on the latest COVID-19 outbreak. The outlook, though, was better, at 37.1 vs. 36.5, way ahead of expectations.

Japanese machine tool orders are still on a tear, up 8.7% year-on-year in December vs, 8.6% the previous month.

Oil/Commodities/Emerging Markets

A little pause in the steady grind up in crude oil. Year-to-date the US price gauge, WTI, is nearing a 10% rise. Nevertheless, oil and copper are on an upward trend.