Markets last week

The US passed half a million COVID-19 deaths. This sad landmark may well help pass the huge fiscal package in Congress. New COVID-19 cases for the week ended 14 Feb were the lowest since October, at 2.7 million globally, according to data from Johns Hopkins University. The increase in total infections from the previous week was the lowest since the start of the pandemic. The death toll is falling, with less than 10,000 over the past five days, down from a peak of more than 18,000 in mid-January. More than 200 million jabs have been administered across the world, including more than 17 million in the UK alone. An Israeli analysis shows that a single dose of the Pfizer vaccine reduced infections by 85% in the 15 to 28 days after the jab. These developments keep encouraging investors to believe the worst is behind us and fiscal and monetary policy will help bridge the gap until the removal of COVID-19-related restrictions.

The Biden administration asked the Taiwanese government for help in solving a global semiconductor shortage that is idling US car manufacturing plants. IHS Markit estimated this week that nearly one million fewer light vehicles will be produced in the first quarter of 2021 because of the semiconductor shortage. Separately, China announced that it may ban rare earth exports on security concerns. Rare earths are crucial for the technology sector, used in mobile phones, EV batteries, clean energy, defence and many other sectors.

During the week, we saw a small correction in equities, but government bond yields surged (10-year gilts up 18 bps and 10-year treasuries up 13 bps), copper hit a 10-year high, gold and the US dollar weakened, so the basic risk-on backdrop did not go away.

Sterling once again was a strong currency, topping the psychological US$1.40 level on Friday. Interestingly, German 30-year bonds finally gave a positive yield after years of negative yields.

Oil prices are supported in part due to the frost in Texas, but the high level of inventories made the temporary output shortfall easier to handle. The energy sector’s strong showing helped the FTSE 100, but not the FTSE 250 or small-caps. In sterling terms, most international equities had a negative week.

The week ahead

Tuesday: UK claimant count rate and jobless claims change for January

Our thoughts: UK employment has been supported artificially by the furlough scheme. As this scheme at some point comes to an end, the natural rebound in jobs has to be organic and it will be important to see how the claims stack up after the latest lockdown. The claimant count rate has been stuck at 7%+ level since the pandemic and has not shown any signs of easing, at 7.4% for December. As to the jobless claims change, after the initial surge, they have come back down to a very low level. This means that there are no new jobs or new redundancies and hence the jobs market is not active. Any change in this data would indicate activity in the employment market.

Thursday: US personal income and personal spending for January

Our thoughts: US consumers have been massively supported by the relief cheques, pandemic unemployment insurance and other schemes. They have therefore accumulated a huge stash of cash over the last 12 months. When will they spend it? The difference between personal income and personal spending has been enormous over the past months, with January personal income up 0.6% and January personal spending down 0.6%. The expectation for January is for an even greater discrepancy. This situation could delay the effectiveness of the government’s fiscal relief package. The hope is that spending catches up with income and overtakes it to bring savings down.

Friday: US PCE deflator and core deflator for January

Our thoughts: inflation scares are the flavour of the month (and year). Given the large fiscal support package, it is natural to expect a rise in consumer inflation. Additionally, base effects are likely to create spikes in prices this year, as prices are compared with a low base last year in March, April and May. Mathematically, there should be an increase. It will therefore be crucial to understand what inflationary pressures there may be prior to these three months, so that we can determine whether the spikes are temporary or a harbinger of more permanent price pressures. The Fed’s inflation target of 2% applies to the core PCE (Personal Consumption Expenditures) which was 1.5% last month and is expected at 1.4% this month. Deviations from these levels may signal trouble ahead.

The numbers for the week

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

Fed minutes confirm inflation policy

The minutes of the last Federal Open Market Committee meeting focused on the stability of the financial system and measures of risk in markets. They assessed asset valuations as elevated and vulnerabilities in household and business borrowing as noteworthy, due to increased leverage and decreased incomes and revenues particularly among small businesses.

Boston Fed Chairman Eric Rosengren said that inflation is not expected to achieve the Fed’s 2% target until at least the end of 2022, confirming the willingness of the US Fed to maintain accommodative financial conditions until the jobs market improves and average inflation hits its target. Former San Francisco Fed Chair John Williams said he did not expect the economy to overheat due to fiscal aid and high market prices were justified by economic growth and low rates.

US Treasury Secretary Janet Yellen had a call with European Central Bank (ECB) President Christine Lagarde where Yellen praised the ECB’s ’swift and decisive‘ response to the pandemic. They emphasised shared priorities on the pandemic, a strong global economic recovery, financial stability and climate change.

United States

Surprise bounce in retail sales and increase in inflation components

Surveys: the Empire Manufacturing survey (NY state) surged from 3.5 to 12.1, above estimates. The Philadelphia Fed business outlook index fell moderately from 26.5 to 23.1, above estimates.

Sales and production: retail sales rose 5.3% in January, the most in seven months, beating all forecasts, driven by furniture, electronics and online retail. Industrial production rose 0.9%, more than expected. Capacity utilisation increased from 74.9% to 75.6%.

Inflation: the producer price index (PPI) rose 1.3% vs. 0.4% expected and even the core PPI ex food, energy and trade services rose 1.2%. Inflation is definitely starting to show in the US: the export price index rose 2.5% in January and the import price index 1.4%, both above estimates.

Housing: the NAHB housing market index was slightly better at 84 vs. 83. Housing starts and building permits went separate ways: housing starts collapsed 6% in January, much lower than estimates, but building permits soared 10.4% against expectations of a drop.

Employment: jobless claims once again disappointed, rising from 848K to 861K, a four-week high, against estimates of a large fall and continuing claims fell less than expected by 64K to 4494K vs. estimates of a large drop.

United Kingdom

Surprise bounce in services PMI augurs well for recovery

Surveys: the GfK consumer confidence index recovered from -28 to -23, still way below the pre-pandemic levels. The PMIs were much better than expected, with the manufacturing PMI rising from 54.1 to 54.9 but mostly, the services PMI bouncing back from 39.5 to 49.7.

Inflation: inflation rose slightly, from 0.6% to 0.7% for the headline CPI, remaining at 1.4% for the core CPI and up from 1.2% to 1.4% for the RPI and from 1.4% to 1.6% for the RPI ex mortgage interest payments.

Housing: the house price index in the UK rose 8.5% for 2020, better than estimates. Most of the strong uplift was in the North whilst London lagged.  

Sales: retail sales disappointed in January, down 8.2% including auto fuel and down 8.8% excluding auto fuel.

Public finances: the Public Sector Net Borrowing Requirement improved from £26.8bn to £8.8bn, beating expectations.

Europe

Weak services in the eurozone

Auto sector: European auto sales in the largest five countries, including the UK, Germany, France, Italy and Spain, dropped 28% in January from one year ago. EU 27 new car registrations plunged 24% in January.

Industry: industrial production in the eurozone fell 1.6% in December after a 2.6% rise the previous month. Construction output in the eurozone fell 3.7% in December after a positive 2.3% the previous month.

Surveys: the German ZEW survey was mixed: the current situation weakened a little at -67.2 but expectations jumped from 61.8 to 71.2. The eurozone Manufacturing PMI rose from 54.8 to 57.7, with Germany from 57.1 to 60.6 and France from 51.6 to 55. The services PMI weakened from 45.4 to 44.7 for the eurozone from 46.7 to 45.9 for Germany and from 47.3 to 43.6 for France, highlighting the huge ongoing difference between manufacturing and services.

China/India/Japan/Asia

Japanese machine orders strong

China: the country was closed for the New Year’s holiday for the first three days of last week and no statistics were issued.

Japan: the tertiary industry index (i.e. services) fell 0.4% in December after a 0.6% fall the previous month. Core machine orders rose 5.2% in December against estimates of a big drop.

Oil/Commodities/Emerging Markets

Oil reacting to cold spell in the US

Cold weather in Texas placed as many as five million people in near-blackouts, creating an output shortfall that could trim up to 4% of global activity. It is pushing oil prices to a 13-month high, but copper also hit a 10-year high. Oil is up 23% YTD and copper up 10%.