The numbers for the week – 25th January 2021
Markets last week
President Biden’s inauguration last week went without a hitch amid the tightest security ever. His priorities have been set out as (1) fighting COVID-19 and supporting the US economy during this period, (2) getting as many as possible of his 1,200 nominees for Cabinet positions to be appointed by the Senate and (3) infrastructure, climate and clean energy investment. Among the first Executive Orders signed last week were a mandate for Americans to wear a facemask for 100 days, an increase in the minimum wage to US$15/hour, an extension of the moratorium on evictions and foreclosures, streamlining the delivery of stimulus cheques and providing Federal food assistance, plus orders for the US to rejoin the WHO and the Paris Climate Accords and the cancellation of the Keystone XL pipeline.
The relationship between Democrats and Republicans in Congress is off to a rocky start, though, as Mitch McConnell, formerly Senate majority leader and now minority leader, refused to agree to a power-sharing agreement with the new majority leader Chuck Schumer for the split Senate. This could delay legislative action on pandemic relief.
Markets have subtly moved from optimism on additional fiscal stimulus, to scepticism until President Biden shows he can deliver legislation with Congress. The year-to-date leader in stock market returns, Hong Kong, fell sharply on Friday on the news that the city would go into shutdown. In the UK and Europe, travel stocks were hit by the Prime Minister’s comment that lockdowns could extend into the summer. Risk markets were mixed last week, with equities lacking direction, gold rallying, the US dollar resuming its downward direction and government bond yields rising again.
The European and UK economies have been hit by the latest restrictions, as reflected in the services PMIs. The US surveys, on the other hand were equally strong for manufacturing and services.
The week ahead
Tuesday: UK claimant count rate and jobless claims change for December
UK unemployment has soared in 2020 but the official ILO unemployment rate does not fully reflect that. Instead the claimant count rate is more representative. The last reading was 7.4% with a large increase in claims in December (64K). From May to December, virtually no change in the claimant count rate was observed after 1 million new claimants appeared in April. It will be worth watching the number in light of the latest lockdown.
Tuesday: US Conference Board consumer confidence
The Conference Board consumer confidence series has a good correlation with consumer and political attitudes. The big drop seen last year was a major hurdle for President Trump to overcome in the November election. The index slumped from the 130 level to 85.70 in April. After a couple of months above 100, it fell back down to the high 80’s, which is what is again expected this month. For reference the 100 level is the threshold between a positive and negative consumer confidence. During the last cycle, it took close to 6 years before the index surpassed 100, starting from a 30 level. This cycle is starting at a much better level, but the question is how soon can it improve? The index breaks down into present situation and expectations and the two different components will give a good reading on how consumers feel about the new President.
Wednesday: Federal Open Market Committee meeting (Fed)
No changes are expected in either Fed funds rates or quantitative easing (QE) asset purchases. What will be meaningful will be the commentary from Fed Chair Jay Powell on the Fed’s willingness to overlook spikes in inflation, on full employment goals, on relative jobless levels for different groups of people within the US, on the output gap in the economy, on expectations for growth and price rises and on the relationship between monetary policy and fiscal policy. With former Fed Chair Janet Yellen now as Treasury Secretary, the coordination between Treasury and Fed will be crucial. Jay Powell’s language should reflect that.
The numbers for the week
|Equity indices (price only)|
|In local currency||In sterling|
|Index||Last week||YTD||Last week||YTD|
|Hong Kong equities||3.10%||8.10%||2.50%||7.90%|
|Emerging market equities||2.60%||7.90%||2.00%||7.60%|
|Government bond yields (yield change in basis points)|
|Current level||Last week||YTD|
|10-year US Treasury||1.09%||0||17|
|10-year German Bund||-0.51%||3||6|
|Current level||Last week||YTD|
|Commodities (in USD)|
|Current level||Last week||YTD|
|Brent oil (bbl)||55.41||0.60%||7.00%|
|WTI oil (bbl)||52.27||-0.20%||7.70%|
|Copper (metric tonne)||7997.5||0.60%||3.00%|
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
Incoming Secretary Yellen outlining Biden’s fiscal priorities
The day before President Biden’s inauguration, Janet Yellen spoke before the Senate Finance Committee at her confirmation hearing to the post of Treasury secretary. She said, “Neither the President-elect, nor I, propose this relief package without an appreciation for the country’s debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big.” She also said that the US won’t seek a weak dollar.
The Bank of Japan (BoJ) left its policy rate unchanged at -0.10% and its 10-year bond yield target at 0%, but slightly raised its CPI (consumer price index) forecast from -0.6% to -0.5% with next year’s CPI also higher from +0.4% to +0.5%.
The President of the European Central Bank (ECB) Christine Lagarde acknowledged that the eurozone is headed for a double-dip recession, but the ECB did not change the current level of monetary stimulus. “Risks surrounding the euro area growth outlook remain tilted to the downside, but less pronounced.” The positives include progress on vaccinations, the approval of the European Union’s recovery fund, a pick-up in manufacturing and the removal of political uncertainty in the US. She also repeated that the emergency bond-buying programme ’need not be used in full‘. Lagarde said that the euro’s strength is being monitored ’very carefully‘ because it dampens the eurozone’s already substandard inflation through lower import costs.
Soaring surveys and housing belie the employment picture
Housing: the NAHB housing market index corrected from 86 to 83, still close to the all-time high. Housing starts rose 5.8% and building permits 4.5%, both hitting new highs. Existing home sales rose from 6.71 million to 6.76 million, a 0.7% increase.
Surveys: the Philadelphia Fed Business Outlook index soared from 9.1 to 26.5, including a significant rise in unfilled orders, which bodes well for subsequent months. The Markit manufacturing PMI surged from 57.1 to 59.1 and the Markit services PMI likewise from 54.8 to 57.5.
Employment: jobless claims were still high despite some moderation during the week. Initial claims fell from 926K to 900K and continuing claims from 5185K to 5054K.
Services hit by the lockdown
Housing: the Rightmove January house prices fell 0.9% to clip the year-on-year return to 3.3%. Part of the problem, other than the lockdown, was sellers cutting asking prices to make sure deals can go through quickly and still benefit from the remaining stamp duty holiday. The UK house price index (average price for all dwellings) for November was up 7.6% year-on-year.
Inflation: the CPI (consumer price index) picked up from 0.3% to 0.6% in December with the core CPI moving from 1.1% to 1.4%. CPIH, including owner occupier’s housing costs, also rose from 0.6% to 0.8%. Likewise, the RPI (retail price index) rose from 0.9% to 1.2%. Upward pressure on inflation last month came from transport, clothing, recreation and tobacco and alcohol. That was offset by food and non-alcoholic beverages. The expiration of the VAT cut in the spring may add to inflationary pressures but this, like other factors, could be a one-off.
Surveys: the CBI orders series was negative, with total orders down from -25 to -38, selling prices up from 0 to 4 and business optimism plunging from 0 to -22.
Once again, a huge wedge has been driven between manufacturing and services. The Markit manufacturing PMI fell from 57.5 to 52.9, remaining in expansion territory, but the Markit/CIPS services PMI collapsed from 49.4 to 38.8.
Public finances: Public Sector Borrowing Requirement has soared in December from £25.4bn to £33.4bn.
Same services weakness in Europe
Surveys: ZEW survey expectations soared both for Germany and the eurozone. The current situation in Germany remained depressed at -66.4 but expectations rose sharply from 55.0 to 61.8. For the eurozone, the expectations number also went up from 54.4 to 58.3.
The Markit eurozone manufacturing PMI went from 55.2 to 54.7 and the services PMI from 46.4 to 47.5. France suffered a bigger fall in services from 49.1 to 46.5 while manufacturing edged up from 51.1 to 51.5. German manufacturing PMI fell from 58.3 to 57.0 and services PMI were almost unchanged at 46.8 vs. 47.0.
Confidence indicators: French business confidence edged up from 91 to 92, manufacturing confidence from 94 to 98, own-company production outlook from 5 to 7, but the production outlook indicator fell from -5 to -9 and the business survey overall demand from 7 to 2.
China still beating the rest of the world
China: Q4 GDP growth rose to 6.5% annualised (2.3% for the full year), beating expectations. The December data dump was quite positive but lagging estimates, with the exception of industrial production. Industrial production rose 7.5% year-on-year, property investment 7.0%, retail sales a little less good at 4.6% and fixed assets ex rural (which is non-property investment) up 2.9%.
Japan: the final number for machine tool orders for December was further improved from 8.7% year-on-year to 9.9%.
Gold and copper prices continued their ascent, as the US dollar weakened again, but Brent oil stalled.