The Daily Update: The Week Ahead

Events in the US continued to dominate the news-flow last week. On Wednesday, the House of Representatives voted to impeach Donald Trump on the charge of ‘incitement of insurrection’ after VP Mike Pence declined to invoke the 25th amendment to remove Trump from office. However, Nancy Pelosi did not send the article of impeachment to the Senate to trigger the trial and the Senate is not due to reconvene until January 19th. Hence, attention turned to Joe Biden's proposed fiscal spending package, the American Rescue Plan, which amounts to USD1.9tn. That said, USTs have already been factoring in greater fiscal stimulus on the back of the Democratic taking control of the Senate. Comments by senior Fed officials Lael Brainard, Richard Clarida and Jerome Powell downplaying recent ‘taper talk’ comments from Fed speakers that had unsettled the market was a focus. Jerome Powell spoke on Thursday indicating that talk of tapering bond purchases is premature: “Now is not the time to be talking about exit. I think that is another lesson of the global financial crisis, is be careful not to exit too early.” Plus, he stated “We’ll communicate very clearly to the public and we’ll do so, by the way, well in advance of active consideration of beginning a gradual taper of asset purchases.” He also noted it was a long time before rates would rise stating “When the time comes to raise interest rates, you know, we’ll certainly do that. And that time, by the way, is no time soon”.

US economic data releases erred on the weak side: Notably, Friday’s retail sales data for December disappointed falling 0.7% mom, the third straight month of decline. Plus, November retail sales was revised down to -1.4% mom. Weekly jobless claims also rose by 181,000 to 965,000 making it the largest weekly increase since March 2020 and putting jobless claims at the highest level since August 2020. The US December CPI data pointed to a still benign inflation backdrop. USTs, having been under pressure since the start of the year, and despite heavy issuance last week, recovered into Friday’s close helped by the weak retail sales data: the yield on the UST 10-year tightened 4bps to end the week at 1.08% and the 2s30s spread tightened 4bps to 170bps. Against this backdrop the S&P 500 fell 1.48%.

Elsewhere, UK GDP shrank 2.6% mom in November which was better than expected given the second lockdown. It would take a monthly drop of 1% or more in December to for Q4 growth to contract and the UK came out of lockdown but Q1’21 will be hit by the stricter third lockdown but the UK vaccine rollout does appear to be proceeding according to plan. In Europe, lockdown restrictions are being tightened/extended (e.g. France, Italy, Netherlands) weighing on the economic outlook and the vaccination rollout is slow. China’s December exports increased 18.1% yoy in US dollar terms and imports increased 6.5% yoy taking the trade surplus to a new record of USD78.17bn.

The week ahead is likely to start on a quieter note with the US market closed for the Martin Luther King Jr. Holiday and the Fed also enters a blackout period ahead of its meeting on 26-27th January. President Elect Joe Biden’s inauguration on 20th January will be a focus as investors look for more detail on the new administration’s policies, whether he can deliver on the aim of 100m vaccinations in his first 100 days and whether the USD1.9tn stimulus package can get approved by the Senate. Janet Yellen’s confirmation hearing as US Treasury Secretary before the Senate Finance Committee is due on January 19th and Trump’s impeachment proceedings in the Senate are yet to be triggered. Central bank meetings will be a focus with the BoJ and ECB due to meet on Thursday and BoC on Wednesday. The PBoC loan prime rate decision is also due on Wednesday. The BoJ is expected to make no change to its main monetary easing measures ahead of the framework review in March but may downgrade the outlook given the extension of the state of emergency to additional prefectures. While the covid situation and continued lockdowns are negative for Europe’s economic outlook the ECB announced further measures in December so is expected to stand pat this month. In the UK, BoE Governor Andrew Bailey is due to speak on Monday.

Key US data releases over the week include December building permits and housing starts along with the Philadelphia Fed Business Outlook reading for January on Thursday and the US Market PMI January readings for manufacturing and services due on Friday. The US earning season also continues. Elsewhere, China’s Q4 GDP, released earlier today, grew 6.5% yoy exceeding expectations of 6.2% yoy. December industrial production grew 7.3% yoy also exceeding expectations of 6.9% yoy, but retail sales came in at 4.6% yoy below expectations as was fixed asset investment at 2.9% yoy. In Europe, Germany’s ZEW survey for January is due for release on Tuesday, the final reading of the December Euro area inflation due on Wednesday and Eurozone and UK flash PMIs for January are also due for release on Friday. Developments in the Italian political situation will also be a focus following Matteo Renzi withdrawing his Italia Viva party from the government and taking away Giuseppe Conte’s majority in the Senate. The EU leaders are also due to hold a virtual summit on Thursday with the covid response expected to be on the agenda.