The Daily Update: The Week Ahead

Last week, equities traded on a firmer footing as market participants looked to economic recovery spurred by expectations of further economic stimulus in the US, vaccine rollout and signs of declining infection rates in the US and UK. President Biden held talks with Republican senators on a stimulus package but on Friday the Senate and House of Representatives passed the Budget Resolution for 2021, paving the way for Biden to pass the USD1.9tn plan with a simple majority in the Senate. The reflation trade took hold again against this backdrop. By midweek, the VIX index of volatility returned to the bottom of its recent trading range in the low 20s as markets recovered from last week’s ructions from the Reddit/GameStop saga, although shareholders in GameStop and other Reddit favourites such as AMC were left nursing losses on the week as the share prices collapsed. The S&P 500 and Nasdaq indices made new highs and closed the week up 4.65% and 6.01% respectively. The UST curve steepened: the 2s30s spread widened 14bps to 186bps at Friday’s close. The yield on the UST 10-year increased 10bps to 1.17% at the end of the week.

US data releases were mixed: the US ISM manufacturing reading for January came in below expectations at 58.7, down from December’s 60.5 reading, although still in expansionary territory. Later in the week the US ISM services gauge for January came in at 58.7, ahead of expectations of 56.7, and up on the upwardly revised previous month’s reading of 57.7. The employment data was mixed weekly jobless claims came in better than expected at 779,000 although Friday’s non-farm payroll data for January was weaker than expected: 49,000 jobs were added but the survey ahead of the release was looking for 105,000 jobs to be created. December payrolls were also revised to a larger 227,000 jobs lost. The unemployment fell to 6.3% from 6.7% but the participation rate also edged lower to 61.4%.

Elsewhere, the BoE left rates unchanged and made no change to its asset purchase programme and it dampened any prospects of cutting interest rates below zero for the next few months at least. Following a consultation with the UK’s major banks, the MPC concluded they would need at least six months to prepare for negative interest rates. Moving sooner than six months would lead to ‘increased operational risks’. The BoE also expects the economy to recover strongly on the back of the vaccine roll-out but it lowered 2021 GDP estimates to 5% and raised 2022 estimates to 7.25%: the 10 year gilt yield backed up 15bps to 0.48%. European data releases were more encouraging: Q4 GDP for the Euro area fell 0.7% yoy which was ahead of expectations and Euro area CPI for January moved into positive territory gaining 0.9% yoy. In Italy Mario Draghi accepted a mandate from the President Sergio Mattarella to be Prime Minister and to form a new unity government which was taken positively by the bond market with BTPs broadly rallying. It is expected to become clearer in the week ahead whether he has been able to form a new coalition government.

In the week ahead Donald Trump’s impeachment trial gets underway in the US Senate although the Biden’s administration’s policy announcements are expected to be more of a focus for financial markets. In terms of central bank speakers, Wednesday is a focus with Jerome Powell is due to speak at the Economic Club of New York and Fabio Panetta, ECB Executive Board member, speaks on the potential effects of a digital euro at a virtual Bruegel think tank event. Other Fed speakers include Loretta Mester during the week. On Tuesday ECB chief economist Philip Lane is also due to appear on a panel discussion. Interest rate decisions are also due from the Mexican and Russian central banks on Thursday and Friday respectively: no change to policy is expected from Russia but it is less clear in the case of Mexico as the recent appointment of Galia Borja to the board could shift the balance in favour of a cut.

Data-wise the US inflation data will be a key focus on Wednesday with the Bloomberg survey looking for an increase of 1.5% yoy in January CPI. The University of Michigan Sentiment gauge for February is also due at the end of the week. Industrial production data from Germany, Spain, France and Italy is due followed Euro area industrial production data at the end of the week. UK 4Q GDP is due on Friday with the Bloomberg survey looking for growth of 0.5% qoq and industrial production data for December. Market participants will also be focused on Italy and Mario Draghi’s progress on forming a new government. In Asia, a number of markets are closed in the latter part of the week for the Chinese Lunar Holidays. In China, the loan/money supply data and January CPI data will be released earlier in the week.