US Congress reaches deal on fiscal stimulus

Chris Scicluna

Today’s Key News

  • Markets open with ‘risk off’ tone even as US Congress agrees roughly $900m fiscal stimulus deal, as coronavirus worries and ongoing Brexit uncertainty weigh, sterling hit directly by double whammy.
  • Japan’s initial FY21 budget confirmed at record ¥106.6trn, vs expected tax revenues of ¥57.4trn.
  • PBoC leaves China’s prime lending rates left unchanged, as expected.
  • Euro area consumer confidence, UK retail, and Chicago Fed survey indicators due later today.

The Fortnight Ahead

  • Japan: BoJ’s Kuroda to speak on Thursday, while retail, labour market, construction and Tokyo CPI figures ahead on Friday; IP report due the following week.
  • China: Industrial profits data released this coming weekend, official PMIs for December released New Year’s Eve.
  • For the UK it’s all about Brexit – there’s just about still time for a deal that could be applied provisionally from 1 January.
  • US: A busy period ahead, with key activity, sentiment and inflation data all due ahead of Xmas and further lower tier data due ahead of the New Year.
  • Euro area: a quiet period ahead for data, with some national surveys, retail sales and inflation data due.
  • Australia/NZ: Preliminary Aussie retail sales and trade data due this week, together with credit data. Home price data released in the New Year. No significant Kiwi data scheduled over the next fortnight.

As Brexit and coronavirus concerns weigh, markets re-open with slight ‘risk off’ tone even as US Congress reaches deal on fiscal stimulus

On Sunday (US time), Congressional leaders announced that they had finally agreed a roughly $900bn short-term pandemic relief deal, partially funded by the $429bn of funds retrieved from the closing of the Fed’s emergency lending programmes. However, the required legislation is still to be written and so the House and Senate will not be able to vote on the deal until later today. Therefore, with the vote on the pandemic relief bill tied to a vote on $1.4trn of regular spending to tide the government through this fiscal year, Congress has passed a further one-day temporary funding extension to prevent a partial shutdown of federal agencies. As expected, the pandemic relief deal extends federal unemployment insurance (and similar assistance programmes for those not usually eligible for federal aid) for a further 11 weeks, and also provides the unemployed with a supplemental $300 per week until mid-March. Stimulus checks of $600 per adult and child will be paid to eligible families. Amongst other things, the deal also provides funds to help small businesses, for vaccine distribution, for schools and universities and for food aid. Negotiations regarding further stimulus – including contentious spending where agreement could not be reached in the current bill – will resume in the New Year.

Despite the fiscal deal, however, US equity futures re-opened lower today and USTs and most other major government bonds have made substantive gains (10Y USTs are back close to 0.90% from 0.95% at Friday’s close), with investors seemingly more concerned with the growing economic disruption caused by the pandemic and the weekend’s continued lack of progress in Brexit trade talks. On that score, sterling has weakened sharply following the UK government’s weekend announcement of tightened pandemic-related restrictions in London and Southeast England, with the UK’s key European trading partners (France, Germany, Ireland, Belgium and the Netherlands) among numerous countries restricting entry by UK nationals in response to what experts believe is a more contagious mutation of the Covid-19 virus.

Indeed, with the UK both politically and economically isolated, sterling is now down almost 2% this morning to below $1.328 (having been above $1.36 on Thursday), while UK and European stocks have opened significantly lower (the Stoxx600 opened down more than 2%) and 10Y Gilt yields are down almost 7bps to below 0.18% with 10Y Bund yields about 4bps lower at -0.62%. While EU government representatives will meet this morning to discuss a further response to the coronavirus news, and Brexit talks will continue today, the disruption to supply chains from the travel ban will provide merely flavor of what might ensue if the UK fails to agree a deal with the EU and facilitate its provisional application from 1 January. We do, however, maintain our baseline expectation that the UK will relax its position on fish to allow an eleventh hour deal to be reached.

In the Asia-Pacific, after initially firming on the open, Japan’s TOPIX quickly turned tail, before eventually closing down 0.2% even as the government confirmed that the initial budget for FY21 would be the largest on record (more on this below). A sharp rise in coronavirus cases and the prospect of new restrictions saw Thailand’s market plunge 3%. Bucking the trend, China’s CSI300 increased 0.6% as the PBoC again held the key benchmark 1-year and 5-year prime lending rates at 3.85% and 4.65% respectively. In the Antipodes, weekend news of further coronavirus cases in Sydney – the northern beaches cluster growing to 83 today – saw the Aussie dollar open weaker and then lose further ground across the day, dragging the Kiwi dollar lower too as any thoughts of a near-term Trans-Tasman travel bubble were dashed. But despite Sydney being subject to new gathering restrictions while officials try to trace the source and extent of the cluster, the weaker currency and positive US fiscal news helped to limit the ASX200’s loss to just 0.1%.

Japan’s government confirms record initial budget for FY21
In an otherwise quiet day for economic news, as newswire reports had suggested late last week, today the government announced that it had approved a record initial budget of ¥106.6trn for FY21 (up ¥3.9trn from last year’s initial budget). This budget, which includes ¥35.8trn for social security, ¥23.8trn for debt servicing, ¥16trn for transfers to local and regional governments and ¥5trn in the coronavirus response reserve fund, is far in excess of an expected tax revenue of ¥57.4trn. Accordingly, Japan will issue ¥43.6trn of new bonds to fund the initial budget, including ¥6.3trn of construction bonds. Total debt issuance, including refunding bonds, FILP bonds and reconstruction bonds, is forecast at ¥236trn (¥221.4bn issued to the market), down from an expected ¥263.1trn in FY20 (after the third supplementary budget). Of note for investors, the MoF’s funding plan provides for increased issuance of 40-year JGBs (now ¥0.6trn per auction) and decreased issuance of 6-month Treasury Bills.

Japan: Kuroda to speak this week; some important data ahead over the next fortnight too
This week’s Japanese economic diary gets off to a slow start with few indicators that are likely to move markets. Tomorrow will see the release of nationwide department store sales data for November, together with the confirmed results of the MHLW’s Monthly Labour Survey for October and the BoJ’s measures of underlying inflation for November. On Thursday, the services PPI for November will be released, while a speech by BoJ Governor Kuroda will be of interest if it casts any further light on the review of monetary policy that the Bank’s Board announced at last week’s meeting.

The key day for Japanese data this week is Friday, which will see the release of retail sales, household employment, housing starts and construction orders for November, together with the advance Tokyo CPI for December. The retail sales report is likely to be impacted negatively by pandemic-related restrictions, but surveys indicate that analysts are hoping for signs of stability in the other activity indicators. The core inflation measures from Tokyo are likely to remain in negative territory, however. The only diary entries during the following holiday-shortened week are Monday’s November IP report and release of the Summary of Opinions from last week’s BoJ Policy Board meeting. The manufacturing PMI suggests that IP may have posted a sixth consecutive advance in November – as firms had forecast last month – but it will be interesting to see how firms now view the outlook for the next two months in light of tightening pandemic-related restrictions in many countries.

China: A relatively quiet fortnight ahead, with most interest on the PMIs
The only economic report scheduled over the next week is Sunday’s industrial profit data for November. The following week is highlighted by the release of the official PMI reports for December. Bloomberg’s survey suggests that analysts expect a modest decline in the manufacturing PMI from last month’s 3-year high of 52.1 – a forecast that doesn’t seem unreasonable in light of pandemic developments in many of China’s overseas markets. The non-manufacturing PMI is also forecast to ease fractionally from the more than 8-year high of 56.4 reported last month.

Brexit the main focus in Europe, with few local data releases to offer distraction
With another Brexit deadline passed – which means the European Parliament won’t be able to approve a deal before the end of the year and so any agreement, if it’s reached, would need to be applied provisionally from 1 January – the negotiations between the EU and UK will be the main focus this week. And given the festive season, there will be precious few top-tier economic data releases to offer distraction. This week brings a smattering of further economic sentiment survey results for December, starting today with the Commission’s flash estimate of euro area consumer confidence, which last month fell to its lowest level since May. Not least given the improvement in sentiment in France following the end of lockdown, we look for a pickup in the Commission indicator. Tomorrow the German GfK consumer confidence indices are due, with the broader ISTAT Italian economic sentiment indices out on Wednesday. As in the euro area, the remainder of the year will be very quiet for economic data from the UK. Among the few releases scheduled in the coming week, the CBI’s distributive trades survey today will give a snapshot of the strength of pre-Christmas retail sales. Tomorrow will bring revised Q3 GDP data (current estimate of growth of 15.5%Q/Q but -9.6%Y/Y) and public finance figures for November.

US: A busy diary ahead stateside, especially over the coming week
This week’s US economic diary begins tomorrow with the ‘final’ GDP estimate for Q3, which should result in no material revision to the 33.1%AR rebound in activity reported previously. Also tomorrow we received the Conference Board’s consumer confidence survey for December, existing home sales data for November and the Richmond Fed’s manufacturing survey for December. Daiwa America Chief Economist Mike Moran thinks that record highs for the major equity indices might have helped to brighten consumers’ mood a little, but existing home sales are likely to have declined modestly – from robust levels – given indications from pending home sales. On Wednesday, given other positive indications from the manufacturing sector, Mike expects to see a further lift in durable goods orders reported for November. Also of note on Wednesday is the personal income and spending report for November. Although a further improvement in the labour market will have lifted wages, the scaling back of government transfer payments is likely to have weighed on personal incomes during the month. In addition, the already-reported decline in auto sales and retail spending does not bode especially well for overall consumer spending during the month. Meanwhile, results from the CPI point to another moderate lift in the PCE deflator, leaving inflation well below the Fed’s target. Continuing a very busy Wednesday is the release of new home sales data for November, the final results of the University of Michigan’s consumer survey for December and the weekly jobless claims report – the latter of particular interest in light of the recent upward trend.

The data-flow is significantly lighter between Christmas and the New Year. The S&P/CoreLogic home price index for October is released on the Tuesday, followed a day later by advance trade and inventory data for November, pending home sales for November and the Chicago PMI for December. The weekly jobless claims report completes that week’s diary on Thursday.

Australia/NZ: A quiet fortnight for data in the Antipodes
This week’s Australian economic diary is sparsely populated. Tomorrow will see the release of preliminary retail sales data for November, which should benefit from the further easing of pandemic-related restrictions that took place in Melbourne. On Wednesday, the ABS will release preliminary merchandise trade statistics for November and the RBA will release private sector credit data for November. In the following week there are no releases scheduled aside from the CoreLogic home price index for December. Meanwhile, there are no economic reports of any significance scheduled in New Zealand over the coming fortnight.

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