Equity rally continues as Biden named President-elect, reducing political uncertainty
Election-related uncertainty continues to dissipate with Democratic challenger Joe Biden declared ‘President-elect’ over the weekend after the major news networks called Pennsylvania in his favour. With Nevada being called for Biden shortly thereafter, this took him up to 279 Electoral College votes – above the magic 270 required – with the likelihood that this may be extended to 306 votes once results are eventually called in Arizona (where Biden leads by around 17,000 votes) and Georgia (where Biden leads by over 10,000 votes). However, uncertainty regarding control of the Senate will not be resolved until after the two run-off elections that will be held in Georgia on 5 January. With Kamala Harris now installed as Vice President-elect – and thus holding a casting vote in the Senate – a win for the Democrats in those two run-off elections would give them effective control of what would be a 50-50 chamber. Needless to say, these run-off elections will be the subject of huge interest in the New Year.
Sadly, as had seemed very likely, President Trump – who spent the weekend on the golf course – has refused to concede defeat. And despite some senior Republicans – including former President George W. Bush – acknowledging Biden’s win, Trump still seems determined to attempt to overturn the result in the courts. This action seems very unlikely to succeed, especially if a Biden win is confirmed in either Georgia or Arizona, which would be sufficient to give him the necessary 270 Electoral College votes irrespective of the outcome in Pennsylvania. In any case, the transition appears to be getting underway regardless of Trump’s lack of concession, with Biden set to announce a new 12-person coronavirus task force today.
In the wake of Friday’s news of a larger-than-expected gain in October in US private payrolls and a much steeper-than-expected decline in the unemployment rate to 6.9%, as well as some stronger-than-expected Chinese export data, markets have welcomed the weekend’s developments – S&P futures are presently up about 1½% and Nasdaq futures are up more than 2%. But Treasuries and euro area govvies are a touch firmer following losses on Friday (10Y yields are currently close to 0.81%), while the US dollar has weakened a touch further. Asian markets have taken their lead from the US, with most key regional bourses up at least 1%. In Japan, where the Reuters Tankan pointed to greater cheer in the factory sector (see below), the TOPIX increased 1.4%. Meanwhile, the weekend’s strong Chinese export data has seen the CSI300 increase about 2%.
Japan’s Reuters Tankan improves notably, consumer spending grows
Consistent with the significant improvement seen in recent readings of both the PMI and Economy Watchers Survey, the latest Reuters Tankan pointed to a substantial reduction in business sector pessimism in early November. The overall manufacturing diffusion index (DI) increased 13pts to -13 – the largest monthly increase since the index troughed at -46 in June and now just 13pts below the historic average. By industry, all sectors aside from food perceived improved business conditions this month, with the largest improvements in sentiment occurring in the metals, textiles and precision machinery sectors. Encouragingly, despite rising pandemic worries in Europe and the US, the forecast DI – which measures expected business conditions three months ahead – also increased to -8, indicating that respondents expect the improving trend to continue. The same survey pointed to a less emphatic 3pt rise in the DI for non-manufacturing firms to -13 with respondents expecting no further improvement in conditions over the next three months. Firms in the information services sector – which unsurprisingly have fared much better than most during the pandemic – were notably less upbeat this month, but this was offset by a deterioration in pessimism in the transport and utility sector and smaller improvements elsewhere.
In other positive news, the BoJ released its Consumption Activity Index, providing the first reliable estimate of how overall consumer spending evolved in September. In common with last week’s household spending survey, the BoJ’s measure pointed to a pickup in spending during the month. In particular, following on from a 1.3%M/M lift in August that was 0.2ppts larger than estimated previously, the real index rose a further 0.7%M/M in September. In the detail, spending on durable goods fell sharply during the month and was down more than 20%Y/Y – the latter exaggerated by base effects associated with the surge in spending ahead of last year’s consumption tax hike. Spending on non-durable goods rose 1.8%M/M but was down 3.7%Y/Y. Meanwhile, while rising 3.1%M/M in September, spending on services – hit especially hard by the pandemic – remained down a distressing 16.1%Y/Y. Given these movements, after declining 12.4%Q/Q in Q2, total real spending increased 9.0%Q/Q in Q3. Of course, a more definitive estimate will be available a week from now with the release of the preliminary GDP report for Q3.
Finally, the Cabinet Office released its preliminary business indicators for September. The coincident indicator increased 1.4pts to 80.8 – still dreadfully weak by historical standards but the highest reading since March. More optimistically, the leading index increased 4.4pts to 92.9 – the highest reading since July last year and now slightly above the long-term average of 91.6.
Economy Watchers survey and machine orders the likely focus in Japan
Looking ahead to the remainder of the week, tomorrow will bring additional anecdotal evidence on the state of the economy in the form of the Economy Watchers survey for October. In addition, the BoJ will release bank lending data for October. The only other day featuring significant reports this week is Thursday, when the market is wary of learning of a modest pull-back in core machinery orders during September, even as METI’s Tertiary Activity Industry Index is likely to point to further growth in service sector activity during the month. The BoJ will also release the goods PPI for October, which will report a sharp step up in annual deflation due to the impact of last year’s consumption tax hike rolling out of the figures.
China’s trade surplus widens more than expected as imports slow
Over the weekend China released its external trade statistics for October. Growth in exports picked up to 11.4%Y/Y in US dollar terms from 9.9%Y/Y previously (7.6%Y/Y in yuan terms given the firming of the exchange rate over the past year). Excluding the LNY-holiday impacted outcome in March 2019, this outcome was the strongest in two years and a little above market expectation. Growth in exports to the US edged up to 22.5%Y/Y, thus remaining above 20%Y/Y for a third consecutive month. Meanwhile, after slowing in September, growth in exports to the UK and Australia rebounded to 30.1%Y/Y and 16.6%Y/Y respectively. In contrast, there was a notable slowing of growth in exports to ASEAN countries (7.3%Y/Y). Given the weakness seen earlier in the year, total exports increased just 0.5%YTD/Y for the first ten months of the year – nonetheless, the first time this year that growth has been positive on a YTD basis.
Less encouraging this month – at least for China’s trading partners – was a greater-than-expected slowdown in growth of imports, suggesting that at least some of last month’s strength may have been related to the looming Golden Week holiday. Imports increased 4.7%Y/Y in US dollar terms (and just 0.9%Y/Y in yuan terms), down from growth of 13.2%Y/Y in September. Of note, China’s imports from the US rose 33.4%Y/Y – the most in more than 3½ years – yet China’s bilateral trade surplus with the US still widened slightly to $31.4bn. China’s overall trade surplus rebounded to $58.4bn – almost exactly where it had stood in August. While growth in China’s imports from Germany picked up to 24.0%Y/Y, growth in imports slowed from the ASEAN countries (2.7%Y/Y) and Japan (5.5%Y/Y), and was negative for France (-6.7%Y/Y), the UK (-12.7%Y/Y) and Canada (-18.9%Y/Y).
Inflation and credit data due in China this week, PBoC’s 1-year MLF rate likely to be held steady
As in Japan, a quiet week lies ahead in China. Tomorrow we will receive the CPI and PPI reports for October. The CPI inflation rate is expected to almost half to 0.8%Y/Y as last year’s hefty increases in food prices role out of the calculation. The improving economy and firmer oil prices might help lift the PPI in the month, slightly raising the annual inflation rate from the -2.1%Y/Y recorded last month. Later in the week the PBoC will release the money and credit aggregates for October and announce the outcome of its monthly review of the benchmark 1-year Medium-Term Lending Facility rate (no change expected from the 2.95% rate that has been set since April).
German exports continue to outpace imports
Following Friday’s so-so IP report
, Germany’s trade data for September released this morning showed that exports continue to outpace imports, providing a positive contribution to the economic recovery. In particular, the value of exports rose 2.3%M/M – admittedly the smallest rise so far since the rebound in trade began in May to leave them still 7.7% below their level in February, suggesting that almost four-fifths of the initial peak-to-trough decline has been reversed. Meanwhile, imports fell 0.1%M/M to be 5.7% below their pre-pandemic level but reverse less than three-quarters of the initial peak-to-trough decline. On an adjusted basis, the trade surplus rose a further €2.4bn to €17.8bn, the highest level since February. The equivalent trade figures for the euro area are due on Friday.
ECB Monetary Policy Forum a key euro area focus this week
With the ECB now currently reviewing all of its policy tools ahead of a ‘recalibration’ in December, arguably the most notable event in the euro area this week will be the ECB’s annual Monetary Policy Forum, which will take place on Wednesday and Thursday. Thursday afternoon’s policy panel, featuring ECB President Lagarde as well as BoE Governor Bailey and Fed Chair Powell, will be the clear highlight.
Later this morning, the Sentix investor sentiment indices are due ahead of the similar ZEW investor survey results tomorrow. Also out tomorrow are the September IP figures for France and Italy, which will be followed by aggregate euro area numbers on Thursday. Similar to the German and Spanish figures released last week, euro area IP should maintain its uptrend, with growth of about 1.0% M/M, which would leave it still almost 5% below February’s pre-lockdown level. Releases scheduled for the second half of the week include the preliminary estimate of Q3 employment in the euro area on Friday along with an updated estimate of GDP growth for the same quarter (the initial growth estimate beat expectations at 12.7%Q/Q), as well as final estimates of October inflation from Germany (Thursday), France and Spain (Friday).
UK: Brexit negotiations to continue; GDP and labour market data ahead
This week should see the negotiations between the EU and UK on a new FTA move closer to a climax ahead of the self-imposed 15 November deadline. We are not, however, hopeful of an imminent breakthrough. Interventions at the political level – perhaps accompanied by more drama – will eventually be required to reach a deal that resolves all key sticking points (including governance, the level playing field, and fish). However, with Donald trump having previously been a cheer-leader for no deal, but Joe Biden having previously sent a warning shot to UK PM Johnson not to jeopardise the successes of the Northern Irish Good Friday Agreement through his Brexit policy, the rhetoric from the UK government over the weekend had a more emollient tone than of late, suggesting that it is readying to make the concessions required to reach an agreement with the EU.
Meanwhile, this week will also bring more noteworthy data, with plenty of attention to be on Thursday’s release of the first estimate of Q3 GDP, as well as monthly output and trade figures for September. With the spring lockdown measures having been relaxed, output rebounded vigorously in Q3, albeit not sufficiently to fully reverse the substantive drop posted in the first half of the year. Our forecast of growth of 15.5%Q/Q is a touch weaker than the BoE’s latest projection and would leave GDP still down almost 10% from the peak in Q419. Certainly, as the boost to hospitality from the government’s Eat Out to Help Out scheme faded, and coronavirus cases began to pick up steadily in September resulting in the imposition of tougher localized restrictions, the figures for that month are likely to show the weakest monthly pace of growth since the recovery started in May. And with England now entering a second lockdown, GDP is now set to decline in Q4, and probably by several percentage points.
Ahead of that release, the latest UK labour market figures (tomorrow) are likely to show an accelerated drop in the number of people in employment in the three months to September. And with firms having increased redundancies in expectation of the termination of the government’s Job Retention Scheme – which has now belatedly been reactivated due to the new English lockdown – the unemployment rate is likely to have risen further too, despite a further pickup in the number of vacancies. With the average number of hours worked up again, however, wage growth is also likely to have picked up further. The BRC’s retail sales survey for October is also out tomorrow – and if the CBI’s distributive trades survey is anything to go by, this will suggest a drop in sales last month. In terms of BoE commentary, Governor Bailey’s contribution to the ECB Monetary Policy Forum on Thursday afternoon will likely be of most interest, although he will speak at a green finance summit today while Chief Economist Haldane will talk about the economic outlook.
Inflation the US data highlight of a holiday-shortened week
This week’s US economic diary gets off to a very slow start with no first-tier releases ahead of the Veterans’ Day holiday on Wednesday. After the holiday break the focus will turn first to Thursday’s CPI report for October. Pricing seems to be settling back into a trend-like pattern following the pandemic-induced volatility of recent months, so we expect core prices to have advanced 0.2%M/M, leaving annual inflation steady at 1.7%Y/Y. That day will also bring Federal budget data for October. While outlays are likely to have declined somewhat as pandemic-related support is withdrawn, the sub-par economy is likely to continue to weigh on revenue. As a result, we anticipate a budget deficit of $US275bn – around double the deficit recorded in the same month last year. On Thursday, as usual, the weekly jobless claims report will also be analyzed closely, especially given the somewhat conflicting outcomes of last Friday’s household and establishment employment surveys. On Friday we will receive the PPI report for October, which like the CPI is expected to point to low and steady core inflation. We expect both headline and core prices to have advanced 0.2%M/M. The preliminary University of Michigan consumer survey for November rounds out this week’s sparse calendar.
Confidence indicators the focus in Australia over the coming week
There were no economic indicators released in Australia today and the diary remains sparse over the remainder of the week. Most interest will centre on Tuesday’s NAB Business Survey for October, where the positive impact of the easing of pandemic-induced restrictions in the state of Victoria will be partly countered by deteriorating coronavirus news from offshore. The ANZ Roy Morgan weekly consumer confidence index will also be released on Tuesday, followed by the monthly Westpac Consumer Confidence Index on Wednesday.
RBNZ to announce Funding for Lending Programme this week
The key focus in New Zealand over the coming week is going to be on the RBNZ’s policy review and associated Monetary Policy Statement (MPS). While the economy is clearly outperforming the RBNZ’s expectations, given its preference to risk too much stimulus rather than too little, the Bank is widely expected to announce the introduction of a Funding for Lending Programme – similar to that deployed by many central banks – to help banks to further lower borrowing costs for businesses and households. Given the Bank’s past guidance, the OCR is widely expected to remain unchanged at 0.25%, rather than lowered to match the RBA’s recent 15bps cut. We don’t expect any changes to the NZ$100bn envelope for the RBNZ’s LSAP bond purchase programme, either. Given the rising risk of a renewed downturn in the US and Europe due to record coronavirus cases, the commentary in the MPS and Governor Orr’s post-meeting press conference seems certain to remain very dovish. So in contrast to the RBA, which has dismissed the value of a negative cash rate, we expect the RBNZ to confirm that it is continuing to make preparations to ensure that banking system is able to implement a negative cash rate as one option should further stimulus be required. Ahead of the release of the next Financial Stability Report a fortnight later, one point of interest will be whether the RBNZ foreshadows the early re-imposition of LVR restrictions – at least on investor loans – given booming conditions in the housing market.
On the data front the key releases this week are tomorrow’s key consumer spending indicator for October and Friday’s manufacturing PMI for October. The REINZ housing market report for October is also likely to be released at some point during the week.