EU-UK negotiations still making little progress

Chris Scicluna

US equities and bond yields backtrack on pandemic news
As had been indicated by the futures market earlier in the day, Wall Street backtracked on Thursday as investors reacted to another record day for new coronavirus cases and new restrictions on activity in New York and elsewhere. The S&P500 fell an even 1%, with Fed Chair Powell telling the ECB’s Monetary Policy Forum that the next few months could be “challenging” given the increasing spread of the virus. In the bond market, the 10Y Treasury yield continued to backtrack from its post-Pfizer announcement highs, declining 6bps to 0.88%. 

Since New York went home US equity futures have traded in a narrow range with, unsurprisingly, little reaction to news that the major news networks had finally united in calling the state of Arizona for Joe Biden (with just over an 11k margin), bringing the President-elect’s Electorate College vote tally to 290. Meanwhile, it has been a mixed day for markets in the Asia-Pacific region. In China, ahead of Monday’s download of key activity indicators, the CSI300 closed down about 1.0% as President Trump signed an executive order banning US investments in any companies with ties to the Chinese military. Ahead of Japan’s Q3 GDP report on Monday – which is likely to show that little more than half of the 7.9%Q/Q decline in Q2 was reversed, with growth highly reliant on consumption and exports – the TOPIX fell 1.3%, not helped by yesterday’s news that the country had reported a record 1,661 new coronavirus cases – still exceptionally low relative to the recent experience in the US and Europe, but continuing a pronounced upward trend over the past week or so. By contrast, gains were seen in markets in South Korea and Taiwan.

In the bond markets, with Treasury yields continuing to edge lower in Asian trading, 10Y government bond yields declined 3bps in both Australia and New Zealand. But, perhaps inevitably, JGBs were little changed. And forex markets have also been broadly stable so far today, with the yen little changed close to 105.0/$ after gaining yesterday on the weaker risk appetite. Meanwhile, having lost more than a cent yesterday on concerns that the EU-UK negotiations on post-transition trade arrangements continue to go nowhere, sterling is only slightly firmer this morning as talks look set to drag on into next week, with greater urgency required ahead of next Thursday’s EU leaders videoconference.

Kiwi manufacturing PMI softens, but still points to expanding activity
On a quiet day for economic reports from the Asia-Pacific region, the latest Kiwi manufacturing PMI indicated that growth in activity moderated in October. The headline BNZ-Business NZ manufacturing PMI fell 2.3pts to 51.7, with the production index declining 5.6pts to 51.1 and the new orders index declining 5.3pts to 52.4. More encouragingly, the employment index picked up a further 0.9pts to 52.6 – the highest reading since April 2018 and perhaps suggesting a degree of underlying confidence about medium-term prospects for business.

Employment, goods trade and revised GDP the euro area data focus today
The week in the euro area will conclude with the preliminary estimate of Q3 employment as well as an updated estimate of GDP growth for the same quarter, and September goods trade figures. Following a modest decline of 0.3%Q/Q in Q1, employment fell a record 2.9%Q/Q, representing 4.7mn workers, in Q2 as the coronavirus and associated restrictions on activity took their toll. Hours worked fell a much steeper 13.4%Q/Q and 17.3%Y/Y as government labour support schemes bore the brunt. Among the member states, Spain was worst hit, with employment down 7.5%Q/Q and hours worked plummeting 21.7%Q/Q. Q3 will have brought a return to positive job growth on the quarter, but nowhere near sufficient to prevent the level of employment remaining well down on a year earlier. Indeed, the unemployment rate has edged steadily higher over recent months, reaching 8.3% in August and September.

Meanwhile, the initial estimate of euro area GDP growth beat expectations at 12.7%Q/Q, to be down just 4.3% from the pre-Covid peak in Q419 – less than half the equivalent drop confirmed yesterday in the UK. There seems little reason to expect anything significantly different in today’s revisions. In addition, September goods trade data for the euro area are likely to show that exports continue to outpace imports, underscoring that net trade made a substantive contribution to the record GDP growth in Q3.

From the member states, final estimates of October inflation from France and Spain are due. According to the flash estimates on the EU-harmonised measure, French inflation was unchanged at 0.0%Y/Y last monthwhile the Spanish rate dropped 0.4ppt to -1.0%Y/Y. Yesterday’s final estimates from Germany aligned with the preliminary figures, with the EU-harmonised rate dropping 0.1ppt to -0.5%Y/Y, the lowest since January 2015 and core inflation seemingly softening too. Ratings-wise, later today Fitch will announce the review of its French sovereign rating, currently 'AA' but on negative outlook.

Inflation and consumer confidence the focus data in the US today
Today‘s US economic diary begins with the PPI report for October. We expect both headline and core prices to have advanced 0.2%M/M, although yesterday’s soft CPI reading – in part due to pandemic-related price restraint – cautions that the balance of risks is probably skewed to the downside. The preliminary University of Michigan consumer survey for November will also be released today. While the market expects the headline confidence index to have inched higher, helped by improving conditions in the labour market, increasing anxiety about rising coronavirus cases might have limited any gain.

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