Biden announces coronavirus relief package; UK GDP contracts in November

Chris Scicluna

Biden confirms $1.9trn relief proposal, but equity futures weaken and bond yields fall as investors contemplate tax hikes
Wall Street traded moderately in the black for most of the Thursday’s session as investors awaited confirmation of President-elect Biden’s coronavirus relief package. Supporting stocks, the 10Y UST yield slipped below 1.09% after Fed Chair Powell reminded investors that rates would be lifted “no time soon” and made it clear the FOMC would be mindful of the need to avoid a taper-tantrum. That followed an earlier jump in initial jobless claims to 965k – the highest since August. However, Wall Street fell away in the final two hours of trade as UST yields took a sharp leg up from their session lows. At the close, the S&P500 was down 0.4% and the 10Y yield at a session high of 1.13%.

After Wall Street closed, Biden released the broad details of his relief package proposals, which are estimated to cost $1.9trn – slightly below the $2.0trn price tag mooted yesterday, but with Biden expected to ask Congress for additional funds in coming weeks to roll out his longer-term policy agenda. The package would provide more than $1trn for direct relief spending (including raising payments to eligible individuals to $2,000 from the $600 approved last month, and extending unemployment insurance benefits until the end of September); $400bn for virus management (including money to help schools and to fund a national programme of testing and vaccination, with the aim of vaccinating 100m people in Biden’s first 100 days in office); and $440bn for communities and businesses (including $350bn for state and local governments). The package also seeks to more than double the federal minimum wage to $15 per hour. Of course, Biden’s plan still needs to pass the Senate. While much can be achieved by a simple majority vote using the “reconciliation” process (thus bypassing the Senate filibuster, that effectively requires a 60 vote super-majority to pass most legislation), Biden has indicated that he would like to secure bipartisan support.

Initially there was little market reaction to the release of the relief package, which was much as expected. However, during a subsequent address discussing the package, Biden said that he would pay for the package “by making sure that making sure that everyone pays their fair share of taxes”, singling out the closing of tax loopholes used by corporates as being one source of revenue. Perhaps as a result, US equity futures have since traded lower – S&P minis are presently down only about 0.25% however – while the 10Y UST yield has also declined almost 3bps to close to 1.10%.

Turning to the Asia-Pacific region, with US equity futures heading lower after Biden’s remarks, most of the region’s equity markets closed in the red today. In Japan, where service sector data also pointed to an unexpected contraction of activity in November, the TOPIX fell 0.9%. In South Korea the KOSPI fell an even larger 2.0% as the BoK left its policy rate unchanged at 0.5%, but the Bank’s Governor professed to be worried about leveraged investment in the country’s equity and housing markets. In China, where investors are awaiting Monday’s Q4 GDP report, following yesterday’s 1.9% slump, the CSI300 overcame some initial weakness to close down just 0.2% as the PBoC maintained its 1-month Medium-term Lending Facility rate at 2.95% for a ninth consecutive month. Australian equities bucked the trend and closed flat after the ABS reported that housing loan approvals had increased to a record high in November. With UST yields coming off their highs, the 10Y ACGB yield decreased 1bp to 1.08%, however.

Japan’s service sector activity contracts unexpectedly in November
The only significant economic report released in Japan today was METI’s survey of service sector activity for November. The aggregate Tertiary Industry Activity Index fell 0.7%M/M in November, contrasting sharply with the 0.3%M/M increase that the market had expected. While some solace could be taken from a sizeable upward revision to growth in October – revised up 0.6ppts to 1.6%M/M – activity was still down 3.7%Y/Y and the decline in November may prove to be the tip of the iceberg given the recent worsening of the coronavirus situation and associated restrictions. Nonetheless, the level of activity over the first two months of last quarter sits 3.1% above the average through Q3. So with manufacturing activity presently on track for an even larger increase, the early indications for GDP growth in Q4 remain encouraging. Sadly, it seems increasingly likely that this will be followed by renewed contraction in the present quarter.

In the detail, all of the weakness in November owed to essential personal services, with the relevant index declining 1.0%M/M – the first fall since May – to be down 1.1%Y/Y. Activity related to medical, healthcare and welfare fell 4.5%M/M, making by far the largest downward contribution to the aggregate index. Activity related to non-essential personal services – the category hardest hit by the pandemic – increased 0.1%M/M but still declined 6.9%Y/Y. Activity in the living and amusement industry increased a further 1.1%M/M, but was down 14.8%Y/Y (and likely to get worse over coming months given the increasing incidence of early closing times for restaurants and bars). Meanwhile, the business services index increased a modest 0.1%M/M in November – the sixth consecutive month of growth – but nonetheless declined 3.0%Y/Y.

China’s home price inflation moderates in December
This week’s Chinese data flow concluded with news regarding developments in home prices. New home prices across 70 cities increased a modest 0.1%M/M in December – the same as last month, which had been the smallest increase since February – causing annual growth to slow a further 0.3ppts to 3.7%Y/Y. Existing home prices also inched up 0.1%M/M for a third consecutive month, so that annual growth edged down to 2.1%Y/Y. However, it is worth noting that this figure owes to low rates of inflation in second- and third-tier cities, as existing home prices in first-tier cities rose 8.6%Y/Y (prices in Shenzen were up 14.1%Y/Y, although monthly increases have slowed significantly in recent months). Attention now will turn to Monday’s Q4 GDP report, which surveys indicate will show growth surpassing 6%Y/Y for the first time since 2019, albeit with full calendar year growth expected to be closer to 2%Y/Y due to the pandemic-induced slump in activity at the beginning of last year.

UK GDP falls a smaller-than-expected 2.6%M/M in November
Having risen in each of the prior six months, the re-imposition of pandemic containment restrictions in November saw UK GDP fall 2.6%M/M to be 8.5% below February’s pre-covid level and down 8.6%Y/Y. Services output fell a steep 3.4%M/M to be down almost 10% from February, with consumer-facing services worst hit. Indeed, four-fifths of the decline in the sector was accounted for by accommodation and food services (down for a third successive month and by a hefty 44.0%M/M), arts, entertainment and leisure (down 14.0%M/M) and retail and wholesale trade (down 5.6%M/M). In contrast, manufacturing (up 0.7%M/M thanks to growth of 5.7%M/M in the autos sector) and construction (up 1.9%M/M) provided some offset having being excluded from the restrictions. But weak global demand saw oil and gas extraction fall 4.5%M/M, while utilities output also declined.

While the drop in GDP in November was the third steepest on the series, it was smaller than expected (the Bloomberg median forecast was about 4½%M/M) reflecting the greater ability of many sectors to cope with the restrictions. And as a result, the average level of GDP in the first two months of Q4 was still 0.7% above the Q3 average. Some restrictions were eased for much of December. And activity in manufacturing and distribution was ramped up further before year-end to try to dodge the new barriers to trade with the EU. So, although the festive season was a wash-out for hospitality, it is possible that a full-quarter contraction was avoided. Nevertheless, the recent tightening of lockdown measures has weakened activity once again, while there will be payback for the Brexit-related year-end surge in manufacturing output. And while the drop in new covid-19 cases over the past week raises hopes that some restrictions might be lifted before the end of the quarter, UK GDP still seems highly likely to decline in Q1.

Ahead of euro area trade data, final French CPI data match flash estimates
As suggested by last week’s data from Germany and France, euro area trade data due this morning are likely to report a seventh successive monthly increase in exports in November. Meanwhile, final French inflation data for December released earlier this morning aligned with the preliminary figures, which revealed that the EU-harmonised measure fell 0.2ppt to 0.0%Y/Y, matching September’s four-year low. Within the detail, services inflation was steady but inflation of non-energy industrial goods was weaker and so core inflation fell back (down 0.2ppt to 0.2%Y/Y on the national measure). And a moderation in the pace of decline in energy prices was offset by a drop in food inflation. The equivalent Spanish inflation figures for December also aligned with the flash estimates, so that the EU-harmonised measure rose 0.2ppt to -0.6%Y/Y.

German politics in focus as Italy’s PM awaits confidence votes next week
While Italian PM Conte awaits confidence votes in the Parliament’s Lower House on Monday and, most challenging, the Senate on Tuesday, one eye should shift from Italian to German politics, as Angela Merkel’s CDU will today commence its virtual Congress ahead of tomorrow’s vote among delegates to determine the successor to Annegret Kramp-Karrenbauer as party leader. The candidates for Saturday’s vote – the outcome of which currently looks impossible to predict with confidence – are the more centrist Armin Laschet (currently Minister-President of North Rhine-Westphalia and the narrow favourite), the right-wing Friedrich Merz (previously key Merkel rival and BlackRock Germany Supervisory Board Chair), and Norbert Röttgen (Chair of the Bundestag’s Foreign Affairs Committee). But while the winner of the vote will be well-placed to become the centre-right’s choice of candidate to run as successor to Angela Merkel as German Chancellor, he would not be guaranteed that honour. In particular, the CDU’s sister CSU party will have a say and might push for its own leader, Markus Söder, to get the nod. And while he is nominally Laschet’s running-mate, Health Minister Jens Spahn has also signaled a possible candidacy for the Chancellor role.

Busy day ahead in the US: retail sales, IP, consumer sentiment and PPI due
While developments in Washington DC will doubtless continue to generate headlines, there is also a slew of important economic data ahead in the US today. Following the pull-back recorded in November, most interest will likely centre on the retail sales report for December. Daiwa America Chief Economist Mike Moran expects higher auto and gasoline sales to boost spending by a modest 0.3%M/M, while ex-auto spending is likely to be up fractionally at best. Information on the factory sector will come in the form of the December IP report and the New York Fed’s manufacturing survey for January. As far as IP is concerned, Mike suggests that information from the payrolls survey, together with indicators in the mining and utility sectors, point to a 0.7%M/M lift in output during the month. Also of note is the release of the preliminary findings of the University of Michigan’s consumer sentiment survey for January, which Mike expects will be little changed given the competing impact of record stock prices and record coronavirus cases. Finally, the PPI for December and business inventory report for November will complete the day’s diary, with the PPI expected to have behaved similarly to this week’s CPI (i.e. a solid headline lift, but core prices up just 0.1%M/M).

Australian housing loan approvals surge to record high in November
Further evidence of considerable strength in the Australian housing market was provided today by the ABS, which reported that the value of housing loan approvals increased 5.6%M/M in November – well above market expectations and lifting the series to a new record high. The value of approvals for loans by owner-occupiers increased 5.5%M/M – also reaching a record high – so that annual growth stood at a remarkable 31.4%Y/Y. In addition, the renaissance in the investor sector continued, as approvals for investor housing loans increased 6.0%M/M and 3.9%Y/Y. Loan approvals for the purchase of existing dwellings increased 5.9%M/M, while approvals of loans to finance new home construction increased a further 5.6%M/M and are now up by 75% since the Government implemented the Homebuilder grant in June. Finally, approvals for personal loans also grew a very strong 13.2%M/M in November and so were up 5.8%Y/Y.

Kiwi house sales surge in December as buyers rush to beat LVR restrictions
As foreshadowed by other housing indicators, today REINZ reported that nationwide home sales surged 36.6%Y/Y in December as buyers rushed to beat the re-imposition of LVR restrictions on 1 March. In the major city of Auckland, home to around a third of the population, sales grew an even larger 66%Y/Y. Buyers’ urgency was reflected in the median days taken to sell a house, which fell to the lowest level since 2003, and the REINZ House Price Index, which increased 17.3%Y/Y to a fresh record high. 

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