US equities, bond yields and greenback all firmer Friday, but soft start to the new week
Despite non-farm payrolls declining in December for the first time since April, on Friday US equity prices, bond yields and the greenback all finished stronger. With President-elect Biden promising to set out plans for addition fiscal stimulus later this week, the S&P500 increased 0.6% to a fresh record high, while the 10Y UST yield increased 4bps to a 10-month high of 1.12% (break-evens fell, but real yields increased). In the FX market, the US dollar index closed at the highest level since 23 December, providing a degree of relief to trading-partner central banks.
US equity futures have re-opened a little weaker today, with S&P futures down about ½% as we write. With Japanese markets closed for a public holiday, cash UST’s did not trade in Asia but futures were little changed. Meanwhile, the greenback has maintained its firmer trend. In US political news, House Speaker Pelosi said that she would today ask the House to pass a resolution urging VP Pence to convene the Cabinet to invoke the 25th Amendment to remove President Trump from office. Given there is no chance of this being passed unanimously, the resolution will go to the House floor for a vote tomorrow. Thereafter, given the likelihood that Pence will reject the resolution, Pelosi intends to take impeachment legislation to the House on Wednesday, with a vote possibly held as soon as that day. While the Senate reconvenes on 19 January, it seems unlikely that Pelosi would take the bill to the Senate until it has finished passing urgent legislation – notably to boost fiscal stimulus payments – and has confirmed Biden’s Cabinet nominees. Moreover, while several Republican senators have been critical of Trump for last week’s events, none has so far indicated a willingness to convict him.
Turning to the Asia-Pacific region, as noted, Japanese markets were closed for a public holiday today. And elsewhere in the region markets have been mixed. South Korea’s Kospi jumped more than 3% in early trade, taking its year-to-date gain to over 13%, but then backtracked to close little changed. However, Chinese equities fell for a second consecutive session, with the CSI300 falling 1.3%. Headlines focused on rising US-China tensions after the US announced that it had dropped all restrictions on meetings between US and Taiwanese officials, and as China announced new local rules seeking to discourage firms from complying with US sanctions on doing business with some Chinese companies. Australia’s ASX200 fell 0.9% and ACGB yields fell, even as data confirmed a bumper November for the country’s retailers, as mining stocks were weighed down by a slump in the gold price amidst the firmer US dollar. In Europe, USTs have opened a slightly firmer (10Y yields down about 1½bps to 1.10%) with Bunds also higher. Meanwhile, Bitcoin has been back in the news with the cryptocurrency extending its losses to as much as 18% today after peaking at almost $42k on Friday.
Key sentiment, machine orders and service sectors indicators lie ahead in Japan this week
After today’s Coming-of-Age Day holiday, tomorrow will bring the Economy Watchers survey for December, which will be of significant interest considering the marked weakening report last month, in contrast to the resilience seen in PMI indices. According to Bloomberg’s survey, analysts expect both the current and outlook indices to have weakened further given the sharp increase in local coronavirus case numbers. The BoJ will also release bank lending figures for December. On Thursday, core machinery orders seem very likely to give back some of the record 17.1%M/M surge recorded in October. Meanwhile, the BoJ will release the goods PPI for December and its updated Regional Economic Report for Q4. This week’s dataflow concludes on Friday with the release of the Tertiary Industry Activity Index for November, which is very likely to report reduced forward momentum in light of the resurgence of coronavirus cases during the month (which unfortunately gathered pace in December).
Chinese inflation picks up in December; trade and credit data the key focus in the week ahead
This week’s Chinese economic dataflow kicked off with the release of the CPI and PPI reports for December. While markets had expected a rebound in inflation, the headline CPI increased a greater than expected 0.7%M/M, which also lifted annual inflation by 0.7ppts to 0.2%Y/Y. Importantly, almost all of the pickup was attributable to the reversal of the previous downward trend in food prices. Indeed, food prices increased 2.8%M/M, causing annual inflation to increase to 1.2%Y/Y from -2.0%Y/Y previously, driven by sharply higher prices for both fresh vegetables and pork. By contrast, non-food prices increased just 0.1%M/M, lifting annual inflation by 0.1ppts to 0.0%Y/Y. However, excluding both food and energy, the CPI was unchanged during the month, causing this measure of core inflation to edge down to 0.4%Y/Y – the slowest pace since March 2010.
Consistent with the latest PMI surveys, a more pronounced pickup in inflation was observed in the PPI indices, suggesting that consumer price inflation may begin to firm later in the year. The PPI output index increased 1.1%M/M in December, lifting annual inflation by a greater-than-expected 1.1ppts to -0.4%Y/Y. Reflecting the recovery in industrial activity, the monthly increase was driven mainly by higher prices for producer goods, including a 2.6%M/M lift in the price of raw materials and a 0.8%M/M lift in the price of manufactured goods (the latter now unchanged from a year earlier – the first time in 18 months that annual inflation has not been negative). By contrast, the PPI for consumer goods increased just 0.1%M/M, driven by higher food prices. Prices for durable consumer goods fell a further 0.3%M/M and were down 1.8%Y/Y. Therefore, while China’s economic activity picked up impressively last year, it is likely to be some time before concerns about too high inflation motivate the PBoC to tighten momentary policy.
Looking ahead, the key economic release over the remainder of the week will be Thursday’s trade report for December. This will help to condition expectations ahead of next Monday’s Q4 GDP report, as well as cast light on how Chinese demand is supporting activity in other countries. Given the slight softening in this month’s PMI activity data, understandably Bloomberg’s survey indicates that analysts expect China’s export growth to have slowed somewhat to around 15%Y/Y, but growth in imports is expected to be close to the 5%Y/Y pace reported in November. Data on home prices for December will be released on Friday, while the December money and credit aggregates should be released by the PBoC at some point during the week.
ECB policy meeting account due along with euro area IP and trade data
After a busy start to the year, the economic data calendar is somewhat quieter this week. Sentiment surveys feature at the start of the week, with the euro area Sentix investor confidence survey for January out today, followed tomorrow by the December business sentiment survey from the Bank of France, which will illustrate the economic impact of the lifting of the national lockdown arrangements last month. In terms of hard data, Spanish and Italian IP data for November will be published today and Wednesday respectively, with the aggregate euro area measure also out on Wednesday. Despite the decent increase in German production reported on Friday, weakness in France and certain other member states will likely mean that aggregate industrial output broadly flat on the month in November following October’s increase of close to 2%M/M. On Thursday, we will get the whole-year GDP and fiscal figures for Germany – we forecast a contraction of 5.5%Y/Y in 2020. The end of the week sees the release of euro area trade data for November, as well as final French and Spanish inflation data for December.
Beyond the economic data, Thursday sees the publication of the ECB’s minutes of the 9-10 December policy meeting when the Governing Council extended and augmented its asset purchase and liquidity schemes. In addition, ECB President Lagarde is due to moderate a panel discussion during the One Planet Summit this afternoon, while on Thursday she will take part in a Q&A session with Reuters. Finally, Friday will see Germany’s ruling CDU commence its virtual Congress, with the following day bringing the vote of delegates to determine the successor Annegret Kramp-Karrenbauer as party leader. While the winner of the vote will not necessarily become the centre-right’s choice of candidate to run as successor to Angela Merkel as German Chancellor (not least as the sister CSU party will have a say), he would undoubtedly be well-placed to do so. The candidates for Saturday’s vote, the outcome of which currently looks impossible to predict, are the centrist Armin Laschet (currently Minister-President of North Rhine-Westphalia), the right-wing Friedrich Merz (previously key Merkel rival and BlackRock Germany Superviorsy Board Chair), and Norbert Roettgen (Chair of the Bundestag’s Foreign Affairs Committee).
UK GDP data for November on Friday to flag the likelihood of contraction in Q4
The UK economic data highlight of the coming week will be Friday’s monthly GDP release for November. The economy is bound to have shifted back into reverse as new restrictions on activity, including the closure of non-essential retail in England, were brought in belatedly to curb the rising number of coronavirus cases. We expect GDP to fall around 4½%M/M in November, after growth already slowed significantly to just 0.4%M/M in October. The drop in output, however, should be concentrated in the services sector. Indeed, manufacturing production is likely to have benefited from stock-building ahead of the end of the Brexit transition period while construction output likely continued to grow against the backdrop of the strong rebound in housing market activity. Ahead of the GDP figures, tomorrow will bring the BRC retail sales monitor for December, which will provide an insight into how the restrictions affected spending at the end of the year. In addition, the RICS house price survey for December will be published on Thursday. In other news, BoE Deputy Governor Broadbent will be speaking tomorrow about the impact of Covid on the composition of spending.
A busy week ahead in the US, highlighted by inflation, retail sales and factory sector reports
This week’s US economic diary contains a number of important economic releases. The data flow kicks off tomorrow with the NFIB small business survey for December and JOLTS report for November. On Wednesday, attention will turn to inflation with the release of the CPI report for December. Daiwa America Chief Economist Mike Moran expects higher energy prices to lift the headline index 0.3%M/M, but that the core CPI will have increased just 0.1%M/M (likely leaving annual core inflation steady at 1.6%Y/Y). Also on Wednesday the Fed will release its latest Beige Book of economic anecdotes and the Treasury will release federal budget data for December (Mike expects a roughly 50%Y/Y rise in outlays, partly due to timing effects associated with social security payments, to underpin a bumper deficit of $190bn for the month). On Thursday, we will receive trade price data for December as well as the weekly jobless claims report.
The week ends on Friday with a slew of important data. Following the pull-back recorded in November, most interest will centre on the retail sales report for December. Mike 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 NY 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 on Friday 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 behave similarly to the CPI (i.e. a solid headline lift, but core prices up just 0.1%M/M). Aside from the data, there are a number of Fed speeches scattered through the week, including Chair Powell’s participation in a webinar on Thursday.
Australian retail sales confirmed to have surged in November; quiet data flow ahead this week
As suggested by the ABS’s preliminary report, Australian retailers enjoyed a bumper November. Total retail sales surged 7.1%M/M, just a fraction stronger than the preliminary estimate, to be up a whopping 13.3%Y/Y. The reopening of stores in the state of Victoria was the key driver of the result, with spending in that state rising 22.4%M/M. That said, spending still increased a very robust 2.6%M/M when Victoria is excluded. The re-opening of stores in Victoria led to a 21.1%M/M increase in spending at department stores and a 26.7%M/M increase in spending at clothing and accessory stores. Spending on household goods increased 12.7%M/M and 27.8%Y/Y, while spending at cafes and restaurants also increased a strong 6.7%M/M, yet remained down 6.0%Y/Y. Given November’s figures, average monthly spending over the first two months of Q4 is presently 2.8% higher than occurred in Q3, boding well for a further lift in private consumption during the quarter.
In other news, the Melbourne Institute’s Monthly Inflation Gauge increased 0.5%M/M in December, lifting annual inflation by 0.1ppt to 1.5%Y/Y – the highest level since March. The trimmed mean was significantly more subdued, however, increasing just 0.1%M/M and 0.4%Y/Y – albeit the latter marking a 5-month high.
The remainder of this week’s Australian diary is lightly populated. Following tomorrow’s ANZ Roy Morgan consumer confidence reading, Wednesday will bring the release of the ABS measure of job vacancies for Q4 – likely to show a further strong rebound if the ANZ’s monthly job ads count is any guide. On Friday, the ABS will release housing finance approvals figures for November.
Kiwi data flow resumes with building and housing data
This week the Kiwi dataflow will begin to pick-up from its summer hiatus. Wednesday brings the release of the ANZ’s traffic-flow measure of activity for December, while Thursday brings building approvals data for November. On Friday, data on food prices will allow analysts to refine their forecasts ahead of next week’s CPI report. Finally, the REINZ Housing Report for December, which may be released later in the week, is likely to paint a very strong picture for both sales and prices.