Bond yields reverse course as media moots $2trn Biden stimulus
A relatively quiet session on Wall Street yesterday saw the S&P500 close with a modest 0.2% gain on Wednesday as US bond yields continued to recede from this week’s 10-month high. Indeed, the 10Y UST yield fell a further 4bps to a low of 1.07%, as the CPI report confirmed that core inflation remained subdued in December and the Beige Book reported that vaccine-driven optimism regarding growth had been tempered by concerns about the pick-up in coronavirus cases and what this would mean for business conditions in the near term. Moreover, Fed Governor Brainard pushed back on QE taper-talk, stating that she expects ‘that the current pace of purchases will remain appropriate for quite some time’. After weakening during Tuesday’s bond rally, however, the US dollar rebounded. There was little reaction to confirmation that President Trump had been impeached by the House by a vote of 232-197, with 10 Republicans backing the motion (more on this below).
The rally in USTs was reversed abruptly during Asian trading, however, after CNN reported that President-elect Biden would unveil a coronavirus relief package today that could be as large as $2trn. According to the report, citing the usual sources familiar with the matter, the package features the expanded household payments and state and local funding that the Democrats had been seeking last year but that was blocked by the Republican-controlled Senate. This news triggered an immediate rise in the 10Y UST yield to 1.11%, which also moderated the early rally in bond markets in the Asia-Pacific region (the Aussie 10Y yield still closed down 1bp at 1.09%).
US equity futures have increased only modestly, while it has been a somewhat mixed day for equity markets in the Asia-Pacific region. Japanese indices firmed, supported by a surprise lift in core machine orders in November and as BoJ Governor Kuroda – speaking at a virtual meeting of branch managers ahead of the release of the latest Regional Economic Report – reiterated his belief that Japan’s economy is picking up. However, the TOPIX halved its intraday gain – closing up just 0.5% – following the publication of that report (more on this and the region’s other main data releases below). At the other end of the spectrum, China’s CSI300 fell 2.0% led by weakness in consumer-related stocks, even as both exports and imports proved stronger than market expectations in December. A mix of modest gains and losses were recorded elsewhere in the region.
Japan’s core machine orders surprise with further modest increase in November
Following a huge rebound in machine orders in October, understandably analysts had anticipated a decent pullback in this volatile series in November. However, after increasing 9.7%M/M previously, total machine orders fell just 1.5%M/M in November and so were virtually unchanged from a year earlier. Moreover, the closely-followed measure of core private domestic orders (which excludes volatile items such as ships and capex by electricity companies) increased by a further 1.5%M/M in November, building on a 17.1%M/M lift in October that had been the largest since 1996. As a result, core orders are sitting at their highest level since February, although orders are still down 11.3%Y/Y due to base effects associated with a strong November 2019 reading (indeed, the second strongest recorded during that year).
This result means that over the first two months of the quarter, core orders are sitting more than 14% above the average level recorded during Q3 – a far cry from the 1.9%Q/Q decline that pessimistic machine producing firms had forecast. The pickup in orders lends some credence to the surveyed investment forecasts of firms in the likes of the BoJ’s Tankan survey, which have pointed to a relatively modest decline in overall capex in FY20, despite the sharp decline reported during the first half of the year. Of course, the monthly orders data can be very volatile and the worsening coronavirus situation in Japan raises the prospect of a pullback in orders over the remainder of the fiscal year.
In the detail, orders from the manufacturing sector fell 2.4%M/M in November, with orders from the non-ferrous metals industry falling back as had seemed likely, but orders from the chemical sector increased further to the highest in almost two years. As a result, manufacturing orders were down 3.1%Y/Y, compared with the 1.1%Y/Y increase reported in October. Core orders from the non-manufacturing sector increased 5.6%M/M in November, although orders were still down 17.1%Y/Y. That growth was due in part to a sharp lift in orders from the communications industry, which increased to the highest level in more than four years. Government orders, which are usually volatile, were little changed in November but down 2.1%Y/Y. Consistent with the pickup in external demand indicated by the JMTBA’s machine tool order series, foreign orders increased 5.9%M/M and so were up a strong 25.4%Y/Y.
Goods PPI rises more than expected in December; BoJ Regional Report highlights pandemic impact
The BoJ’s producer goods price indices for December provided a rare upside surprise, with the headline index increasing a larger than expected 0.5%M/M, unexpectedly reducing the rate of annual deflation to 2.0%Y/Y from 2.3%Y/Y previous. While this partly reflected an 18.8%M/M increase in the price of scrap and waste – which is very volatile on a monthly basis – the PPI for manufactured goods still increased a solid 0.4%M/M, reducing annual deflation by 0.2ppts to 1.6%Y/Y. The increase in December was driven by a 4.7%M/M increase in the price of fuel, which nonetheless remained down 16.5%Y/Y. Prices for non-ferrous metals also increased a strong 3.8%M/M, raising annual inflation to 10.4%Y/Y. Final good prices increased 0.4%M/M in December but were still down 1.4%Y/Y, while final consumer goods prices increased 0.5%M/M but were still down 1.6%Y/Y. Meanwhile, measured in yen – which on average appreciated slightly during the month – import prices increased 1.9%M/M in December, but were still down 9.8%Y/Y (energy prices remained down more than 30%Y/Y and chemicals prices were down 7.6%Y/Y).
In other BoJ news, following Governor Kuroda’s speech to branch managers, the BoJ released the latest edition of its quarterly Regional Economic Report. This report provides a summary of anecdotal information gathered by the Bank’s various branches in a similar manner to the Fed’s Beige Book, and will help inform the Policy Board’s deliberations at next week’s meeting. The news this quarter was somewhat mixed, with eight of the nine regions continuing to describe conditions as being ‘severe’. Moreover, whereas eight of the nine regions had revised up their economic assessment in the October report (only Shikoku reported no improvement), this time just three regions upgraded their assessment (Shikoku, Hokuriku and Kyushu-Okinawa). Meanwhile, Hokkaido revised down its assessment, citing a recent slowdown in momentum. Moreover, two other regions – including Kanto-Koshinetsu, which includes the Tokyo prefecture – hinted that the worsening coronavirus situation was beginning to impact activity, unsurprisingly especially spending on consumer services. Investment was generally described as being relatively weak or declining. Comments on production were more positive, with all regions reporting some degree of pickup. However, all regions continued to describe both labour market conditions and household incomes as being weak.
China’s trade surplus reaches new record high in December but both exports and imports beat expectations
With the latest PMIs easing off their recent highs, analysts were expecting today’s Chinese goods trade statistics to point to somewhat slower growth in exports in December. As it turns out, growth in exports slowed less than had been expected, declining to a still very robust 18.1%Y/Y in US dollar terms from 21.1%Y/Y previously (10.9%Y/Y in yuan terms given the firming of the exchange rate over the past year). Nonetheless, given the impact of the pandemic on exports earlier in the year, growth was just 4.0%Y/Y for the full calendar year. Growth in exports to the US maintained its recent firmer trend, albeit slowing somewhat to 34.5%Y/Y, while growth in exports to the UK also slowed but was still very strong at 38.1%Y/Y. Growth in exports to Japan picked up to a relative modest 8.2%Y/Y, whereas growth in exports to Hong Kong more than doubled to 25.4%Y/Y.
Encouragingly for China’s trading partners, China’s strengthening domestic recovery helped to drive a slightly larger than expected pickup in import growth in December. Imports grew 6.5%Y/Y in US dollar terms (-0.2%Y/Y in yuan terms), up from 4.5%Y/Y in November, although imports for the full calendar year were still down 0.9%Y/Y. Of particular note, China’s imports from the US rose a whopping 47.7%Y/Y in December. As a result, after hitting a record last month, China’s bilateral trade surplus with the US narrowed to $29.9bn in December (bringing the calendar year surplus to $316.9bn), although this was still $6.6bn wider than a year earlier. China’s overall trade surplus increased to a record $78.2bn, however. China’s imports from Japan increased 12.3%Y/Y, marking the fastest pace since September, but imports from Australia declined 8.9%Y/Y. Meanwhile, imports from the UK also remained lower than a year earlier.
Italian politics back in crisis after Renzi withdraws support for government
Shortly after Europe’s market closed yesterday, concerns about Italy’s politics intensified as former PM Matteo Renzi finally withdrew his Italia Viva (IV) party’s three ministers from the government of PM Giuseppe Conte. Of course, IV was only a bit-part actor in the coalition, which is dominated by the uncomfortable alliance of the populist Five Star Movement and centre-left Democrats. And with IV’s ratings extremely low – averaging only about 3% of late – it would be political toast if the new crisis triggers early elections. Indeed, in his press conference, Renzi stated that he wouldn’t necessarily veto a new government led by Conte. But it remains to be seen whether Conte decides to seek a parliamentary confidence vote to bolster his position, or resigns his position for now before attempting to form a new coalition. Of course, one eventual solution could be a new government under an alternative non-aligned Prime Minister – with Mario Draghi’s name one of those often mooted. And not least as none of the current ruling parties would have anything to gain, we continue to doubt that the current spat will lead to an early general election.
ECB account of December meeting to shine light on policy stimulus debate
Lunchtime will bring the publication of the ECB’s account of the 9-10 December policy meeting when the Governing Council extended and augmented its asset purchase and liquidity schemes. That policy decision was calibrated on the basis of updated economic projections, which yesterday Christine Lagarde insisted were still realistic despite the intensification of the pandemic. Indeed, Lagarde noted that the forecasts assumed that containment measures would remain in place throughout the first quarter. But they also assumed that progress implementing vaccination programmes would deliver ‘sufficient’ levels of herd immunity by year-end, something that Lagarde acknowledged might be at risk given the ‘laborious’ start to vaccination programmes in the euro area member states.
Datawise, Germany will shortly publish full-year GDP and fiscal figures for 2020. Given weakness at the end of the year, we forecast an economic contraction of about 5.5%Y/Y. And the general government budget is expected to show a deficit for the first time since 2011, and of a magnitude of about 6% of GDP following a surplus of 1.5% of GDP in 2019.
After Trump impeachment focus today turns to Biden fiscal proposal; weekly jobless claims and import price data due; and Powell to speak via webinar
In US political news, as expected the yesterday the House voted to impeach President Trump for his role in inciting the violence at the Capitol last week, with 10 Republicans joining 222 Democrats to pass the vote 232-197 and make Trump the first President impeached twice. Republican Senate leader McConnell indicated that, despite some media reports to the contrary, he has not made a final decision on how he will vote when the article of impeachment is sent to the Senate for trial. The timing of that trial remains uncertain. As we noted yesterday, this may depend on whether the Senate can simultaneously advance Biden’s immediate agenda – including fiscal stimulus and confirming nominees to the cabinet – and conduct a trial. McConnell appears to favour delaying the trial given that there is no prospect of reaching a conclusion before Trump’s term concludes at midday on 20 January.
In the US today most interest will likely centre on President-elect Biden, who is expected to unveil a substantial coronavirus relief package that is more in line with what the Democrats were seeking last year, including expanded direct payment to households and increased state and local funding. On the data front, the only notable releases today are the trade price indices for December and the weekly jobless claims report. In addition, there are a number of Fed speakers today, notably including Chair Powell who will take part in a Princeton Economics webinar.
Kiwi dwelling approvals maintain frenetic pace in November
The first official economic report released this year in New Zealand maintained last year’s positive tone, with the number of dwelling approvals rising by a further 1.2%M/M in November to be up almost 24%Y/Y and at the highest level since monthly statistics began in the 1960s. Approvals for houses increased 4.9%M/M yet were up a more modest 4.4%Y/Y, with most of the growth over the past year driven by generally cheaper apartments and townhouses. As a result, the value of dwelling approvals increased 16.7%Y/Y in November, while the value of approvals for non-residential buildings increased 9.3%Y/Y.