Worsening spread of Covid-19 in Europe to result in extension of restrictions

Chris Scicluna

Markets mixed in Asia as near-term coronavirus worries weigh
Wall Street ended 2020 with key indices at record highs, with the S&P500 climbing 0.6% on the last trading day to take its advance for the year to an unlikely 16% – this amidst the once-in-a-century pandemic and the largest economic downturn since the Great Depression (that said, Bitcoin rallied more than 400% last year, and has surged further since). The 10Y UST yield closed the year at 0.91% – a full percentage point lower than it had begun the year – while the broad US dollar index closed at its lowest level since April 2018.

Following Friday’s New Year holiday, this year’s first day of trading has so far seen USTs weaken somewhat, with 10Y yields up to 0.94%, even as US equity futures have seen only modest gains. And there has been a mixed performance across Asian markets. A notable underperformer has been Japanese stocks, where the TOPIX began the New Year with a loss of 0.6%. While Japan’s manufacturing PMI was revised higher in December (more on this below), PM Suga confirmed earlier media reports that he was considering declaring a state of emergency in the Tokyo metropolitan area due to rising coronavirus infections (nationwide infections have regularly topped 3,000 in recent days, with Tokyo now accounting for around a half of these cases and vaccinations expected to begin only in late February). According to reports, the declaration would ask bars and restaurants to close by 8pm, with Suga acknowledging that such a declaration would quash any thoughts of reinstating the ‘Go-To’ travel and hospitality incentives. By contrast, China’s CSI300 began the year with a 1.1% gain, lifting the index to a new record high. Likewise, a record high was also seen in South Korea (the Kospi surging 2.5%), while Australia’s ASX200 rose 1.5% – erasing the loss recorded on New Year’s Eve – as the NSW state government introduced new restrictions to combat the spread of a so-far limited coronavirus cluster in Sydney (masks are now compulsory in indoor public venues, including public transport).

Japan’s manufacturing PMI revised up to 50.0 in December
The final results of the Jibun manufacturing PMI survey pointed to an improvement in Japanese factory sector conditions during December. Indeed, the headline index was revised up 0.3pt from its preliminary reading to 50.0 – now up 1.0pt from November and the highest reading since April 2019. Upward revisions were widespread across the key activity and pricing components of the survey. Of particular note, the output index was revised up 0.5pt to 50.0 and the new orders index was revised up 0.7pt to 49.8 – both now up 1.1pts from November, with the latter now at the highest reading in two years. The new export orders index was revised up 0.3pt to 49.6, but was still 0.6pts below the November reading. Meanwhile, the output prices index was revised up 0.7pt to 50.1, leaving it 0.8pt firmer than November.

Wages, consumption and services PMI data still to come in Japan this week
Looking ahead to the remainder of the week, tomorrow the BoJ will release monetary base data for December while auto sales figures for last month are also due. On Wednesday, the final services PMI for December together with the Cabinet Office’s consumer confidence index for the same month will likely reflect the disruption caused by the rise in local coronavirus cases since the second half of November. That disruption may also be evident in the labour income data contained in the MHLW Monthly Labour Survey for November, released on Thursday, notwithstanding the strong increase in household employment reported in MIC’s survey. On Friday, the BoJ’s Consumption Activity Index will cast light on consumer spending during November – the retail sales report has already indicated a steep decline – while the MIC’s measures of household spending and disposable income are also released that day. Later in the day the Cabinet Office will release its preliminary business conditions indices for November, concluding this week’s Japanese data flow.

China: Caixin manufacturing PMI softens in December; Caixin services PMI still to come this week
Last week’s official manufacturing PMI had pointed to slightly weaker conditions in China’s manufacturing sector in December, especially for smaller firms, and this was confirmed by today’s Caixin manufacturing PMI. The Caixin headline index fell 1.9pts to a 3-month low of 53.0 – still 2pts above the historic average – with the new orders index falling 3.7pts to 54.6 and the new export orders index falling 1.5pts to 51.8. In common with the official survey, despite the moderation seen in the activity measures the Caixin survey reported a significant strengthening of price pressures during the month. The input prices index increased 4.5pts to a 59.2 (a three-year high) while the output prices index increased 2.1pts to 54.6 (the highest reading since June 2018) – developments that point to a lift in the PPI indices over coming months. Looking ahead to the remainder of the week, the only scheduled economic releases in China are Wednesday’s Caixin services and composite PMI indices for December.

A busy week of data from the euro area includes flash inflation, retail sales, IP, trade & final PMIs
Like elsewhere, the euro area economic data calendar kicks off of a busy start to the year today with the release of final manufacturing PMIs for December. The flash PMIs suggested a rebound in momentum in the sector at the end of last year with the headline euro area PMI rising 1.7pts to a respectable 55.5. The final service sector and composite PMIs will be published on Wednesday – the flash euro area services activity PMI rose a substantive 5.6pts to a three-month high of 47.3, to suggest a slowing in the pace of decline in the sector. The December construction PMIs will be released for the first time on Thursday.

Flash inflation figures are among the other more notable data due from the euro area this week. The French numbers are out tomorrow, with the German figures due on Wednesday and the euro area and Italian numbers on Thursday. We expect the headline euro area inflation rate to edge up 0.1ppt to -0.2%Y/Y in December, with the core CPI rate also rising 0.1ppt to 0.3%Y/Y. However, once again, we caution that price data for a large share items in the basket will need to be imputed by the statisticians, rendering the figures less reliable than usual. The first figures to be released by a large member state came last week from Spain, where the EU harmonised measure of inflation rose 0.2ppt to -0.6%Y/Y.

Among other releases due from the region this week, new car registrations data from France, Spain and Italy will also be published later today, followed by the equivalent German figures tomorrow. Euro area bank lending figures for November are also out tomorrow, along with unemployment numbers for December from Germany and Spain. Wednesday will bring the December French consumer confidence survey from INSEE ahead of Thursday’s full European Commission’s sentiment surveys for December. Euro area retail sales figures for November and German factory orders data for the same month are also due Thursday along with the December construction PMIs. The euro area retail sales figures will be weak, with French sales having dropped due to the closure of non-essential retail that month, and sales in other member states also hit by the second wave of Covid-19 (Spain’s figures released last week showed a drop of 0.8%M/M on a seasonally adjusted basis following growth of just 0.1%M/M in October). Finally, on Friday, euro area unemployment rates for November will be released, alongside German and French industrial production and trade figures for November.

Beyond all the economic data, the worsening spread of Covid-19 will likely see the German government decide to extend its current lockdown restrictions beyond the current deadline of 10 January – Chancellor Merkel is due to meet the heads of Germany’s states tomorrow to discuss what to do. In addition, Italian politics will be watched this week, with former Italian PM Matteo Renzi threaten to pull the support of his small centrist Italia Viva party from the coalition government led by Giuseppe Conte. Reports suggest that matters could come to the boil at a cabinet meeting on Thursday, when Conte is expected to seek ministerial backing (including from two ministers from Italia Viva) for his contested economic recovery plan. The current furore could ultimately see Conte forced from office, with a new government installed. Given the pandemic, we do not expect a sudden move to early elections.

UK data to be overlooked as 2nd Covid wave worsens and post-Brexit trade arrangements get tested
With the second wave of Covid-19 continuing to worsen, and the new post-Brexit trade arrangements to be tested for the first time, economic data are unlikely to be the main focus in the UK this week. Nevertheless, like elsewhere, today brings the release of the final UK manufacturing PMIs for December, which will be released along with November bank lending figures from the Bank of England. While the flash manufacturing output PMI continued to suggest positive growth, at 55.3 it slipped to a six-month low. After a quiet day data-wise tomorrow, Wednesday sees the release of the final service sector and composite PMIs for December, along with the BRC shop price index and new car registrations for the same month. The preliminary services PMI rose to 49.9 in December, while the composite PMI rose 1.7pts to 50.7, above the key 50 level to suggest a modest increase in activity. Wednesday also sees BoE Governor Bailey speaking at a Parliamentary Hearing on the BoE’s Financial Stability Report. The week’s data calendar ends quietly, with only the construction PMIs for December due on Thursday.

A busy week ahead in the US: Senate run-off races, ISM reports and payrolls the key focus
The focus in the US early in the week will be on political developments, starting with the two run-off Senate elections to be held in the state of Georgia tomorrow. The Democrats need to win both of these races – with polls indicating a tight contest – in order to tie the Senate 50-50, thus giving them control via the tie-breaking vote of VP-elect Kamala Harris. Should the Democrats gain control of the Senate, this would open the way to easier fiscal policy settings, but probably also increased regulation and higher tax rates for those on higher incomes. Separately, on Wednesday, a joint session of Congress will convene to formally count and finalize the presidential Electoral College votes that should install Joe Biden as the 46th President on 20 January. Normally a mundane task, it appears that this session will be complicated by the objections of a number of House and Senate Republicans who have bought into President Trump’s unsubstantiated claims of widespread electoral fraud. Following a two-hour floor debate, the objections will almost certainly be rejected by votes in both chambers (the Democrats already control the House while a number of Republican Senators have already acknowledged Biden’s win, including present majority leader Mitch McConnell).

Turning to this week’s data flow, today sees the release of the final Markit manufacturing PMI reading for December together with construction data for November. Tomorrow, most interest will centre on the ISM manufacturing report for December, with the headline index likely to moderate further from the elevated readings seen over the past couple of months. Auto sales data for December will also be of interest in light of the drop-off reported in November. On Wednesday, the ADP employment report for December might cast some light on what to expect from the official employment data at the end of the week. Factory orders data for November and the final services PMI for December are also due that day, while the Fed will release the minutes from last month’s FOMC meeting. On Thursday, given the advance merchandise trade figures released last week, the full trade balance for November is likely to reveal a substantially wider trade deficit. Meanwhile, the ISM services index for December will cast further light on how the economy closed out last year. On Friday, the key focus will be on the official employment report for December. Given rising coronavirus case numbers and associated lockdown restrictions, Daiwa’s Mike Moran forecasts a mere 100k lift in non-farm payrolls and an unchanged unemployment rate at 6.7%. Wholesale trade and consumer credit data for November complete the week’s diary.

Australian manufacturing PMI revised slightly lower in December; house prices continue to rise
The preliminary increase in Australia’s CBA manufacturing PMI during December was revised away today, with the final reading lowered 0.3pts to 55.7 – now down 0.1pt from November but a very robust reading nonetheless. The largest downward revisions were to the output and new export orders indices, with the latter now down 1.4pts from November to a 4-month low of 48.0. In other Aussie news, the CoreLogic home price index increased 0.9%M/M in December – the third consecutive increase and the largest since February. However, given the even larger increases recorded prior to the pandemic, annual home price inflation slowed to 0.4ppts to 2.0%Y/Y. Prices rose 0.7%M/M in Sydney, 1.0%M/M in Melbourne and 1.1%M/M in Brisbane. The hottest of the capital cities remained Darwin, where prices increased 2.3%M/M and 9.0%Y/Y.

A smattering of economic reports still ahead in Australia this week
Looking ahead to the remainder of this week, tomorrow will see the release of the ANZ Jobs Ads Index for December while the final CBA services and composite PMI reports for December will likely attract only limited attention on Wednesday. On Thursday, news regarding dwelling approvals for November will be on interest given the very strong uplift reported over the previous four months. Meanwhile, preliminary merchandise data released prior to Christmas suggests that the full trade balance for November is likely to reveal a very sharp narrowing of the trade surplus from the A$7.5bn recorded in October (to a much greater extent than indicated by pre-Xmas surveys of analysts’ expectations).

Kiwi data-flow remains sparse this week
The Kiwi market remained closed for a public holiday today. A more than two-week data drought will be broken on Wednesday by the release of the Corelogic house price index for December, which seems certain to report another hefty lift in home prices. However, there are no official sector economic reports scheduled until the release of building approvals figures on 14 January.

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