Political tension remains front and center, while increased odds of fiscal stimulus moves into the second spot and mixed Fed signals into third. Inflation expectations hit multi-year highs and China-US tensions continue to percolate.
Political tension remains front and center, while increased odds of fiscal stimulus moves into the second spot and mixed Fed signals into third. Inflation expectations hit multi-year highs and China-US tensions continue to percolate.
Georgia runoff and vaccine rollout remain front and center for markets. The outlook for stimulus, OPEC and oil prices and the British Pound and UK lockdowns round out the top five.
Prospects brighten for a relief bill and Fed asset purchases in focus ahead of the meeting, while the Pound continues to fluctuate with no Brexit deal. Oil prices rally on OPEC+ accord and political uncertainty remains ahead of the Georgia runoff.
Looking Ahead – The Future’s So Bright, I Gotta Wear Shades
After a year that featured so many surprises, and not many pleasant ones, it is a testament to both the natural human tendency toward optimism, as well as miracles of biomedical science, that 2021 can be a repository for so many positive and tantalizing expectations. The strong prospects for a V-shaped recovery not only in the economy but for our collective well-being are underpinned by a trio (at least) of highly effective vaccines that are being distributed with tireless efficiency by our logistical networks. Anticipation of a return to relative normalcy in the not-too-distant future is not only a psychological bulwark against the stresses and troubles of the present but is also a reasonably likely base-case scenario.
The reality could be more nuanced, as uneven supply and tentative public uptake of the vaccine may be factors that lengthen out the timeline for defeating Covid-19. But questions of pacing aside, 2021 seems almost certain to be showing us the way to brighter days ahead, particularly after the dark months of winter finally give way to spring and then summer. Investors are, of course, already flashing-forward to this upbeat future. Market participants know that growth will rebound after tipping into what might amount to a brief double-dip recession this winter. But whether faster or slower than consensus, how can growth not improve alongside increasingly widespread vaccine distribution? Meanwhile, the Fed has promised to stay ultra-easy; more pandemic relief spending is almost certainly on the way from Capitol Hill (with a greater front-loaded magnitude than we had expected, it appears); inflation seems highly likely to remain in abeyance; the trajectory of dollar depreciation is already well established; and the Treasury yield curve steepening trend is gradual but seemingly inexorable; and last but not least, buoyant stocks appear set to either run higher or a lot higher. Through the lens of the markets, 2021 looks almost – dare we say it – predictable?
Amid all this apparent predictability resides one glaring unknown – the outcome of the two Senate runoffs in Georgia on January 5th, which will decide control of the chamber. A leading prediction market reflects roughly 2/3 odds that the GOP get at least a split, leaving meaningful residual odds that the Dems sweep and take back control of the Senate by the thinnest of margins. Other aspects also feed the uncertainty:
It is worth noting that moderate Dems may not be too upset to see the GOP keep control of the Senate if that occurs, as it would absolve them of any pressure to “change the world” and they can spend two years setting their policies up, trying them out, and painting McConnell and the Senate GOP as obstructionists for not passing any of the bills they are sent – infrastructure is a good example of this. Then, for the midterm elections in 2022, the Senate electoral math is firmly in the Dems’ favor as they only have to contest 13 seats versus 20 for Republicans.
In short, there can only be low conviction about the high-impact outcome in Georgia. The two vastly divergent alternate policy realities of the two possible outcomes are shown below:
Looking ahead, the year-end period will feature at least a few more days of continued drama on Capitol Hill over the pandemic relief bill and government funding deadline. Meanwhile, we expect Brexit negotiations to run over the Sunday deadline, and then the year-end departure date, but be accompanied by both sides trying to play up the “amicable divorce” angle, with promises to keep negotiating, even as the economic reality of the UK’s departure from the EU looks more like a disorderly Brexit. Meanwhile, the entire US political landscape will pivot around the Georgia Senate runoffs on January 5th, with control of the chamber and the Biden administration’s policy wishlist hanging in the balance.
The regular macro calendar for the coming weeks until January 8th features some global PMI data and the December nonfarm payroll report on that second Friday in January, when we will publish our first Looking Ahead of 2021. Have the happiest of holidays!
Global Economic Calendar: Auld Lang Syne
The day begins with the GfK Consumer Climate Indicator in Germany. Heading into December the GfK dropped to a five-month low of -6.7, from a revised -3.2 in the prior month and below market consensus of -5, as sentiment was hit by a partial lockdown to curb a second coronavirus wave. The gauge for economic outlook fell 7.3 points to -0.2, the lowest figure since May of this year when it stood at -10.4. Also, the income expectations sub-index declined 5.2 points to 4.6, and the willingness to buy indicator dropped 6.5 points to 30.5. GfK consumer expert Rolf Buerkl stated, “How the infection rate develops in the coming weeks will play a decisive role in determining whether the consumer climate will be able to stabilize again. Only a significant decrease in the number of infections and an easing of restrictions will restore a more optimistic outlook.”
The US brings the Final Estimate of US 3rd Quarter GDP. The second estimate showed the US economy expanded by an annualized 33.1%, in line with the advance estimate. It is the largest expansion ever, following a record 31.4% plunge in Q2, as the economy rebounds from the coronavirus pandemic. Upward revisions to business and housing investment, and exports were offset by downward revisions to personal and public consumption and private inventory investment. Still, personal spending was the main driver of growth, helped by checks and weekly unemployment benefits from the federal CARES Act. However, GDP is still 3.5% below its pre-pandemic level.
The focus of the day will be on the US Personal Income and Spending. In October personal income fell by 0.7% m/m, following a downwardly revised 0.7% increase in the previous month and compared with market expectations of a flat reading. The decrease in government social benefits was mostly to blame because of a drop in Lost Wages Supplemental Payments, a Federal Emergency Management Agency program that provides wage assistance to individuals impacted by the pandemic. In contrast, compensation and proprietors’ income rose. On a positive note, personal spending increased 0.5%, following a downwardly revised 1.2% growth in September and slightly beating market forecasts of 0.4%. Personal spending increased 0.5% m/m, following a downwardly revised 1.2% growth in September and slightly beating market forecasts of 0.4%. Real PCE rose 0.5%, boosted by increases in spending for both goods and services. Consumption of goods advanced 0.2%, boosted by recreational goods and vehicles. In addition, spending on services was up 0.6% due to health care spending. Additionally, The PCE price index was unchanged in October, following a 0.2% gain in September, as a 0.1% increase in services cost offset a 0.2% decline in goods prices. Within goods, prices were down for nondurable goods and durable goods. Core PCE, which excludes food and energy, were also flat in October, in line with market expectations. Year-on-year, the PCE price index advanced 1.2% and Core PCE increased 1.4%.
Christmas Eve brings US Durable Goods Orders. In October new orders increased 1.3% m/m, easing from an upwardly revised 2.1% rise in September and above market expectations of 0.9%. It is the sixth consecutive gain in durable goods orders. Excluding transportation, new orders rose 1.3% and excluding defense, new orders went up 0.2%. Orders slowed for transportation equipment and capital goods and computers and electronics. Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, increased 0.7%, following a 1.9% rise in September.
The Caixin China General Manufacturing PMI rose to 54.9 in November from 53.6 in October and beating market estimates of 53.5. This was the seventh straight month of growth in factory activity and the strongest since November 2010, as the post epidemic economic recovery continued to pick up speed. Both output and new orders rose at the fastest rate in a decade, employment grew the most since May 2011 and new orders rose further. Also, buying levels increased at the steepest pace since the start of 2011, with stocks of purchases rising the most since February 2010. At the same time, capacity pressures persisted, with the rate of backlog accumulation being the quickest since April. Meanwhile, the active market led to longer delivery times from suppliers. On the price front, the gauges for input and output prices rose further into expansionary territory. Looking ahead sentiment remained strongly positive, despite easing slightly since October.
The ISM Manufacturing PMI fell to 57.5 in November from a two year high of 59.3 reached in October. The PMI came slightly lower than market forecasts of 58, but still pointed to expansion in the overall economy for the seventh month in a row. A slowdown was seen in production, new orders and inventories while employment contracted. On the other hand, new export orders increased faster. Timothy R. Fiore, Chair of the ISM Manufacturing Business Survey Committee said, “The manufacturing economy continued its recovery in November. Survey Committee members reported that their companies and suppliers continue to operate in reconfigured factories, but absenteeism, short-term shutdowns to sanitize facilities and difficulties in returning and hiring workers are causing strains that will likely limit future manufacturing growth potential. Panel sentiment, however, is optimistic.”
The Consumer Confidence Index in Japan edged up to 33.7 in November, the highest since February but below pre-pandemic levels. Two out of the main sub-indices improved, overall livelihood and income growth. Furthermore, the sub-indice of willingness to buy durable goods was stable, while that of employment perceptions weakened.
The ADP Employment Report estimated that private businesses in the US hired 307K workers in November, below an upwardly 404K in October and market forecasts of 410K. It is the smallest increase in four months as a rise in COVID-19 infections and further lockdowns slowed down the hiring. The service-providing sector added 276K jobs led by leisure and hospitality with 95K, education and health with 69K, professional and business with 55K, trade, transportation & utilities with 31K, other services with 18K and financial activities with 8K, while the information sector added none. The goods-producing sector created 31K jobs, due to construction with 22K, manufacturing with 8K, and natural resources and mining with 1K. Private payrolls in midsized companies were up 139K, small firms added 110K, and large companies 58K.
Australia’s Balance of Trade increased to AUD 7.46 bil in October from an upwardly revised AUD 5.82 bil in September. This was the biggest trade surplus since April, amid improving global demand as more countries reopen their economies following an easing of COVID-19 lockdowns. Exports rose 5% to AUD 35.72 bil, while imports edged up 1% to AUD 28.26 bil. Considering the first ten months of the year, the trade surplus widened slightly to AUD 60.92 bil from AUD 59.24 bil in the same period of 2019.
Canada’s Balance of Trade narrowed slightly to CAD 3.76 billion in October from an upwardly revised CAD 3.82 bil. Exports rose 2.2% to CAD 46.5 bil, the highest since February, partially on higher exports of pharmaceutical products. Meantime, imports increased at a softer 1.9% to CAD 50.23 bil, the highest since October last year in part due to higher imports of cell phones. Canada’s trade surplus with the US widened to CAD 3 bil from CAD 1.7 bil in September, as exports went up 2.0% while imports dropped 2.3%. The trade gap with countries other than the US widened to CAD 6.8 bil from CAD 5.5 bil, with imports rising 9.1% and exports climbing 2.7%.
The US Trade Deficit widened to $63.1 bil in October from a revised $62.1 bil and compared to market expectations of $64.8 bil. Exports increased 2.2% to $182 bil in 2020, while imports rose 2.1% to $245.1 bil, reflection both the ongoing impact of the COVID-19 pandemic and the continued recovery from the sharp declines earlier this year.
The Ivey PMI for Canada fell to 52.7 in November from 54.5 and missing market expectations of 54.7. It was the lowest reading since May, amid the ongoing tightening of some COVID-19 restrictions to curb a second wave of infections. Employment and supplier deliveries decreased, while inventories rose and price pressures intensified.
The ISM Non-Manufacturing PMI fell to 55.9 in November from 56.6, in line with forecasts of 56. The reading pointed to the slowest increase in the services sector in six-months, but it remained above the long-term average of 54.6. Production and new orders slowed, inventories contracted, and price pressures eased while employment rose at a faster pace. “Respondents’ comments are mixed about business conditions and the economy. Restaurants continue to struggle with capacity constraints and logistics. Most companies are cautious as they navigate operations amid the pandemic and the aftermath of the US presidential election,” Anthony Nieves, Chair of the ISM Services Business Survey Committee said.
Germany’s Trade Surplus narrowed slightly to €19.4 bil in October from €21.3 bil a year earlier. Exports shrank 6.5% y/y to €112 bil, the 8th straight annual decline and imports fell 5.9% to €92.7 bil, the 10th consecutive drop. Exports to the Euro Area went down 5.1% and those to the UK sank 11.7%. Sales to the US, which have been hit particularly hard by the coronavirus pandemic, dropped 10.5% while sales to China edged up 0.3%. Imports to the Euro Area decreased 2.9% and those from the UK were down 14.7%. Purchases from China slumped 3.3%, those from the US 18.8% and from the UK 17.6%. Adjusted for calendar and seasonal effects, exports were still 6.8% and imports 5.2% lower than in February of 2020, the month before restrictions were imposed due to the coronavirus pandemic.
The Canadian Employment Report showed the economy created 62K jobs in November, well above forecasts of a 20K rise and after an 83.6K increase in October. This is the lowest number since the recovery began six months ago as full-time work went up by only 99K and 37K part-time jobs were shed. Self-employment stalled and compared to public sector and private sector employees, employment in this group remained furthest from the February pre-COVID level. Increases were seen in Ontario, British Columbia and in all four Atlantic provinces. Employment growth resumed in the goods-producing sector in November, with most of the increase in construction. At the same time, employment in the services-producing sector was little changed, for the first time since the recovery began in May. Among youth aged 15 to 24, employment rose 0.9% from October, while the youth unemployment rate fell 1.4 percentage points to 17.4%.
The US Nonfarm Employment Report showed that the US economy added 245K jobs in November, easing from a downwardly revised 610K, and well below market expectations of 469K. It was the smallest employment gain since the job market started to recover in May from a record 20.787 mil loss in April. In November, nonfarm employment was below its February level by 9.8 mil, or 6.5%. Employment declined in government and retail trade while gains occurred in transportation and warehousing, professional and business services, and health care. The unemployment rate edged down to 6.7% from 6.9% and compared with market expectations of 6.8%, as fewer people looked for work. The number of unemployed persons fell by 326K to 10.7 mil and the employment level declined by 74K to 149.7 mil. The labor force participation rate edged down to 61.5% in November, 1.9% points below its February level. The employment-population ratio was little-changed at 57.3%, 3.8% points lower than in February.
The CPI in China unexpectedly declined by 0.5% y/y in November, after a 0.5% rise a month earlier and compared with market consensus of a flat reading. This was the first deflation rate since October of 2009 as food prices dropped for the first time in nearly three years, with prices of pork tumbling after soaring last year due to the African Swine outbreak. Also, there were falls in cost of transport, rent, fuel, and utilities, and clothing. Meanwhile, prices of household goods and services were flat, while cost rose for health, education, and other goods and services. On a monthly basis, the CPI fell by 0.6%, the steepest drop since May, and following a 0.3% decline in October.
Summary and Price Action Rundown
US equities slipped from record highs today as wrangling continued today over the US pandemic relief package and UK-EU Brexit agreement. The S&P 500 declined 0.4% today to pare year-to-date gains to 14.8%, as the index adjusts to include Tesla on Monday (more below). The Fed’s announcement after markets closed for regular hours that it would be allowing US banks to resume stock buybacks, but not raise their dividends, lifted shares of JPMorgan 2.9% in after-hours trading as the megabank rushed to announce $30 billion in buybacks. The Euro Stoxx Index broke its four-day rally with modest downside while Asian equities also posted losses overnight. The dollar edged above yesterday’s most recent multi-year low, while longer-dated Treasury yields increased slightly, with the 10-year at 0.94%. Brent crude prices vaulted over $52 per barrel, reaching a new 9-month high, amid stimulus hopes.
US Fiscal Stimulus Negotiations Drag On
Pandemic relief talks appear to be grinding slowly toward a deal, perhaps as early as this weekend, but in the meantime, Congress will either need to pass an omnibus spending bill or another funding extension by midnight tonight or trigger a partial government shutdown. In the final hours ahead of tonight’s midnight deadline to pass a stimulus package alongside the omnibus spending bill, a push led by Republican Senator Toomey to include terms seeking to block the Federal Reserve’s pandemic lending facilities has stymied a final compromise. A provision to prevent the Fed from restarting any of the five lending programs, or create similar ones in the future, has become the main sticking point for Republicans now that the two controversial elements of direct funding for state and local governments and liability protections for businesses have been omitted. “It’s not acceptable for anybody to decide that they’re going to circumvent this law, restart these programs and turn them into something that they were never intended to be,” said Toomey on Thursday. While Senator Toomey asserted that the provision would exclusively target the five programs, Democrats have accused Republicans of specifically constricting the incoming Biden administration and limiting the ability of the Federal Reserve to respond to economic distress in the future. With Republican’s seemingly entrenched over this issue, it is likely lawmakers will fail to reach a compromise this evening, and will either trigger a partial government shutdown when the current spending authorities expire, or Congress will seek to approve another stopgap funding measure through the weekend, allowing more time to resolve the remaining differences. Should any pandemic relief bill fail to pass this weekend, Congress will have until the end of the month when nearly 12 million workers will lose their benefits, on top of the 4.4 million who have already exhausted their benefits, which would further pressure an already distressed economic backdrop. – MPP view: The New York Times reported yesterday that McConnell’s surprising reversal on individual payments and the overall size of the relief bill was spurred by indications that the two GOP candidates in the pivotal Senate runoffs in Georgia are taking heat over the delay of fiscal support. But even with rising economic and political urgency, a deal is still stalled – we see this as a preview of the extreme difficulty the Biden administration will face getting anything through a GOP-led Senate and do not buy the narrative that Majority Leader McConnell will morph into a dealmaker with his old friend Joe Biden in the White House. Our base case has been for something less ambitious than $748 billion lame duck session compromise stimulus (which could be tacked onto the omnibus spending bill) and a somewhat larger deal post-election, but this sequencing could be flipped and total amounts meaningfully larger.
Brexit Talks Enter Another Pivotal Weekend
With negotiations coming down the wire ahead of the year-end deadline for the UK to depart the EU, European officials are calling for a deal by Sunday or face a no-deal Brexit. The pound retreated from its recent highs against the dollar and euro as signals over the prospect for a deal turned more mixed today, with comments from a Bank of England official suggesting the possibility of negative interest rates adding to the downside impetus. EU chief negotiator Barnier expressed continued hope for a deal in remarks earlier today but highlighted the remaining challenges, saying “the path… is very narrow.” Last evening, UK negotiators characterized negotiations as stalled over the thorny issue of fishing rights, as Prime Minister Johnson called the EU position on the issue “not reasonable.” Meanwhile, the European Parliament indicated that Sunday would be the final day for an agreement that could be ratified by the December 31st deadline. This comes after a burst of optimism earlier in the week amid reports that the UK and EU had ironed out most of their differences on the so-called “level playing field” issue involving state subsidies. – MPP view: We are retaining our out-of-consensus call for a hard and/or disorderly Brexit at year-end, as fishing rights remain intractable and the timeline is rapidly dwindling. In such a case, both sides appear to be steering toward the halfway house of a “friendly no-deal,” whereby promises to continue negotiating soften the blow to the pound and financial markets, even if the real-world economic consequences look more like a hard Brexit. Optimism for a deal is riding high, but we do not expect the EU to give much ground from here.
Tesla Joins the S&P 500 – Electric carmaker Tesla is set to join the S&P 500 on Monday, but the shares of Tesla stock that will be needed to rebalance the index were purchased today at the close of trading in unprecedented volumes. The S&P 500 indexers bought around $85 billion worth of Tesla stock, but other investment funds that track the S&P 500 also purchased the stock, resulting in over 200 million shares traded on the day, as opposed to its normal volume of 40 million. Conversely the same amount of other stocks in the index was sold. Tesla is now the seventh largest stock in the S&P 500, making up 1.52%, which means that for every $11.11 dollar move in the price of Tesla, the S&P 500 will move one point. Shares closed up 0.37% on the day but are also up 65% since it was announced they were joining the index.
Our Latest Podcast! – On this week’s Macrocast, which we produce with our friends at Hamilton Place Strategies, we discuss the last-minute stimulus drama, what to expect in the bill, and the impact this will have on the economy. We also discuss the news coming out of the Fed’s recent FOMC meeting and what this means for its changing monetary mandate heading into 2021, the (continuing) Brexit drama, and the important consumer metrics to look for next week. Please remember to subscribe, rate, and share. Macrocast: “Bad Economics Is Never Good Politics” – Hamilton Place Strategies
Looking Ahead – Next week could feature 11th hour negotiations over both the US pandemic support bill and Brexit, in the event that resolutions to both remain elusive. The holiday-shortened economic data calendar features November personal income, spending, and inflation figures, as well as durable goods orders, and a final reading of third quarter US GDP. Following today’s publication, our next Looking Ahead will be published on January 8th and Sunday’s Market Viewpoints will be the final one of 2020, with the next installment due on January 10th.
Summary and Price Action Rundown
Global risk assets are steadying this morning as the long-delayed US pandemic relief package heads to the President’s desk, Brexit negotiators soldier on despite more setbacks, and vaccine rollout continues apace. S&P 500 futures indicate a 0.2% gain at the open after the index closed with a modest 0.4% loss yesterday after being down nearly 2% in the morning, shaving year-to-date gains to 14.4%. Meanwhile, the Nasdaq continued its outperformance trend amid the Covid-19 resurgence. Equities in the EU are retracing a portion of yesterday’s steep loss, which was spurred by fears of the mutated Covid-19 strain in the UK and Brexit concerns, while Asian stocks were mostly lower overnight. A broad dollar index is holding above its recent multi-year low and longer-dated Treasuries are flat, with the 10-year yield at 0.93%. Brent crude prices are retreating toward $50 per barrel as OPEC+ considers its supply cut trajectory.
US Pandemic Relief Bill Finally Passes Congress
The House and Senate approved the $900 billion compromise relief package late last night alongside a spending bill to fund the government through the fiscal year, with President Trump set to sign it today. This long-awaited pandemic relief bill features $600 in direct payments to individuals (adults and children), which Secretary Mnuchin said yesterday could be sent to bank accounts as early as next week. Additionally, the package includes expanded and extended unemployment benefits of $300 per week through March 14th, $325 billion in support for small businesses, extended eviction moratorium and $25 billion in aid to renters, $15 billion for airlines, and assistance for schools, childcare, and vaccine rollout. The total includes $429 billion in unused funds from the CARES Act and the entire package will be appended to the $1.4 trillion omnibus spending bill that will fund the government through the end of this fiscal year. Both President-Elect Biden and House Speaker Pelosi indicated their belief that more stimulus will be needed next year, particularly given the relatively brief period granted for additional unemployment benefits. The provision to prevent the Fed from restarting any of the five CARES Act lending programs, or create similar ones in the future, had become the main sticking point last week once the two most controversial elements, direct funding for state and local governments and liability protections for businesses, had been omitted. While GOP Senators asserted that the provision would exclusively target the five Fed programs, Democrats accused Republicans of trying to hamstring the incoming Biden administration and limiting the ability of the Federal Reserve to respond to economic distress in the future. The final version of the bill is said to narrow the restriction on the Fed to identically reproducing the CARES Act programs, thereby allowing novel formulations of Fed emergency lending facilities in the future. – MPP view: Better late than never. And with the Democrats and Republicans both falling short of their two “must-haves” in this bill (state and local government aid, and corporate liability limits, respectively), we expect a resumption of negotiations after the inauguration.
Brexit Negotiation Bog Down in Waning Days Before the Deadline
The pound is extending its decline from recent highs against the dollar and euro as the UK and EU remain deadlocked over the stubborn sticking point of fishing rights, with the deadline looming next Thursday. Having missed yet another artificial deadline on Sunday, Brexit talks remain stalled this morning after the UK’s proposed compromise on fishing rights remained unacceptable to the EU. The pound, which has acted as a barometer for the fortunes of Brexit, at one point yesterday was down nearly 2% versus the dollar and euro, with the latest pandemic developments adding to the pressure, but steadied in later trading as the UK gave more ground on this challenging issue, and analysts note that more concessions may be forthcoming. With a reimposition of total lockdowns in southeast England and freight stoppage between the UK and France as the fraught backdrop, Prime Minister Johnson is reportedly set to decide in the coming days whether to accept EU terms on fishing and other outstanding issues or opt for a no-deal departure from the single market at midnight on December 31st. In the absence of a firm UK decision, however, reports suggest that talks could continue straight up to the deadline. – MPP view: We are retaining our out-of-consensus call for a hard and/or disorderly Brexit at year-end, as fishing rights remain intractable and the timeline is dwindling. But with both sides seemingly ready to continue talking past the deadline, Brexit may seem, from a market perspective at least, less like an acute shock and more like a chronic condition.
Possible Easing of OPEC+ Output Cuts – Russia gave indications today that it intends to support OPEC+ raising output by 500,000 barrels a day at next month’s meeting. The hike would take place in February, matching the increase already agreed for January. 500,000 barrels is the maximum monthly incremental supply hike allowed by the cartel’s agreement in early December. OPEC+ shifted their schedule to monthly meetings in order to be able to adjust their production more rapidly to changes in the market. The new stance from Russia came after Brent crude had already dropped toward $50 a barrel due to the UK implementing a new full lockdown in London and southeast England to combat a more contagious strain of Covid-19 that is spreading rapidly. Furthermore, a host of nations around the globe limited travel to and from the UK. Brent fell 2.9% today. – MPP view: Like stocks, oil prices have been in a transition phase as traders try to look past the dire near-term outlook to the post-vaccine demand surge. As we had expected, the latest OPEC boost provided short-term support to prices, and US stimulus expectations seem to have given some additional lift, with rising tensions (and increasing incidents) in the Gulf and dollar weakness adding to the upside impetus. Still, we have expected the dismal demand dynamics of the coming quarters to keep prices capped and see OPEC+ commitment to output cuts as difficult to maintain in the coming months. Today’s development is aligned with our base case expectation that oil prices will have a hard time making significant headway from here.
Traders Eye Georgia Runoffs – Market commentators are noting options activity in the Treasury market in anticipation of the two Senate runoff elections scheduled for January 5th, though early and mail-in balloting is well underway with a reported 1.5 million votes already cast. For context, traders would expect to see longer-dated Treasury yields jump and the dollar slump in the event of a Democrat sweep of the two contests, which would deliver control of the Senate and facilitate a far more expansionary fiscal stance in the first time of the incoming Biden administration. Betting lines and a popular prediction market are reflecting odds of the Republicans achieving at least a split in the two races and retaining Senate control at over 70%. – MPP view: Our base case is aligned with consensus but we expect odds to tighten into polling day on January 5th and investors will not be able to take a GOP win for granted, which will keep longer-dated Treasury yields biased upward and will remain a headwind for the dollar. Though the potential for a Dem sweep might give rise to concerns over taxation at the margin, enthusiasm for a less constrained pro-growth and fiscally stimulative Biden economic program would, we expect, render that result a comfortable net positive for equities.
Odds for a new round of relief spending are rising and taking markets up with them. Meanwhile, Brexit drama continues with no deal in sight. Vaccine rollouts move down to the third spot and oil and OPEC drops to fourth after a successful meeting last week. Finally, Trump – China tensions are heating up.
Looking Ahead – The Dragon and the Ant
It has been an eventful few weeks, even by the standards of 2020, which has not lacked for consequential occurrences. As the post-election legal challenges wind down, this unprecedented US political season seems to be heading toward the likely resolution of a grudging (to put it mildly) transition from the Trump administration to the Biden White House, though the actual endgame of the electoral college and physical departure of the incumbent have yet to play out, leaving residual but disquieting tail risks. Meanwhile, initial polls for the Georgia Senate runoffs show that both races are essentially tied, for what that is worth, but we expect markets to grapple with that uncertainty closer to the day of the election. Our base case remains a split decision at best for the Democrats, allowing the GOP to retain control of the Senate, though we expect that the apparent tightness of the races, skepticism in the polls, and the unprecedented political backdrop will force investors to seriously contemplate the possibility that the Dems win back the Senate by running the table on January 5th.
In the meantime, market participants have been weighing the near term Covid-19 autumn/winter nightmare against the encouraging longer-term outlook for widespread distribution of a highly effective vaccine from Pfizer/BioNTech and Moderna, and probably AstraZeneca as well. A focus in financial markets on the heartening prospect of herd immunity being achieved at some point in 2021 predominated for much of last week but the immediacy of the unfolding public health disaster across the US and its economic consequences have dampened the investor mood for much of this week.
The rest of the world has not stood still during all of this, of course, and one of the most consequential recent developments has been the delay of the planned $34 billion Ant Financial IPO on the Shanghai and Hong Kong stock exchanges earlier this month, which was set to eclipse the $29 Saudi Aramco offering as the largest in history. Initial reports citing some regulatory shortcomings did not seem to square with a process that would have surely been so involved and thorough, and with only a matter of days before the offering date of such a high-profile and historical stock market debut. Subsequent reports indicating that President Xi himself had ordered the IPO pulled cemented suspicions that this was no mere regulatory matter and that crossing a few more t’s and dotting a few more i’s on the compliance front would not provide a solution.
What could have been the motive? Clearly Ant Financial’s role in disintermediating the Chinese state-owned banking sector, by competing for deposits and loan business, was obviously one potential consideration. China’s state banks our more than just financial institutions, they are in effect the circulatory system of the state capitalist model and a major wellspring of power for the Chinese Communist Party (CCP). Many of the loans they make are well understood to be on non-commercial terms in the furtherance of policy goals and propagation of often sclerotic state-owned companies and local government funding structures. The fact that Ant Financial was offloading its balance sheet risks on to these lumbering giants while eating off their plate of potential deposits and quality lending opportunities surely had the attention of Beijing. Analysts are speculating that pulling the IPO is in part designed to hamper Ant Financial’s rise while allowing some of the state banks to potentially catch up, and the tighter regulatory standards being applied suggest a meaningful dent in Ant’s profitability advantage.
Meanwhile, Ant Financial’s dominance and sheer size is surely a factor as well. The CCP has always been sensitive to the potential for competing power structures in China, and President Xi’s tenure has featured pronounced assertiveness on this front. While Jack Ma is not Bo Xilai, some major Chinese conglomerates have been taken down in recent years when they fell afoul of the Chinese leadership, with Dalian Wanda and Anbang Insurance being the most prominent examples.
Lastly there is the issue of the digital renminbi. It was always assumed that this innovation, which is putting China out in front of its sovereign competitors in digitizing its currency, would necessarily be competing with WeChat and Alipay, but analysts were unsure the degree to which Beijing was intent on vigorously competing with these popular platforms. This may be a signal that the fight for share of digital payments in China is heating up, with the state looking to capture a meaningful slice, which would not be out of character.
From the US regulatory perspective, this is marvelous news. Beijing is helping make the case that so many policymakers in Washington have pressed recently that Chinese companies are subject to state directives, or even outright agents of Beijing in some cases, routinely fall short of western accounting and disclosure practices, and often feature malign ties to espionage activities. This example will certainly be cited as the new administration carries on the job of attempting to force a higher standard of compliance with accounting rules for Chinese companies listed in the US. This seemingly capricious delay of the Ant Financial IPO is an object lesson that even China’s private sector giants enjoy no enforceable legal protections or property rights in their domestic market, except at the pleasure of President Xi.
Looking ahead, next week’s calendar in the US is dominated by the Thanksgiving holiday, which will occur against the dangerous backdrop of the virulent autumn resurgence of Covid-19, but there will still be plenty of data for analysts to chew on. The preliminary readings of November’s global purchasing managers’ indexes (PMIs) are due, along with US income, spending, and inflation for October.
Global Economic Calendar: Thanks(giving) but no thanks(giving)
This week brings a heavy dose of global manufacturing purchasing managers’ index (PMI) data, beginning with the IHS Markit/BME Germany Manufacturing PMI. The October PMI was revised higher to 58.2 from a preliminary of 58, pointing to the strongest expansion in factory activity since March of 2018. New orders rose at record pace amid stronger demand both domestically and abroad, with rising sales to Asia, specifically China, helping lift new export orders to the greatest extent since December of 2017. As a result, output growth was the third-fastest on record and reflected sharp increases in consumer, intermediate and investment goods. On the other hand, employment fell for the twentieth month. On the price front, average factory gate charges rose modestly and for the first time since May 2019, as stronger demand allowed some goods producers to pass on the burden of higher costs to clients. On the other hand, business confidence slowed slightly from a 32-month high in September, but companies remained positive in general.
Later in the morning the IHS Markit Eurozone Manufacturing PMI for November will be released. October was revised slightly higher to 54.8, from an initial estimate of 54.4 and compared with September’s final 53.7. The latest reading pointed to the steepest month of expansion in the manufacturing sector since July 2018, as output growth accelerated to an over two-and-a-half-year high and new orders rose by the most since the start of 2018.
Next is the IHS Markit/CIPS UK Manufacturing PMI. October was revised higher to 53.7, from a preliminary estimate of 53.3 and compared to September’s final reading of 54.1. The latest number pointed to solid expansion in the UK manufacturing sector, for five months running, with both output and new orders rising amid stronger demand from both domestic and overseas sources. Meanwhile, employment declined for the ninth successive month, and at a faster pace, due to redundancies, recruitment freezes, the non-replacement of leavers, cost reduction strategies and workforce restructuring. On the price front, input cost inflation was the highest since December 2018, while output charges also increased. Looking ahead, business optimism hit the highest level since January 2018 on hopes of economic recovery and a reduction in COVID-19 disruption.
Finally, the IHS Markit US Manufacturing PMI ends the PMI data dump. October was revised higher to 53.4, from a preliminary estimate of 53.3. The reading pointed to the 4th consecutive month of growth in factory activity and the strongest since January of 2019. Output growth was the sharpest since November of 2019, driven by stronger client demand and higher new order inflows. New order growth picked up due to more robust client demand, with some firms noting larger orders being placed. Although domestic demand ticked higher, new export orders fell for the first time since July due to reimposed coronavirus lockdown restrictions in Europe. Reflecting weaker pressure on capacity, firms increased their workforce numbers at a softer pace. Meanwhile, average cost burdens increased at the steepest rate since January of 2019. Business expectations remained positive, improving on September’s 4-month low, as firms foresee a rise in output over the coming year.
The Chicago Fed National Activity Index dropped to +0.27 in September 2020 from an upwardly revised +1.11. Three of the four broad categories of indicators used to construct the index decreased from August. Production-related indicators contributed -0.24 to the CFNAI in September, down from +0.31 in August; and the contribution of the sales, orders, and inventories category to the CFNAI edged down to +0.07 from +0.10. Also, employment-related indicators contributed +0.35 in September, down from +0.71 in August, while the contribution of the personal consumption and housing category to the CFNAI moved up to +0.09 from a neutral value in the previous month.
The day begins with the Final Estimate of German Third Quarter GDP. The previous estimate showed the German economy grew by a record 8.2% q/q, trying to recover from the historic 9.8% slump seen in the second quarter and beating market consensus of 7.3%. The expansion was supported by a rebound in household consumption, strong fixed investment in machinery and equipment and a sharp increase in exports. Year-on-year, the economy shrank by 4.3%, easing from a record contraction of 11.3% in the previous period. The economy was also 4.2% smaller when compared with Q4 2019, the quarter before the coronavirus pandemic hit. Meanwhile, Germany’s government has revised upwards its 2020 GDP forecast. It now expects the economy to shrink by 5.5%, compared to an initial estimate of 5.8% decline, before rebounding by 4.4% in 2021.
Also, in Germany the Ifo Business Climate indicator will be released. October Ifo dropped to 92.7, from a seven-month high of 93.2 in September. Companies were considerably more skeptical regarding developments over the coming months following the imposition of tougher restriction measures to curb the spread of the COVID-19 pandemic. In contrast, firms assessed their current situation as better than in the previous month.
In the US, the Conference Board Consumer Confidence Index will be the focus of the day. In October, the index declined slightly, after increasing sharply in September. The Index now stands at 100.9, down from 101.3 in September. The Present Situation Index, based on consumers’ assessment of current business and labor market conditions, increased from 98.9 to 104.6. However, the Expectations Index, based on consumers’ short-term outlook for income, business, and labor market conditions, decreased from 102.9 in September to 98.4.
The day opens with the Second Estimate of US GDP. The first estimate showed the US economy expanded by an annualized 33.1% in Q3 2020, the biggest expansion ever, following a record 31.4% plunge in Q2. Personal spending surged and was the main driver of growth, helped by checks and weekly unemployment benefits from the federal CARES Act. Growth also reflects increases in private inventory investment, exports, nonresidential fixed investment, and residential fixed investment that were partly offset by decreases in federal government spending, reflecting fewer fees paid to administer the Paycheck Protection Program loans.
The day also will digest US Durable Goods Orders. In September, new orders surged 1.9% m/m, well above a 0.4% rise in August. Orders rose for the 5th straight month, led by transport equipment, as the economy recovers from big plunges in March and April due to the coronavirus pandemic. Orders rebounded for transportation equipment, namely motor vehicles, and fabricated metal products, and continued to rise for capital goods, and computers and electronics. On the other hand, orders fell for machinery, and electrical equipment, appliances and components. Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, increased 1%, following an upwardly revised 2.1% rise in August.
Third Quarter US Corporate Profits come next. In Q2, corporate profits tumbled by 10.7% to an over four-year low of $1.59 tril. It was the sharpest decline in corporate profits since the last quarter of 2008, amid the coronavirus crisis. Undistributed profits slumped by 43.8% to $230 bil and net cash flow with inventory valuation adjustment, the internal funds available to corporations for investment, dropped by 9.5% to $2.10 tril. Also, net dividends were 1.1% lower at $1.36 tril.
Weekly Initial and Continuing Jobless Claims. The number of initial claims for state unemployment benefits rose by 742K in the week ending November 14th, surpassing market forecasts of 707K, and registered as the fifth consecutive week that claims remained in the 700K’s territory. The reading climbed by 31K from the prior report’s revised level of 711K and was the first rise in claims in over a month amid a resurgence in coronavirus cases and targeted lockdowns across the country. Continuing claims fell by 429K to 6.37 million in the week ending November 7th, slipping below market forecasts of 6.47 million, and marked the lowest total since the pandemic-induced turmoil in March. The increase in initial claims was most severe in Louisiana, where filings more than quadrupled to 42K. Massachusetts, Texas, and Virginia also saw notable increases, while Illinois, Florida, New Jersey, and Washington saw the greatest declines. Although total state claims have fallen, the number of Americans claiming extended non-state benefits is continuing to rise. For the week ending November 14th, the Pandemic Unemployment Assistance (PUA) reading rose by 320K. The Pandemic Emergency Unemployment Compensation (PEUC) program, which provides an additional 13 weeks of support, added 233K claims in the week ending October 31st, summing to nearly 4.4 million Americans receiving extended aid through the program. The total persons claiming unemployment benefits including non-state programs fell by 841K to 20.3 million ending the same period.
The Personal Income and Spending Report comes later in the morning. In September, personal income rose by 0.9% m/m, rebounding from a revised 2.5% slump in August. The monthly gain was boosted by increases in proprietors’ income, compensation of employees, and rental income of persons, which were partly offset by a decrease in government social benefits. Personal spending increased 1.4%m/m, following a 1% rise in August. Real spending went up by 1.2% or $159.2 bil, reflecting an increase of $109.9 bil in spending for goods and a $61.0 bil rise in spending for services. Within goods, clothing and footwear as well as motor vehicles and parts were the leading contributors to the gain. Within services, the largest contributors were spending for health care as well as recreation services, led by membership clubs, sports centers, parks, theaters, and museums.
The report also contains the Personal Consumption Expenditure (PCE) Price Index. Headline PCE rose 0.2% m/m in September, following a 0.3% gain in August, boosted by an increase in services cost, while goods prices fell 0.1%, led by a 0.3% drop in nondurable goods. Core PCE, which excludes food and energy and which the Fed has a 2% target, rose 0.2%, in line with market expectations. Year-on-year, Headline PCE advanced 1.4% and Core increased 1.5%.
New Home Sales follows as sales dropped 3.5% m/m to a SAAR of 959K in September, from the previous month’s 14-year high of 994K. The level of home sales remained elevated as the housing market has been supported by record low interest rates and increasing demand from people moving away from big cities due to the coronavirus crisis. In September, new home sales declined 4.7% to 563K in the South, 4.1% to 93K in the Midwest and 28.9% to 32K in the Northeast but rose 0.7% to 284K in the West.
The day closes with Final Estimate of the University of Michigan’s Consumer Sentiment. The preliminary estimate decreased to 77 in November from 81.8 in October and against market expectations of 82. It is the lowest reading since August as consumers judged future economic prospects less favorably, 71.3 vs 79.2 in October, while their assessments of current economic conditions remained largely unchanged. Meanwhile, inflation expectations for the year ahead increased to 2.8% from 2.6% and the 5-year outlook to 2.6% from 2.4%. The outcome of the presidential election as well as the resurgence in COVID-19 infections and deaths were responsible for the early November decline. Interviews conducted following the election recorded a substantial negative shift in Republicans’ expectations and no gain among Democrats.
The focus of Thursday will be the GfK Consumer Climate Indicator in Germany. The index fell to -3.1 heading into November from a revised -1.7 in October. This was the weakest reading since July, amid fears over another lockdown following a resurgence of COVID-19 cases in the country. The gauge for economic outlook tumbled 17 points to 7.1, the income expectations sub-index fell 6.3 points to 9.8, and the willingness to buy indicator dropped 1.4 points to 37. GfK consumer expert Rolf Buerkl said, “Consumers apparently assume that the much more active infection process in Germany will slow down the previously hoped for rapid recovery of the German economy.”
The week closes with the Eurozone Economic Sentiment Indicator for November. In October, the indicator was unchanged at 90.9but remaining well below pre-pandemic levels, as rising COVID-19 cases across the region forced many European governments to impose fresh restrictive measures. By sector, confidence deteriorated among service providers and consumers, while morale improved among manufacturers, retailers and constructors.
Summary and Price Action Rundown
US equities retrenched slightly today after a month of powerful gains that were spurred by positive vaccine news and a relatively clear and orderly US election process, followed by pro-growth cabinet nominations by the incoming Biden administration. The S&P 500 backed off from Friday’s record high, declining 0.5% to shave year-to-date upside to 12.1%. The tech-heavy Nasdaq outperformed as economic fundamentals weighed on the Dow Industrials, which still registered its best monthly performance since 1987. For context, the Dow, which tends to be more sensitive to economic fundamentals, has underperformed significantly during the pandemic but was revitalized by the announcements of effective vaccines throughout November. The Euro Stoxx Index and Asian equities also retreated to close the month. A broad dollar index edged above its multi-year low today, while Treasuries have remained steady, with the 10-year yield hovering at 0.86%. Brent crude prices retreated below $48 per barrel as the ongoing OPEC meeting kept traders in suspense (more below).
US Economic Data Shows More Hints of Softening
With US economic figures providing some garbled signals over the past few weeks, and analysts bracing for further deterioration amid the ongoing resurgence in Covid-19, today’s releases added to the evidence of a renewed slowdown. The MNI Chicago Business Barometer fell to 58.2 in November from 61.1 in October. New Orders dropped 5 points to the lowest level since August, while Production fell 1.2 points. Inventories slipped 2 points to a three-month low. However, Supplier Deliveries jumped 4.9 points to the highest level since May as firms saw delivery delays, while Prices at the Factory Gate surged 9.8 points to the highest level in two years. A special question asked: “Does the outcome of the general election have any effect on your forecast? “A majority 73.2% said that the election results do not influence their forecasts, while 12.5% saw their forecasts increase and 14.3% reported a decrease.” Similarly, the Dallas Fed manufacturing gauge undershot expectations, printing 12.0 versus a consensus estimate of 14.3 and the prior month’s 19.8.
Also, the Small Business Confidence index sank to its lowest level on record at a reading of 48, one-point below the previous low reported in the second quarter (Q2) during the worst of the pandemic-driven economic turmoil. Though responses in the current fourth quarter (Q4) survey, conducted in the period between November 10-17, were impacted by the virulent resurgence in Covid-19, the reinstatement of targeted lockdowns, and the Congressional deadlock in providing additional fiscal relief, survey-data suggests that President-Elect Biden’s victory further compounded the decline in relation to the Main Street outlook on taxes and regulation. Of the 2,200 small business owners polled, 53% expect tax policy to have a negative impact on their business during the next 12 months, and 49% said government regulation will have a negative impact over the same period. While the decrease in outlook is notable, responses from small business owners are heavily skewed by their political affiliations, and the index overall leans conservative. Separated by political connection, 75% of Republicans believe tax policy will have a negative effect and 72% said regulations will be negative, while only 15% and 11%, respectively, of Democrats believe tax and regulatory changes will hinder business operations. Overall, the survey indicates 34% of owners believe Joe Biden will be good for small business, while 55% say the opposite. Though by political affiliation, 89% of Republicans are pessimistic of the Biden administration on small business and 86% of Democrats are optimistic. The stark contrast in business sentiment following the election “reveals how deeply politics has become embedded in the public’s assessment of the economy, and in particular how divided the country is,” stated Laura Wronski, research science manager at SurveyMonkey. She continued to note over the past several quarters that Republican respondents consistently reported a higher degree of confidence than Democrats did, and post-election, that trend has flipped. At the moment however, the feasibility of the Biden team’s tax and regulatory proposals are unclear, and contingent upon Georgia’s runoff Senate races, as a Republican-controlled Senate would surely constrain Biden’s policy agenda.
Lastly, pending home sales in November fell 1.1% month-on-month, well below market expectations of a 1% gain, and following a 2% drop in October. However, this still leaves sales up 20.2% year-over-year following a 20.8% rise in September. Contract activity was mixed among the four major US regions, with the only positive month-over-month growth happening in the South, although each region saw year-over-year gains in pending home sales transactions. Lawrence Yun, NAR’s chief economist said, “The housing market is still hot, but we may be starting to see rising home prices hurting affordability. Both the inventory of homes for sale and mortgage rates are now at historic lows.”
Today’s mixed economic readings follow last week’s pre-holiday data dump that also showed signs of backsliding in weekly jobless claims and October Personal Income.
Vaccine Developments in Focus
With trials showing impressive effectiveness of the various vaccines, investors are now pondering the remaining unknowns of the rollout timeline and public uptake. Moderna’s stock rose 20.2% today on news of its plans to apply for emergency authorization use for its vaccine, a move that could drastically change the course of the pandemic. The results of Moderna’s Covid-19 vaccine trial were released today showing 94.1% efficacy, bolstering hopes of initial vaccine deployment before year’s end. Out of 30,000 participants, only 11 of the 15,000 that received the vaccine developed Covid-19, compared with 185 from the 15,000 who received the placebo. No severe cases emerged in the subset receiving the vaccine compared to 30 in the placebo subset, implying a near 100% efficacy at preventing severe cases. Moderna stated it will file with the FDA on today for emergency authorization of the vaccine following Pfizer’s application on November 20th. The FDA will review both Pfizer and Moderna’s filings on December 10th and 17th respectively, after which, if the panel grants emergency authorization, the process will escalate to the advisory committee from the CDC for recommendations on the first recipients of the vaccine. Once those recommendations are made, vaccines are cleared for distribution and use. Moderna has stated it expects to have 20 million doses by the end of 2020 and as many as 1 billion doses globally in 2021. – MPP view: Investors are still caught in the transition phase between the grim near-term public health reality and its economic consequences, and giddy optimism over the longer term view of widespread distribution of the effective vaccine delivering us from the pandemic.
Oil Slides with OPEC+ Lacking Consensus – The conclusory cartel meeting was rescheduled from tomorrow to December 3rd as reports suggest continued disagreement over the potential extension of price-supporting output restrictions beyond their scheduled expiry in January. Oil prices reversed a portion of their recent upside today, but remain close to multi-month highs, as caution sets in over the possibility of a less ambitious extension or even a deadlock. For context, prices of international benchmark Brent crude and US benchmark WTI both reattained levels from early March last week amid a confluence of bullish factors, including the brightening demand outlook stemming from the encouraging Covid-19 vaccine developments, a weakening dollar, and indications that Saudi and Russia were set to push their fractious OPEC+ allies to hold to their supply curbs well into 2021, with a three-month extension the consensus expectation. Reports now suggest that the timeframe could be limited to two months or feature a gradual tapering of the curbs over three to four months. The UAE is said to be one of the key holdouts and had reportedly threatened to withdraw from OPEC earlier this month over dissatisfaction with other members’ uneven compliance with the cartel supply cuts. Nigeria and Iraq are the two OPEC members that have struggled to implement the curbs and have been pushed for compensatory cuts. – MPP view: Like stocks, oil prices are in a transition phase as traders try to look past the dire near-term outlook to the post-vaccine demand surge. This will make cartel discipline harder to maintain into 2021, but Russia/Saudi should succeed in securing one last supply curb extension at their meeting this week. As we have expected, anticipation of this last OPEC boost will provide some short-term support to prices, and post-election US stimulus dynamics (when they materialize) should provide some additional lift, but we expect the dismal demand dynamics of the coming quarters to keep prices capped, though this short-term rally has exceeded our expectations. This burst of optimism in oil markets has increased the risk that OPEC fails to deliver meaningful additional support to the market in this week’s pivotal meeting, as member discipline will be questionable.
Reserve Bank of Australia Meeting – This evening the Reserve Bank of Australia (RBA) will hold an interest rate meeting. At the November meeting the RBA lowered its cash rate to an all-time low of 0.1% from 0.25%. Policymakers said they would buy A$100 billion of government bonds with maturities of around five to 10 years over the next six months. The RBA also cut its target for three-year bond yields to 0.1%, from 0.25%, to align with the cash rate, which, it pledged will remain unchanged until inflation is sustainably within its 2-3% target band. GDP growth is expected to be around 6% over the year to June 2021 and 4% in 2022 while the unemployment rate is expected to remain high, but to peak at a little below 8%, rather than the 10% expected previously. This meeting is not expected to see any significant change in policy or statement as the November saw significant loosening in policy. – MPP view: We shall see if the RBA mentions its currency during the meeting, which is at its highest level against its US counterpart since 2018, but even if so, there should be scant impact. We expect the Biden administration, when it takes over, to quietly make the case to US allies that now is a particularly inauspicious time for currency controversies as the US attempts to course-correct on pandemic containment and patch up its raw internal political and socioeconomic divisions.
Summary and Price Action Rundown
Global risk assets are mixed this morning after stellar month-to-date performance, with US equities registering record highs last Friday, as investors assess the latest China-related developments and await a key OPEC decision tomorrow. S&P 500 futures indicate a 0.2% lower open after the index edged to a new record high in Friday’s holiday-shortened session, gaining 0.2% to up its year-to-date gain to 12.4%, while the Dow Industrials has slipped a bit after crossing 30,000 for the first time last week. Equities in the EU are consolidating their recent gains as well, while Asian stocks were mostly lower overnight. A broad dollar index is descending to a new multi-year low, at a level last seen in April 2018, while longer-dated Treasuries are generally steady, with the 10-year yield ticking up to 0.85%. Brent crude is paring its recent upside, dipping below $48 per barrel, ahead of a pivotal OPEC meeting (more below).
China Headlines in Focus
Solid purchasing managers’ index (PMI) figures overnight reflected the robustness of China’s recovery but more potential additions to the US trade blacklist highlight ongoing US-China tensions. China’s official PMI figures for November topped estimates across the board overnight, with the composite reading registering a solid 55.7 versus October’s 55.3. For context, PMI readings over 50 denote expansion. The manufacturing reading accelerated to 52.1, outpacing the consensus forecast of 51.5 and the prior month’s 51.4. Services were even more impressive at 56.4, topping estimates of 56.0 and October’s 56.2. Nevertheless, the People’s Bank of China added liquidity to the financial sector as analysts cited proactive management of year-end cash needs. This positive data has helped support the renminbi near its strongest level versus the dollar since June 2018, which takes pressure off the incoming Biden administration on the currency front, but other key US-China sources of tension persist, with the outgoing Trump administration obviously intent on keeping up the pressure in its final weeks. Reports overnight indicated that the White House is preparing to add more Chinese companies to its trade blacklist due to ties with China’s military, including chip giant SMIC and oil major CNOOC, shares of which fell 2.7% and 14.0%, respectively, on the Hong Kong exchange overnight. Analysts have been pondering the extent to which the Biden administration will continue President Trump’s hardline policy direction against China. – MPP view: We believe the Biden administration will take a more multi-lateral approach to confronting China, focusing more on using its human rights transgressions to marshal international pressure on officials and businesses, while still maintaining the segments of the Trump China policy that cover national security, IP, property rights, and investments. We expect trade and currency to be de-emphasized, or perhaps more accurately, dealt with in a more subtle fashion.
OPEC+ Members Lack Consensus Ahead of Pivotal Meeting
With the cartel and its allies meeting today and tomorrow, traders are highly attuned to signs of disagreement over the key issue of whether or not to extend supply caps into 2021. The full cartel meeting will commence later today following headlines indicating that informal interactions among members revealed rifts over the potential extension of price-supporting output restrictions beyond their scheduled expiry in January. Oil prices are retracing a portion of their recent upside this morning, but remain close to multi-month highs, as caution sets in over the possibility of a less ambitious extension or even a deadlock. For context, prices of international benchmark Brent crude and US benchmark WTI both reattained levels from early March last week amid a confluence of bullish factors, including the brightening demand outlook stemming from the encouraging Covid-19 vaccine developments, a weakening dollar, and indications that Saudi and Russia were set to push their fractious OPEC+ allies to hold to their supply curbs well into 2021, with a three-month extension the consensus expectation. Reports now suggest that the timeframe could be limited to two months or feature a gradual tapering of the curbs over three to four months. The UAE is said to be one of the key holdouts and had reportedly threatened to withdraw from OPEC earlier this month over dissatisfaction with other members’ uneven compliance with the cartel supply cuts. Nigeria and Iraq are the two OPEC members that have struggled to implement the curbs and have been pushed for compensatory cuts. – MPP view: Like stocks, oil prices are in a transition phase as traders try to look past the dire near-term outlook to the post-vaccine demand surge. This will make cartel discipline harder to maintain into 2021, but Russia/Saudi should succeed in securing one last supply curb extension at their meeting this week. As we have expected, anticipation of this last OPEC boost will provide some short-term support to prices, and post-election US stimulus dynamics (when they materialize) should provide some additional lift, but we expect the dismal demand dynamics of the coming quarters to keep prices capped, though this short-term rally has exceeded our expectations. This burst of optimism in oil markets increases the risk that OPEC fails to deliver meaningful additional support to the market in this week’s pivotal meeting, as member discipline will be questionable.
Black Friday Spending Shows a Resilient US Consumer – US consumers spent $9 billion online on Black Friday, up 21.6% on a year ago. Adobe had originally forecast sales of between $8.9 billion and $9.6 billion. The figure makes Black Friday the second-largest online spending day in US history, after 2019’s Cyber Monday. The National Retail Federation (NRF) has predicted that holiday sales during November and December will increase between 3.6% and 5.2% this year from 2019 to a total of between $755.3 billion and $766.7 billion, up from last year’s 4% gain that totaled $729.1 billion. Of that amount, NRF expects that online and other non-store sales will increase between 20% and 30% to between $202.5 billion and $218.4 billion, up from $168.7 billion last year. Nevertheless, holiday sales metrics can often contrast with overall consumption figures, and the disappointing October retail sales reading suggested a degree of deterioration in demand as the pandemic intensifies into its second winter season.
Signs of Progress Keep Brexit Deal Hopes High – The pound is turning higher again this morning, though remains below recent multi-month highs versus the dollar and euro, amid upbeat assessments of the prospects for an agreement this week between the UK and EU to avoid a disorderly year-end Brexit. The thorny matter of fishing rights apparently remains the key sticking point, though UK Foreign Secretary Raab expressed optimism that a compromise could be found, and indicated greater clarity on possible resolution of UK state aid and “level playing field” issues. – MPP view: Our base case remains a hard and/or disorderly Brexit at year-end, though the renewed pressure from the pandemic is adding further impetus for PM Johnson to compromise and secure a deal, while the sidelining of arch Brexiteer Cummings also suggests a possible softening of the UK position. We do not expect the EU to give much ground from here.