On Friday, US employment data seemed to confirm the worst for the US, that the rampaging Covid-19 pandemic was holing the US recovery far too close to the waterline. Non-Farm Payrolls added only 245,000 jobs in November, with government and service sectors bearing the brunt. The reduced pace of job creation leaves the US still nearly 10 million jobs short of its pre-pandemic levels and was in line with the warnings given by the ADP Employment and Homebase Small Business Employment Index according to Pantheon Macroeconomics.
The silver lining though is that it appears to have nudged Capitol Hill towards a bi-partisan fiscal stimulus agreement. The USD908 billion package (of which we know very little detail), is far short of the USD2.5 trillion that the Democrats had hoped for, but appears to be palatable to recalcitrant Senate Republicans. A package to be voted on could appear as soon as today allegedly.
A US stimulus agreement will not be an instant panacea to US woes; only beating Covid-19 into retreat will do that, but it’s the thought that counts. A possible deal is lifting Asian markets in early trading, and will likely keep equity markets bid through the remainder of the day. It will also raise the likelihood of the Federal Reserve, increasing their bond-buying targets at the FOMC meeting next week to slurp up the impending new wave of Federal issuance. Just don’t call it debt monetisation. With US 10-year yields approaching 1.0%, I expect their attention to be weighted towards buying the longer end of the curve to cap a steepening of the curve. It is a strange world that we live in where interest rates rising to one per cent make the world’s capital markets break into a cold sweat.
The net effect should be a continuing sell-off in the US dollar, something noticeable on my return from a week off. A vaccine and US stimulus-driven rotation out of defensive US dollar holdings, a Federal Reserve buying a goodly portion of the US stimulus bond issuance in secondary markets, and the search for yield in zero per cent world will keep the greenback in the naughty corner for much of 2021.
The day’s other main event will be the saga we know as Brexit. Talks over a post-Brexit trade agreement between the United Kingdom (united on paper anyway), and the European Union, are unsurprising, going down to the wire. The term “knife-edge” was used extensively by officials over the weekend, and sterling gapped open in the Wellington/Sydney twilight zone this morning. Large moves on currencies in that twilight zone usually reverse when the rest of the world changes out of their pyjamas. The initial drop below 1.3400 has quickly reversed, with GBP/USD now 1.3430, near to its close in New York.
Muddying the waters, but mostly unnoticed, are two pieces of legislation that trundle back to the UK Parliament on Monday and Tuesday. The dreaded Internal Markets Bill, with all its controversial clauses reinserted, and a Taxation Bill, which also contains clauses of dubious illegality. These could be a British negotiating tactic or an admission that no trade agreement with Europe is possible. The speed of sterling’s retreat from 1.3540 on Friday highlights the risks of being long at these levels if no deal is reached. Having completely ignored the possibility of a no-deal scenario for months, markets should expect a fall on steroids if the worst-case scenario plays out.
A no-deal scenario does not leave Europe unscathed, far from it. A reversion to WTO rules means tariffs galore on EU products to the region’s second-largest economy, with whom it runs a huge surplus. That will undoubtedly prompt action from the European Central Bank this Thursday. With rates already negative, the ECB will likely increase its pandemic bond-buying programme, release new TLTRO funds, or both. Admittedly, the ECB was likely to do something anyway, with Covid-19’s second wave wreaking havoc on Europe’s recovery hopes. An increase in QE by the ECB in a Brexit trade-agreement-failure scenario may limit the euro’s gains versus the dollar.
After the first week of the month’s data frenzy, this week has a decidedly second-tier look about it. European and US inflation measures will dominate this week, with CPI readings in Europe notably, expected to be asthmatic. Cue the ECB once again. Markets predict that China exports will grow at an annualised rate of 12.0% today, slightly higher than last month’s gain of 11.40%. The threat is that the data underperforms, and maybe the first sign that China’s outperformance is slowing, as Covid-19 threatens growth in the US, Europe and parts of Asia. The fallout from a miss on exports should be short-lived though, with US stimulus and vaccines allowing markets to be “forward-looking” as a pretext for ignoring reality.
Japan’s umpteenth Q3 GDP reading released tomorrow will be old news, simply because Q3 is now a lifetime away in 2020 terms. China’s CPI, and Japan’s PPI, released later in the week, will show both grappling with deflation, and not inflation. That may cause some concerns regarding China’s domestic consumption, with the PBOC keeping liquidity tight. Apart from peeling back some cracks in the wallpaper of China’s recovery, the data should not be market moving this week. China’s CPI should turn the corner if energy prices remain at these levels.
Although Australia is making much noise about the downstream effects of China’s silent war import ban of Australian goods, none of that appears to be appearing in the data. ANZ Job Advertisements rose 13.90% MoM for November, well above markets expectations of 8.0%. That follows recent, exceptionally strong, employment data. As the king of pro-cyclicals, both the Australian dollar and local equities should outperform this week, as the street ignores China and concentrates instead, on its beta to US fiscal stimulus and a vaccine-led recovery. I suspect the story will return to haunt the lucky country in 2021 though.
Overall markets will be dominated by US fiscal stimulus and Brexit headlines, to a lesser and more localised extent.