- U.S. calendar has manufacturing ISM, construction spending, auto sales
- Canada calendar focuses on Q3 GDP, expected to rebound 48.0%
- Dollar and yen softer, Kiwi dollar hit 1-yr high vs yen, amid risk-on positioning
- European stock markets have rallied after a strong close in Asia
- UK final Nov manufacturing PMI revised up, to 55.6 from 55.2, up from 53.7 in Oct
- German Nov unemployment rate unexpectedly dropped to 6.1% from 6.2%
- Eurozone final Nov manufacturing PMI revised up to 53.8 from 53.6
- RBA left policy settings unchanged, as widely expected
- China manufacturing PMI rose to 54.9 in November from 53.6
- Japan Nov manufacturing PMI at highest level since Aug 2019
North American Open
Treasury Outlook (December 1)It was a November to remember for Wall Street as the S&P 500 and Russell 2000 recorded their best November ever, climbing 10.75% and 18.29%, respectively. The Dow rallied 11.84% on the month for its strongest November since 1928, while the NASDAQ was up 11.8% for its best since 2001. Positive vaccine news provided a lot of the underpinning, but the ongoing Fed accommodation also supported. For the year-to-date, however, the NASDAQ has been the big winner with a 35.96% surge thanks to the strength in the stay-home shares. The S&P 500 is up a very respectable 12.1%, while the Dow is in positive territory with a 3.86% increase as the vaccine developments provide hope for a return to normalcy sooner than later. Treasuries were little changed with the long bond closing at 1.570% and the 10-year at 0.844%, while the 2-year was at 0.147%, well off of the cheapest levels on the month. The calendar heats up and will be heavy for the rest of the week, concluding with the November jobs report. Today’s slate has the November manufacturing ISM, expected to slip to 57.5 from 59.3. October construction spending should rise 0.8% from 0.3% previously. November auto sales will trickle out through the session. For Fedspeak, the focus will be on testimony from Fed Chair Powell on the CARES Act. In his prepared remarks released Monday afternoon he will say that vaccine news is very positive for the medium term, but warned there are still significant challenges and uncertainties, including the timing, production, distribution, and efficacy across different groups. He also noted that the economic improvement has moderated and the outlook remains “extraordinarily uncertain.” Other Fedspeakers include Brainard, Williams and Daly are on deck. The earnings calendar features Salesforce.com, Bank of Nova Scotia, Bank of Montreal, Veeva Systems, Trip.com, HP, and NetApp.
Canadian Market Outlook (December 1)Canada’s GDP expected to rebound 48.0% in Q3 after -38.7% Q2 plunge A busy calendar is on tap in Canada this week, contrasting with the nearly blank docket last week. Q3 GDP, September GDP, November employment and October trade will provide insights into the size of the rebound in Q3 and the impact of the spike and infections and renewed restrictions that began in October and accelerated in November. Q3 GDP (Tuesday) is expected to rebound 48% after the -38.7% plunge in Q2 that came as the economy was nearly shut down. September GDP is seen rising 0.9% after the 1.2% bounce in August. Employment (Friday) is projected to rise 40k in November following the 83.6k gain in October. The unemployment rate is seen at 8.8 from 8.9%. The trade deficit (Friday) is anticipated to narrow to -C$3.0 bln in October from the -C$3.3 bln shotfall in September. The Q3 productivity report (Wednesday) is also due out this week. While the relative deluge of data is of interest, we suspect it will not materially change the outlook for moderation in Q4 growth due to the fresh restrictions that have come as virus cases pick-up, followed by a return to “normal” next year as the vaccine takes hold. Notably, there have been whispers that the economy could be setting up for a surge in inflation if demand returns quickly next year — something the BoC is likely to monitory closely.
FX Update (December 1)EUR-USD has settled lower after yesterday posted a three-month high at 1.2004. Strong Chinese manufacturing PMI data — as in best-in-10-years strong — catalysed a resumption in risk-on positioning in global markets, which saw the dollar, along with the yen, come under pressure, with the effect of lifting EUR-USD form its correction low at 1.1924. EUR-USD’s 30-month peak seen in early September is at 1.2012. Market participants will be mindful that the pair has consistently failed to sustain gains above the 1.1900 level for almost four months now. There aren’t many strong prevailing reasons to bullish on the euro, too, given recession bound eurozone nations, which are underperforming the U.S. and Asian economies, strong dovish bias at the ECB, the 750 bln euro EU recovery fund being delayed by a dispute with Poland and Hungary. One positive has been the recent outperformance of European stock markets relative to global peers. We still anticipate the euro gaining versus the dollar and yen while underperforming against more cyclical currencies, which hinges onrisk appetite holding up in the months ahead. This seems reasonable, given optimism for a vaccine-facilitated return to economic normality in 2021, or something approaching it, alongside massive liquidity from world central banks and prospects of more fiscal stimulus in major economies. Negative real interest rates in the U.S. and the Fed’s codified lower-for-longer policy rubric are considerations, along with the U.S. deficits and capital seeking higher returns in buoyant global markets. The pound came under pressure after Cable traded above 1.3400 for the first time in three months. A high was left at 1.3406 before the pair dropped quite sharply. The correction low so far is 1.3342. The high was a reflection of broader dollar weakness, while the drop has been a reflection of broader pound weakness. These dynamics come with market participants continuing to wait for a concrete development from the EU and UK future relationship negotiations. Just last week today, December 1, was being touted as the deadline, though now the latest deadline is reportedly this Saturday, while there have been reports that the European parliament could convene as late as December 28 to ratify a trade deal. Germany’s Merkel has been putting the pressure on EU states to reach a deal with the UK. Fishing remains a key sticking point, though France’s insistence that the current arrangement remains in place, which gives the UK only 18% of the catch from its own waters, is seen as unreasonable by the UK, naturally, but also many other EU states. Pressure on the UK government is intense. Brexit ideologues in PM Johnson’s party are demanding that no quarter is given to the EU, while a leaked Whitehall document last week warned of a “perfect storm” of chaos in the event of a no-deal in the Covid-19 era. U.S. president elect Biden warned London that the scope for a deal with the U.S. would be compromised if there is a return of a hard border on Ireland — which is what could happen in a no deal. What is clear, deal or no deal, is that EU and UK’s relationship will be an ever evolving and complicated one when the UK exits its transition membership of the common market and customs union at year end. The UK wants to diverge from EU rules, while EU states are concerned that the UK will undercut their markets. The relationship will be subject to dispute arbitration with the possibility of retributive measures. This is why markets are anticipating only a narrow free trade deal, which would be centred on manufacturing. USD-CAD has dropped back under 1.2950, pulling lower from yesterday’s rebound high at 1.3010, which was seen after the pair posted a 26-month low at 1.2922. The oil market will remain the dominant driver of USD-CAD, and we remain bullish of both oil and the Canadian dollar. Oil prices are up today after ebbing moderately over the previous few days. Strong Chinese manufacturing data boosted oil and other resource commodities. The OPEC+ group deferred a decision on output quotas until Thursday. The consensus expectation is for the group to refrain from rising output quotas for at least another three months from January, while a six-month extension is also being considered, which by its own analysis would likely swing the oil market back into supply deficit. Global stockpiles are high and demand for oil is set to be well below normal through the northern hemisphere winter due to Covid countermeasures, which are already tight in Europe and becoming more restrictive across North America and in the more northerly Asian countries. At the same time OPEC output has increased, with Libyan production having fully returned to pre-blockade levels. There is also a view that after the Covid pandemic has gone, oil will have a more elastic characteristic, with many developed nations likely to see a higher prevalence of working from home than before, reducing demand for fuel and enabling consumers of gasoline to reduce commuting days during times of oil high prices. These are motivating reasons for oil producing nations to keep supply restrained. Assuming quota discipline is maintained, the outlook is bullish for oil on the back of the increased optimism for a vaccine-assisted route out of the prevailing Covid situation. Consumers have built up savings and there is potential for a significant acceleration in global economic activity by mid next year. USD-CAD has been trending lower since March, and we anticipate there is more to come. USD-JPY edged out a five-day high at 104.46 before ebbing back to the lower 104.00s. Both the dollar and yen weakened amid a rekindling in risk appetite following strong manufacturing data out of China. Yen crosses lifted, though have remained off recent trend highs for the most part. One exception was NZD-JPY, which pegged a one-year peak. Regarding USD-JPY specifically, both currencies are viewed as safe haven, counter-cyclical currencies, which limits the direction scope for the pairing, though the real interest rate differential between the U.S. and Japan is a mathematical negative for the nominal exchange rate. Outside the case against the dollar, the yen is amid what we are tagging as a longer-term softening trend, especially against the cyclical currencies, including the dollar bloc. The yen’s broader performance should continue to derive from the level of risk appetite in global markets. Japan’s surplus economy, where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, has established the yen as a low-beta haven currency. To learn more about Mark Coe visit his profile here . Key Drivers for the Week of Nov 30 – Dec 4 · Vaccine developments boost optimism, but virus a near term headwind · Wall Street rallied to record highs, Dow hit 30k on promising vaccines · Bond rates likely capped by ongoing central bank accommodation · U.S. employment and ISM reports likely to show some loss of momentum · Fed Chair Powell testifies on CARES Act Tuesday, Wednesday, · Canada monitors employment, GDP, and trade reports · Attention on Asian PMI reports from China, Japan, India, Korea · RBA expected on hold at 0.10%; RBI seen steady at 4.0% · Brexit uncertainties continue, ongoing risk of no-deal scenario · Eurozone releases PMIs, CPI, jobless, retail sales PPI · German HICP, unemployment, manufacturing orders awaited · Switzerland reports retail sales, inflation, KOF leading indicator, PMI
Week Ahead: Game Changer?
On November 30, 2020Equities rallied last week and have posted strong gains in November thanks to positive vaccine developments that should be a major game changer in 2021. Indeed, the increasing prospect that a distribution could begin as soon as early December have boosted optimism for a return to normalcy sooner rater than later. Investors have cheered and global stocks (ex-China) have posted double digit gains on the month even as record spikes in virus cases and more restrictive measures pose significant threats to the durability of the recovery. And even under the most optimistic vaccine scenarios, global economies will face a challenging winter. That realization, and ongoing central bank accommodation should cap bond yields if not knock them lower. There are plenty of key data reports this week, but amid the contrasting vaccine/virus dynamics, none are likely to alter general outlooks. On the other hand, a heavy slate of central bank speak that could provide clues on further accommodation. With Wall Street hitting fresh record highs last week, including Dow 30k, profit taking and month-end rebalancing could could weigh. However, dip buying should limit selling pressure. A lot of focus will be on the November nonfarm payroll report given renewed shutdowns and layoffs. ISMs and vehicle sales will also be monitored for further insights on the economy through November. Fed Chair Powell testifies to Congress, where he is expected to reiterate his call for more fiscal stimulus while maintaining that the Fed has plenty of tools remaining. A gaggle of ECB speakers are expected to maintain the message that economies still need substantial monetary and fiscal support, with the bank readying a package of measures for the December meeting. In Asia, Japan has its usual month end data dump while China releases the always closely followed manufacturing PMIs.
NORTH AMERICAThe U.S. slate is heavy with data and Fedspeak that will provided timely insights into the impact of cross-currents at play in the economy during November. We’ll also be monitoring retail sales as the holiday shopping season kicks off. We suspect pent up demand will be a major source of support. However, the November employment (Friday) will be front and center. We expect a 540k November nonfarm payroll gain, moderating from the increases of 638k in October, 672k in September, and 1,494k in August. The jobless rate should be steady from 6.9% in October, versus a 14.7% peak in April. Hours-worked are assumed to rise 0.5% after a 0.8% October gain, with the workweek steady at a 20-year high of 34.8 for a third consecutive month, from 34.7 in August. Concerns over the labor market have been stoked by rising initial claims that have suggested renewed restrictions are having a negative impact. ns are hampering the growth rebound. However, we’d caution that powerful seasonal patterns for claims between mid-November and late-January will be disrupted this year by the holiday behavioral shifts due to the virus, so we are hesitant to read too much into the two-week initial claims rise. The ISM reports are expected to indicate a loss of momentum heading into winter. The ISM manufacturing index (Tuesday) is expected to ease to a still strong 57.5 in November from a 2-year high of 59.3 in October. The index saw an 11-year low of 41.5 in April. The ISM services index should tick down to 56.5 from 56.6 in October, versus a 17-month high of 58.1 in July, an 11-year low of 41.8 in April, a 13-year high of 61.2 in September of 2018, and an all-time low of 37.8 in November of 2008. Other reports this week include auto sales (Tuesday), construction spending (Tuesday), initial jobless claims (Thursday), factory orders (Friday), and the trade deficit (Friday). Fedspeak will be of interest with Chair Powell headlining. He’ll be testifying on the CARES Act on Capitol Hill, first to the Senate Banking Committee (Tuesday), and then to the House Financial Services Committee (Wednesday). We expect him to argue for more fiscal stimulus, especially with the expiration of more programs at the end of the year, and as the surge in virus cases and increased restrictions threaten the pace of the recovery. We do not expect him to give any indication, and front run the FOMC decision on QE at the December 15-16 meeting. The FOMC minutes from the November 4-5 meeting threw some cold water on expectations for a near term increase, though several policymakers have suggested they support more buying if the economy appeared to be stumbling and/or interest rates were rising. Other Fedspeakers include governors Brainard (Tuesday) and Bowman (Friday), along with presidents Daly (Tuesday), Evans (Tuesday), and Williams (Tuesday). The corporate earnings remain lean this week: Monday has BHP, Zoom, and Autohome. Tuesday brings Salesforce.com, Bank of Nova Scotia, Bank of Montreal, Veeva Systems, Trip.com, HP, and NetApp. On Wednesday, results are due from RBC, CrowdStrike, Synopsys, and Splunk. TD Bank, Dollar General, CIBC, Marvell Technology, Kroger, Cooper Companies, and Ulta Beauty are due Thursday. There are not any reports due Friday. A busy calendar is on tap in Canada this week. Q3 GDP, September GDP, November employment and October trade will provide insights into the size of the rebound in Q3 and the impact of the spike and infections and renewed restrictions that began in October and accelerated in November. Q3 GDP (Tuesday) is expected to rebound 48% after the -38.7% plunge in Q2 that came as the economy was nearly shut down. September GDP is seen rising 0.9% after the 1.2% bounce in August. Employment (Friday) is projected to rise 40k in November following the 83.6k gain in October. The unemployment rate is seen at 8.8 from 8.9%. The trade deficit (Friday) is anticipated to narrow to -C$3.0 bln in October from the -C$3.3 bln shortfall in September. The Q3 productivity report (Wednesday), Q3 current account (Monday), October industrial product price index (Monday) and October building permits (Monday) are also due out this week. While the relative deluge of data is of interest, we suspect it will not materially change the outlook for moderation in Q4 growth due to the fresh restrictions that have come as virus cases pick-up, followed by a return to “normal” next year as the vaccine takes hold. Notably, there have been whispers that the economy could be setting up for a surge in inflation if demand returns quickly next year — something the BoC is likely to monitory closely.
ASIAThis week’s calendar is very busy with key reports around the region with much of the focus on PMIs. Japan has its month-end data deluge that includes industrial production, retail sales, and unemployment. China’s ecnomy remains at the forefront of the recovery and this week’s reports on November manufacturing and services PMIs should confirm that. Elsewhere, production, trade, growth and price data populate the calendar. For central banks, Australia’s RBA meets, with no change to the 0.10% OCR expected. India’s RBI meets as well, also expected to leave policy unchanged at 4.00%. In Japan, it’s a heavy slate of month-end releases. Preliminary October industrial production (Monday) is seen slowing to a 2.5% y/y pace from 3.9% previously. October retail sales (Monday) should see large retailers expand 5.0% y/y after a -13.9% rate of decline, and total sales increase 5.5% y/y following the -8.7% drop in September. October housing starts and construction orders are also due Monday. October unemployment (Tuesday) is expected unchanged at 3.0%, with the job seekers/offers ratio steady at 1.03. The Q3 MoF capex survey (Tuesday) is forecast at -14.0% y/y from -11.3% y/y. November auto sales are due Tuesday. November consumer confidence (Wednesday) is expected at 33.1 from 33.6. The November services PMI (Thursday) should dip to 48.3 from 48.7. China official November CFLP manufacturing PMI (Monday) is seen improving to 51.7 from 51.4. The November Caixin/Markit manufacturing PMI (Tuesday) is forecast rising to 53.9 from 53.6. The November Caixin/Markit services PMI (Thursday) is projected to dip to 56.5 from 56.8. South Korea October industrial production (Monday) is expected to slow to a 0.5% y/y pace from 8.0% previously, while revised Q3 GDP (Tuesday) is seen unchanged at -1.3% y/y. The November trade report (Tuesday) should see the surplus widen to $7.0 bln from $6.0 bln. November CPI (Wednesday) is estimated to have warmed to 0.4% y/y from 0.1%. October current account figures are due Friday. India’s RBI meets (Friday) and is expected to leave policy unchanged, with the repo rate at 4.00%, where it’s been since the 75 bp easing in March. Growth has been picking up steam of late, making further cuts unnecessary for now. Thailand’s October trade and current account figures are due (Monday). November headline CPI (Friday) is seen unchanged at -0.5% y/y. Indonesia November CPI (Tuesday) is estimated at 1.6% y/y from 1.4%. Hong Kong October retail sales (Tuesday) are seen falling -11.0% y/y from -12.9% on a value basis, and down -12.0% from -13.4% on a volume basis. Singapore November PMI is due Thursday. In the Philippines, November CPI (Friday) likely edged up to 2.6% y/y from 2.5% previously. Unemployment is due Friday. Australia’s calendar has the RBA’s meeting (Tuesday), expected to result in no change to the 0.10% rate setting. At the last meeting, the bank cut its key interest rate to 0.1% from 0.25%, as was widely anticipated. It also announced a package of measures designed to secure a rapid recovery from the crisis now that lockdowns have lifted. Governor Lowe appears before the House of Representatives Standing Committe on Economics (Wednesday). The economic data slate is busy this week, with Q3 GDP (Tuesday) highlighting — we anticipate a 3.0% rebound after the -7.0% drop in Q2 (q/q, sa). Retail sales (Friday) are seen rebounding 0.3% in October after the -1.1% drop in October. The trade surplus is projected at A$6.0B in October from A$5.6 bln in September. The current account for Q3 (Tuesday), October building approvals (Tuesday) and October housing finance (Thursday) are also due out this week. New Zealand’s docket has the trade price indexes (Wednesday) and building permits (Thursday). The next RBNZ policy meeting is February 24 of next year. Earlier this month, the RBNZ topped up stimulus with a new Funding for Lending Program to start in December, aimed at reducing banks’ funding costs and lowering interest rates. The bank’s economic projections were less pessimistic on growth and inflation and cut back the projections for peak unemployment. The cash rate was left unchanged at a record low 0.25% and the Large Scale Asset Purchase program remained at NZD 100 bln. The statement reiterated the commitment to use additional tools if necessary, but markets have started to price out expectations that the bank will move towards a negative rate regime next year, on the back of the less pessimistic outlook. The balance of risks remains tilted to the downside, but it seems that in the central scenario further rate action won’t materialize.
EUROPEEurozone: euphoria over vaccine developments has eased somewhat amid the realisation that despite the progress, there remain open questions and that European economies are likely to face further misery over the winter and well into next year even under the most optimistic vaccination scenarios. At the same time, Brexit talks still don’t seem to be going anywhere and the risk of a no-deal scenario remains on the table, which leaves markets cautious and the ECB on course to strengthen asset purchase and conditional loan programs at the December 10 meeting. With that in mind, comments from ECB officials including Lagarde ahead of the start of the blackout period ahead of the meeting will continue to sound dovish. Data releases this week are highly unlikely to change the ECB’s dovish posture even if preliminary inflation data for November are likely to show a slight uptick in the headline rate. At an expected -0.4% y/y (median same), the German HICP rate (Tuesday) would still remain firmly in negative territory and the same holds for the overall Eurozone CPI (Tuesday), which is seen rising to -0.2% y/y from -0.3% y/y. Variations in energy prices continue to play a very large role in headline inflation numbers and Eurozone PPI (Wednesday) is expected to lift to -2.2% y/y, with officials concerned that the prolonged inflation undershoot will ultimately lead to a change in inflation expectations and real deflation down the line. Final PMI readings for November meanwhile are expected to confirm that lockdowns have plunged the services sector into a deep recession that is also dragging down overall activity, even if manufacturing continues to benefit from the ongoing recovery in major export markets and to a certain extent stock building ahead of the end to the U.K.’s transition period. The manufacturing PMI (Tuesday) should be confirmed at 54.8 and the services reading (Thursday) at just 46.9, which would leave the composite at 50.0, signaling stagnation. Against that background, the recovery in the labour market is likely to have come to an end again and we see the German sa unemployment number (Tuesday) rising by 10K in November, which should see the sa rate rising to 6.3% from 6.2%. The overall Eurozone jobless number is even more backward looking, but also expected to lift to 8.4% in the October reading from 8.3% in September. Eurozone October retail sales and German manufacturing orders for the same month are still expected to show improvements over the month, but with the former boosted by consumers preparing for lockdowns and the latter not reflecting the misery in the services sector. In our view, positive surprises will not change the overall outlook. There are once again plenty of ECB speakers, which are likely to collective stress that even with vaccines underway, economies will still need substantial monetary and fiscal support and that the ECB is readying a package of measures for the December meeting. A strengthening of PEPP and TLTRO programs remains the most likely scenario for the next meeting. U.K.: market participants have been continuing to wait in vain for a concrete development from the EU and UK future relationship negotiations. On Friday, the BBC cited an unnamed source saying face-to-face talks will take place in London over the weekend, though the EU’s Barnier would not travel unless the UK changed its negotiating stance. Fishing and level playing field rules remain the major blocks. What is clear, deal or no deal, is that EU and UK’s relationship will be an ever evolving and complicated one when the UK exits its transition membership of the common market and customs union at year end. The UK wants to diverge from EU rules, while EU states are concerned that the UK will undercut their markets. The relationship will be subject to dispute arbitration with the possibility of retributive measures. This is why markets are anticipating only a narrow free trade deal, which would be centred on manufacturing. Note that the EU is considering a stopgap measure for UK financial services to kick in on January 1. The European Commission reportedly told member states yesterday that a decision on equivalence won’t be ready until next year (the UK financial markets must maintain equivalent rules to access EU markets). Pressure on the UK government is intense. Brexit ideologues in PM Johnson’s party are demanding that no quarter is given to the EU, while a leaked Whitehall document this week warned of a “perfect storm” of chaos in the event of a no-deal in the Covid-19 era. U.S. president elect Biden warned London that the scope for a deal with the U.S. would be compromised if there is a return of a hard border on Ireland — which is what could happen in a no deal. In the no-deal scenario, the UK government would have the choice between respecting the withdrawal agreement it signed with the EU to maintain a free-flowing border on Ireland, at the price of imposing a border down the Irish Sea between Northern Ireland and the rest of the UK. Such a scenario would likely spark protests and quite possibly violence from loyalist militants, or break the EU withdrawal agreement, which would result in a hard Irish land border and a lot of bad faith between the UK and EU and the UK and the U.S., and quite possibly violence from republican militants. The stakes are high, which is why we expect a deal. The UK data calendar this week is highlighted by the BoE’s monthly lending and money supply report, along with the final November PMI reports, which should affirm the picture of a double-dip recession-bound UK economy, albeit much shallower than the first recessionary dip that was seen earlier in the year. The UK is coming out of national lockdown on Thursday, with the exception of Northern Ireland, with localized tiered levels of restrictions to replace. The net effect will be increased economic activity. Switzerland: the Swiss data calendar is busy, featuring the latest reports for retail sales, inflation, the KOF leading indicator, and the manufacturing PMI survey. To read more about Mark Coe, read his profile https://asiacapmarkets.com/mark-coe-market-research-analyst Please follow us on our socials:
Overnight Bullets Wall Street leads the pack
-Japan services PPI; Malaysia CPI; Thailand manufacturing production due
-Wall Street surges, Dow climbs over 30,100 on positive vaccine hopes
-Treasury’s $56 bln 7-year auction solid, 0.653% stop, 2.37 cover ratio
-U.S. consumer confidence fell -5.3 points to 96.1 in Nov from 101.4 in Oct
-U.S. Richmond Fed index dropped -14 points to 15 in Nov from 29 in Oct
-U.S. FHFA house price index surged 1.7% in Sep; largest gain on record
-Wall Street stronger on vaccine optimism, Biden transition; Dow 30k
-Dollar bloc currencies firmer amid risk-positive positioning
-German Ifo index plunged to 90.7 – weakest reading since July
Asia Market Outlook (November 25)
Wall Street surged overnight, with the Dow surpassing the 30k mark. More good news on vaccine developments has underpinned gains amid hopes for a quicker than expected return to normalcy. Also the news that the Trump administration is working on a transition gave some relief, as did reports that Janet Yellen, a very well known quantity for Wall Street, would be nominated for Treasury Secretary. It’s also expected that a Biden administration and Yellen Treasury would argue strongly for additional fiscal stimulus. The Dow’s gains were across all sectors, but led by energy, materials, industrials, and financials. A hefty amount of sidelined cash is also expected to come into the stock market, though there is also expected to be some major rebalancing into year end. Core European bourses were all higher, with the FTSE adding 1.55%, the DAX up 1.26%, and the CAC 40 advancing 1.21%. Treasuries sold off on the strength in risk appetite and supply. The 30-year yield was over 5 bps higher at 1.60%, while the 10-year was up 3 bps to 0.882%. The 2-year was little changed at 0.162%. The curve widened to 72 bps from 68 bps Monday and 66 bps late last week. The 10-year Bund yield was up 1.1 bp at -0.56%, while the Gilt yield had lifted 1.1 bps to 0.327%. Eurozone peripherals outperformed thanks to dovish ECB comments and as risk appetite improved.
Today’s regional calendar is light, but will reveal Japan October services PPI, which is expected to have fallen 0.5% y/y from 1.3% previously. Malaysia October CPI is estimated at -1.4% y/y, unchanged from September. In Thailand, October manufacturing production is anticipated at -2.0% y/y from -2.8%.
In Europe, the docket is empty.
The U.S. calendar is very busy as data was condensed ahead of Thursday’s Thanksgiving holiday. The second Q3 GDP report is expected to improve to 34.1% from 33.1%. October durable orders are seen rising 1.0% from 1.9% previously. October advance goods trade report is expected to see the deficit widen to $81.0 bln from $79.4 bln. Advance October wholesale and retail inventories are due as well. Initial jobless claims are expected to fall to 720k from 742k, and continuing claims are seen at 6.000 mln from 6.372 mln. October personal income and consumption should see the former rise 0.1% from 0.9%, and the latter rise 0.6% from the 1.4% increase in September. October new home sales are penciled in at a 0.965 mln pace, versus 0.959 mln previously. The final November University of Michigan consumer sentiment index should improve to 79.0 from 77.0. Weekly MBA mortgage and oil inventory figures are also on tap. The Fed will release the minutes from the November 4-5 FOMC meeting. The earnings calendar is light and features reports from Deere & Co., and Trip.com.
N.Y. FX Summary (November 24)
The Dollar ran higher into the N.Y. open and beyond on Tuesday, taking the DXY from 92.19 to 92.55. The USD advanced versus all the major currencies, seemingly on the back of the formal start to the transition to a Biden presidency. Gains were later partly reversed, perhaps as risk-taking levels surged. The DJIA headed over the 30k mark for the first time, as Wall Street rallied sharply. While the good news on vaccine developments has underpinned gains amid as quicker than expected return to normalcy. Additionally, the pick of Janet Yellen, a very well known quantity for Treasury Secretary, calmed fears of a more radical pick. It’s also expected that the Biden administration and Yellen will argue for additional fiscal stimulus, which would be supportive of further stock and USD gains.
EUR-USD put in a choppy session, rising from near 1.1845 to 1.1895 in London morning trade, before falling to 1.1841 in early N.Y.. From there, the pairing bounced to 1.1885, then settled under 1.1870. The formal start of the transition to a Biden presidency improved USD sentiment, as did the appointment of Yellen to Biden’s Treasury Secretary post, which calmed fears of a more radical pick, and upped the expectations that the Biden administration and Yellen will argue for additional fiscal stimulus, positive for Wall Street and the USD. EUR-USD has largely consolidated November’s modest gains, with the 1.1900 level remaining as solid resistance.
After rallying to 1.3380 in London morning trade, Cable fell to 1.3293 in early N.Y., as a broad round of Dollar buying hit the market. The pairing later recovered to 1.3360 highs. EU and UK negotiating teams have been continuing discussions by video conference, with the deadline for reaching agreement, is reportedly now next Tuesday. Heads of state are now fully engaged. We fully expect that win-win will prevail, with both sides evidently striving to a avoid no-deal, even if it means some kind of fudged extension. JPMorgan analysts are less confident, but still give 80/20 odds for a deal, up from 66% odds for a deal they previously envisioned. France is the main ‘bad cop’ protagonist on the EU side, along with Spain to a lesser extent, which has a special interest about Gibraltar, threatening on numerous occasions to veto any deal if it doesn’t get what it wants on fishing rights. The most likely outcome is a narrow trade deal.
USD-JPY rallied to seven-session highs of 104.76, up from 104.55 at the open, and overnight lows of 104.15. Dollar demand was a feature since London morning trade, seeing the greenback lifted against most major currencies. The start of the formal transition period to a Biden presidency appears to have given USD sentiment a boost, while hopes for a robust U.S. economic recovery in 2021, once Covid vaccines are rolled out appears to have helped the USD for now at least. USD-JPY support is at the 20-day moving average of 104.47, with resistance at the 50-day moving average at 104.95.
USD-CAD bounced from two week lows of 1.3010, trading to 1.3091 highs in early North American trade. The overnight move to the lows came as oil prices hit three-month highs, though broad USD buying stepped in ahead of the open, prompted by the formal start of the transition to a Biden presidency, and a market looking ahead to 2021, when vaccines should put an end to the pandemic. USD-CAD later did an about-face from early gains, retracing to 1.3018 lows in early afternoon. Oil prices advanced further, taking WTI crude over the key $45 level, while surging equities and general risk-on conditions supported the CAD as well. The overnight low of 1.3010 now marks support
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Overnight Bullets-Asia: South Korea consumer confidence; Hong Kong trade -Treasury’s $57 bln 5-year sale mixed, tails to 0.397%, garners 2.38 cover -Treasury’s 2-year auction decent but mixed results, record $56 bln at 0.165% -U.S. flash Markit PMIs climb, manufacturing index at 56.7, best since Sep 2014 -Wall Street firmer on third vaccine candidate optimism; Brexit progress -Treasuries cheaper amid rise in risk appetite and heavy upcoming supply -U.S. Chicago Fed national activity index rose 0.51 points to 0.83 in Oct -Brexit: Signs looking good for a trade deal, deadline now reportedly December 1 -Sterling up on reports of EU and UK drawing near to reaching a trade deal -Dollar, yen softer on risk-on theme; vaccine news, data and Brexit news in the mix – 2020 U.S. Holiday Sales Poised to Weather the Pandemic -A Brexit Deal Is Unlikely to Be the End of Trade Tensions -Growth Outlooks Hit By Second Wave
Asia Market Outlook (November 24)Wall Street moved higher overnight, buoyed by news that AstraZeneca’s Covid vaccine achieved efficacy of as much as 90% in late-stage trials (though it requires 2 doses for that efficacy). This particular vaccine is reportedly cheaper to produce and does not require super-cold temperatures to store it. That will make distribution to poorer countries much easier. U.S. data was supportive of stocks as well, as the November Markit PMIs came in better than expected. Core European bourses all closed fractionally lower after giving up the day’s gains. Treasuries cheapened on the day due to the rise in risk appetite and as record coupon supply hit. The 30-year bond was up nearly 4 bps to 1.566%. The 10-year was 3 bps cheaper at 0.86%, while the just auctioned 2-year was at 0.170%, at a small loss from the 0.165% award rate. The curve bear steepened to 68.8 bps versus 66.3 bps on Friday. Core EGB yields moved higher in tandem with U.S. Treasury yields, as encouraging vaccine news and positive signals on Brexit helped to boost sentiment. The Gilt underperformed, with the rate rising 1.7 bps to 0.316%. The Bund edged up slightly to -0.583%. Eurozone peripherals traded mixed, with Italian and Greek 10-year bonds outperformed as ECB officials continue to signal a strengthening of the PEPP program in December. Today’s regional calendar Today’s regional calendar is light. Japan returns from Monday’s holiday. South Korea reports November consumer sentiment. Hong Kong has October trade, which should see the deficit narrow slightly to HKD 12.2 bln from 12.7 bln. In Europe, Germany will reveal the 2nd releases of Q3 GDP, along with Q3 consumption, investment, government spending, and Q3 import and export figures. November Ifo business climate data are due as well. France has November business confidence and the November production outlook. In the U.K., November CBI distributive trades survey – realized is due. In the U.S., it’s a heavier slate of data. November consumer confidence is expected to lift to 104.0 from 100.9. The November Richmond Fed index is forecast to have fallen to 16 from 29. the September FHFA home price index is due along with the September S&P/Case-Shiller home price index. Weekly chain store sales are on tap as well. The Treasury auctions $56 bln of 7-year notes and $24 bln of reopened 2-year FRNs. For Fedpeak, Bullard and Williams are on deck. The earnings calendar features reports from Medtronic, Vmware, Autodesk, Dell, Analog Devices, Best Buy, HP, Hormel Foods, Dollar Tree, Burlington Stores, J.M. Smucker, and Autohome.
N.Y. FX Summary (November 23)The dollar turned broadly higher in N.Y. on Monday, with the better Markit PMI outcomes providing the main driver. USD Short-covering was noted after the unit tumbled through much of the month of November. The DXY recovered from near three-month opening lows of 92.02 to 92.80. In addition, firmer Treasury yields gave some support to the Greenback. More positive vaccine news appears to have helped, as the FX market begins to look through the current spike in Covid cases to the spring when widespread vaccine distribution is expected, which will mark the beginning of the end of the pandemic. Wall Street was higher as well. EUR-USD fell from just over 1.1900 at the open to 1.1800, while USD-JPY rallied from 103.70 to 104.64. USD-CAD headed from 1.3047 to 1.3113, while GBP-USDD pulled back from near three-month highs of 1.3398 to 1.3264. EUR-USD printed a seven-session low of 1.1800 in N.Y. morning trade, down from 1.1906 seen at the open, and marking the pairing’s biggest down day in two-weeks. Better U.S. PMIs came to the Greenback’s aid, and USD short-covering was reportedly a factor across all the major USD pairings. Next EUR-USD support comes at the 20-day moving average, currently at 1.1792, then the 50-day moving average at 1.1775. Resistance is at the earlier 1.1906 peak, then the November 9 high of 1.1920. Dollar gains drove Cable lower following strong U.S. data, which highlighted a notable growth advantage of the U.S. economy relative to the UK and European economies. Cable printed a near three-month high of 1.3398, later falling to 1.3264. Of note, the UK’s preliminary November services and manufacturing data produced a much less severe drop in the composite reading than had been expected, though still signaled a contraction in economic activity. USD-JPY rallied to one-week highs of 104.64, up from early lows of 103.70. Better Markit PMI numbers helped, sd did firmer Treasury yields, while short-covering from what were seen as oversold conditions supported as well. The pairing has traded through its 20-day moving average, currently at 104.45, and will now eye the November 17 peak of 104.64. USD-CAD rallied on Monday, as the USD made broad gains. After opening at 1.3047, the pairing made its way to 1.3113 highs. Oil price gains along with a broadly weaker Greenback overnight saw USD-CAD under modest pressure. WTI crude traded over the $43 mark, while the DXY hit near three-month lows of 92.02 before recovering. More good Covid vaccine news helped the CAD some early on, though a broad round of USD short-covering later took the pairing higher.-Record infections, renewed restrictions dim recovery outlooks as we wait for vaccines -U.S. markets closed Thursday Thanksgiving; Japan closed Monday -Attention on U.S. confidence, income, consumption, durables, knew home sales data -Treasury auctions record $169 bln in 2-, 5-, 7-year notes Monday, Tuesday -BoK expected on hold at 0.50%; Japan services PPI, Tokyo CPI expected in deflation -Brexit progress remains slow, talks may be extended to early December -Europe Markit manufacturing, services, composite PMIs; ESI economic confidence -German Ifo Business Climate, GfK consumer confidence, GDP, trade prices -ECB: Lagarde, Schnabel, Lane; Financial Stability Review; October policy account -UK data on PMIs, CBI Distributive Trades Survey, Nationwide house prices Week Ahead: Virus Versus Vaccine and the V-Recovery
On November 23, 2020The second wave of Covid infections globally and increasingly stringent lockdowns which in turn have led to a resurgence of uncertainties over the near term growth outlook. And they are overshadowing the positive vaccine developments that offer a more optimistic view for the medium term. Granted, moderation in activity was widely expected after the Q3 surge as economies reopened following the pandemic shut-downs. But while the new restrictions are less onerous, winter conditions will exacerbate the negative effects and will add to worries over a dreaded double dip recession. Concurrently, U.S. growth is seen at risk given the lack of additional fiscal stimulus with many of the relief measures expiring at the end of the year. Hence, attention will be split between the virus and the lockdowns, and the cornucopia of data that will reflect more of the Q4 economy. In Europe, November confidence numbers will be in focus, as well as ongoing Brexit talks. Asia’s calendar is thin, likely to keep the focus on virus developments globally.
NORTH AMERICAIn the U.S., Wall Street and Treasuries saw rangebound, cautious trading last week as many crosscurrents buffeted the markets — rising virus case counts, renewed restrictions, vaccine developments, stimulus uncertainties and increasingly dismal growth outlooks — were all in play. We suspect that this week will feature more of the same in terms of market action, with the focus on the re-ignition of the pandemic and the negative implications for growth. There have been some whispers of dreaded double dip recessions for the U.S. and Europe, although that is not our base case scenario. The calendar will be busy in this holiday shorted week, with numbers condensed into the first three days. November data is at something of premium as it captures the pick-up in virus cases and ratcheting up of restrictions since October. Consumer confidence (Tuesday) is expected to rise to 104.0 from 100.9 in October. The index has improved from a 6-year low of 85.7 in April. The revised November Michigan sentiment report (Wednesday) is expected to show a boost to 79.0 from the lean 77.0 preliminary reading, versus a 7-month high of 81.8 in October. Confidence measures were oscillating near historic highs before being crushed by COVID-19, only to bounce higher after the plunge in Q2. Notably, it is remarkable how firm the consumer measures have stayed relative to prior recessions, suggesting unexpected resilience on the part of households. The housing market remains of considerable interest as it’s one of the leaders of the pandemic recovery. The surge in demand following the reopening of the economy amid the shift in consumer preferences toward more spacious, single family homes in suburbia given remote learning and extended work-from-home arrangements, continue to underpin, along with deteriorating conditions in urban areas and record low mortgage rates. These factors are also causing a de-linking of the housing cycle from the typical school year trends. We expect a 0.6% October increase for new home sales (Wednesday) to a 965k pace from 959k in September, leaving sales just under a 14-year high of 994k in August. Durable goods orders (Wednesday) are seen rising 1.0% in October with a 2.0% climb in transportation orders. A 0.1% gain in personal income (Wednesday) during October is projected after the 0.9% increase in September. Consumption should rise 0.6% after the 1.5% bounce in September. Recall that April income received a sizable boost from the CARES Act, but that has been partly unwound in each month since. Declining jobless benefits have also been a factor undermining income. Speaking of which, initial jobless claims (Wednesday) for the week of November 21 should decline -22k to 720k, after a 31k bounce to 742k from 711k. The second look at Q3 GDP (Wednesday) will be of some interest, even though Q3 is well in the rear-view mirror. The earnings calendar continues to tapper off, with a spare slate due this week. Monday has BHP, Agilent, and Warner Music. Tuesday brings Medtronic, Vmware, Autodesk, Dell, Analog Devices, Best Buy, HP, Hormel Foods, Dollar Tree, Burlington Stores, J.M. Smucker, and Autohome. Wednesday reveales Deere & Co. and Trip.com. No releases are due Thursday and Friday. Heavy Treasury supply hits and like the data, will be condensed into the first part of the holiday abbreviated week. The market will have to absorb a record $169 bln in 2-, 5-, and 7-year notes. The total package was boosted by $7 bln with the volume of each issue increased to new all-time highs. Treasury is selling $56 bln in 2-year notes (Monday), $57 bln in 5-year notes (Monday), and $56 bln in 7-year notes (Tuesday). The shorter notes were bumped up by $2 bln each, and the 7-year was boosted by $3 bln. The debt managers also outlined a $24 bln reopened 2-year FRN (Tuesday), and $105 bln in 3- and 6-month bills (Monday). The doubling up of coupon auctions, as will be the case Monday, typically does neither issue any good. Treasuries richened on Friday. with the wi yields dipping slightly, leaving the 2-year at 0.165%, the 5-year at 0.385%, and the 7-year at 0.620%. In Canada, the calendar has a drought of data following the deluge last week. Average weekly earnings for September are due Thursday, but the report is always overlooked. The CFIB’s Business Barometer for November may be of some interest, but again it is not a market mover. BoC Deputy Governor Gravelle speaks on (Monday), providing “Assessment of risks to the stability of the Canadian financial system, including risks stemming from the COVID-19 pandemic.” Senior Deputy Governor Wilkins participates in a panel (Tuesday) on “New Policy Frameworks for a Lower-for-Long World.”
ASIAFocus will remain on Covid developments as markets continue to walk the tightrope between rising infection, hospitalizations, and deaths, and hopes for a sooner rather than later rescue from vaccines. The economic outlook remains cloudy, though hopes are that the globe will begin to turn the corner at the start of the New Year. This week’s regional calendar is quite light, with no data due from China. Japan will be on holiday Monday for Labor Thanksgiving Day, and later in the week will release November Tokyo CPI. Price, employment, and production data dot the calendars elsewhere. The only central bank meeting will be South Korea’s BoK, where no change to its 0.50% repo rate is expected. Japan will be closed (Monday) for Labor Thanksgiving Day. October services PPI (Wednesday) is expected to have fallen to a -0.5% y/y rate of contraction after accelerating to a 1.3% clip previously, which was the fastest since March. Prices were hit by the pandemic shutdowns during the spring. Tokyo November CPI (Friday) is penciled in falling to a -0.5% y/y rate from -0.3% overall. The October rate was the first negative print since October 2017 and was the fastest rate of decline since March 2017. The core rate is seen sliding to -0.7% y/y from -0.5%. The October drop was the largest since December 2016, and a figure in line with our projection would be the fastest rate of contraction since March 2011. South Korea’s BoK meets (Thursday) and is expected to leave its repo rate unchanged at 0.50%. It’s been on hold since the quarter point cut in May from 0.75%. Policy was eased by 50 bps on March 16. The year began with the rate at 1.25%. November consumer sentiment is due Tuesday. Taiwan October industrial production (Monday) should slow to a 6.0% y/y rate of expansion from 10.7%, while October unemployment (Monday) is seen steady at 3.8%. October leading indicators and GDP are due Friday. Singapore October CPI (Monday) is seen unchanged, as it was in September. Q3 GDP (Monday) will likely be revised up to -6.0% y/y from -7.0%. October manufacturing production (Thursday) is forecast at 12.0% y/y from 24.2% previously. In Thailand, October exports (Monday) likely fell at an -8.0% y/y pace from -3.9% in September. October manufacturing production (Wednesday) is anticipated at -2.0% y/y from -2.8%. Hong Kong October trade (Tuesday) should see the deficit narrow slightly to HKD 12.2 bln from 12.7 bln. Malaysia October CPI (Wednesday) is estimated at -1.4% y/y, identical to September. Australia’s calendar has a speech by Deputy Governor Debelle (Tuesday) at the Australian Business Economists webinar. At the meeting this month, the RBA increased stimulus to ensure recovery. As expected, the bank announced a package of measures designed to secure a rapid recovery from the crisis now that lockdowns have lifted. The RBA cut its key interest rate to 0.1% from 0.25%, as was widely anticipated. It also announced that it will buy AUD 100 bln of government bonds with maturities of around 5-10 years over the next six month. Furthermore, the bank announced that the rate paid to commercial banks for their deposits at the central bank will be cut to zero. The focus is on lowering refinancing costs. On negative rates, the Governor said he sees no appetite to go there. Economic data is sparse this week, but does have private capital expenditures (Thursday), expected to decline -3.0% in Q3 (q/q, sa) after the -5.9% drop in Q2. New Zealand’s docket has Q3 retail sales (Monday), expected to rebound 16.0% after the 14.6% plunge in Q2 (q/q, sa). The trade report (Thursday) is projected to show a NZD -1.2 bln deficit in October following the -1.0 bln shortfall in September. The RBNZ publishes the Financial Stability Report (Wednesday). The next policy meeting is February 24 of next year. Earlier this month, the RBNZ topped up stimulus with a new Funding for Lending Program to start in December, aimed at reducing banks’ funding costs and lowering interest rates. The bank’s economic projections were less pessimistic on growth and inflation and cut back the projections for peak unemployment. The cash rate was left unchanged at a record low 0.25% and the Large Scale Asset Purchase program remained at NZD 100 bln. The statement reiterated the commitment to use additional tools if necessary, but markets have started to price out expectations that the bank will move towards a negative rate regime next year, on the back of the less pessimistic outlook. The balance of risks remains tilted to the downside, but it seems that in the central scenario further rate action won’t materialize.
EUROPEEurozone: vaccine news continue to look promising but progress on Brexit remains slow and the European Commission reportedly briefed envoys from the EU’s 27 member states that talks may have to be extend through to early December. Meanwhile there were reports that some EU leaders want to clarify to chief negotiator Barnier that no deal is better than one that would potentially damage the single market. According to Bloomberg, some members of the bloc have called for contingency plans to be stepped up. The most likely outcome remains a limited and narrow deal that will likely leave both sides on course for prolonged trade squabbles in the future if and when the U.K. diverges from EU standards and the EU retaliates. No wonder then that firm and enforceable rules on the governance of an agreement is one of the key points for the EU in any deal and reportedly one of the sticking points at the moment. The data calendar is very busy this week, with the remaining confidence numbers for November unlikely to make pretty reading. Markit PMIs kick off the data round on Monday and we are looking for a further decline in manufacturing confidence to 52.0 (median 53.2) from 54.8. Services will be hit even harder by lockdowns — the respective PMI is likely to fall back to 41.9 (median 42.0) from 46.9, which should leave the composite at 47.0 (median 45.6) from 50.0. That would signal a fall back into contraction territory, and will likely be mirrored by a weak ESI Economic Confidence number (Friday), which we expect to show a drop to 86.0 (86.5) from 90.9. In Germany, where lockdowns have been less strict than elsewhere and where the manufacturing sector continues to benefit from the ongoing recovery in major export markets such as China, the situation is not quite as bleak as in countries like Italy or Spain. Still, the key Ifo Business Climate index (Tuesday) is nevertheless expected to drop back markedly to 90.3 (median same) from 92.7. Eurozone M3 money supply growth (Thursday) should continue to show a huge amount of money creation thanks to the ECB’s generous liquidity provision. Preliminary French HICP numbers (Friday) are unlikely to indicate a turnaround on the inflation front and German Q3 GDP is too backward looking to have much of an impact, although the breakdown, which will be released for the first time, may attract some interest. There are once again plenty of ECB speakers, which are likely to collective stress that even with vaccines underway, economies will still need substantial monetary and fiscal support and that the ECB is readying a package of measures for the December meeting. A strengthening of PEPP and TLTRO programs remains the most likely scenario for the next meeting. U.K.: trade talks between the EU and UK are commencing via video conference after one of the EU’s team tested positive for Covid. The latest in a series of deadlines that have so far come and gone, now appears to be mid next week. An EU source cited by the UK’s Sun tabloid said that talks can only continue to mid next week before “time will get the better of us.” Time really is running out now given the time needed for the ratification process before the UK’s exit from the common market and customs union on January 1. Fishing rights and level playing field rules remain the stumbling blocks between the EU and UK, and neither side is showing any sign of wanting to make the first move in the concessions game. It would be imprudent to rule out the risk of a no deal, but we still expect win-win will prevail rather than lose-lose, and that an accord will be reached. We expect the pound to rally on any concrete news that a deal has been reached. Canada, meanwhile, looks set to be the latest to sign a continuity agreement with the UK, which would maintain trading on the largely the same terms as under the prevailing agreement with the EU. The UK data calendar this week features the preliminary UK PMI reports for November (Monday). Given the Covid-related lockdown restrictions that have been heavily focused on the hospitality and retail sectors, the consensus expectation is for a sharp fall in the dominant services PMI reading to 42.5 from 51.4 in October. The preliminary manufacturing PMI headline is expected to fare better in declining more moderately to 50.5 from 53.7. The composite PMI reading is seen dropping to 42.5 from 52.1, which would signal that the private sector is once again back in contraction, which is looking like the second dip of a double dip recession. Other data out of the UK will be second tier. Switzerland: The Swiss data calendar is quiet.Overnight Action Bullets
- Asia: Bank Indonesia and Philippines seen on hold; Australia employment
- Yields cheapen after weak auction, but drop in stocks limits losses
- Treasury’s record $27 bln 20-year sale tails to 1.422%, very poor sale
- Fed’s Williams worries about the expiration of fiscal aid
- U.S. housing starts improved 4.9% to 1.530 mln in Oct from 1.459 mln Sep
- U.S. MBA mortgage applications slid -0.3% in the November 13 week
- Canada’s CPI accelerated to a 0.7% y/y pace in Oct from 0.5% in Sep
- Dollar retaining softening bias, hit 20-mth low vs Kiwi dollar
- UK inflation higher than expected at 0.7% y/y in Oct, core at 1.5%
- Eurozone Oct HICP inflation confirmed at -0.3% y/y – as expected
Asian OpenAsia Market Outlook (November 19) Wall Street was mixed through the session. Shares were initially buoyed by Pfizer’s 95% effective vaccine claim, though risk appetite was kept in check by the surge in Covid cases, hospitalizations, and deaths. The better housing starts data had minimal impact. Core European bourses closed moderately higher with the DAX and CAC 40 both up 0.52% and the FTSE advancing 0.31. Treasuries were quiet as investor sentiment vacillated between the good news on vaccines and depressing news on the virus, though a very poor 20-year auction saw yields climb to the day’s highs late in the afternoon. The 20-year cheapened to 1.425% for a small loss, while the 10-year note rose 2.6 bps to 0.883%. Shorter note rates were fractionally higher as well, leaving the 2-year at 0.175%. Expectations for additional Fed QE will help limit the rise in longer rates. EGBs continued to lose ground, though overall it was a quiet day. The virus and worries that lockdowns are unlikely to come to a quick end are expected to help to keep a lid on yields. For today, the German 10-year lifted 0.6 bp to -0.56% and the Gilt was up 1.3 bp to 0.334%, with Brexit optimism adding pressure to U.K. bond markets. Today’s regional calendar has Indonesia’s Bank Indonesia meeting, where rates are seen on hold with the 7-day reverse repo rate expected unchanged at 4.00%. The Philippines central bank also should hold fire with rates not likely to move from the current 2.25% level. Australia’s employment report is expected to show a -20.0k drop in October after the -29.1k decline in September. The unemployment rate is seen rising to 7.0% from 6.9%. In Europe, Eurozone September current account figures are due. The U.K. has November CBI industrial trends – orders. Spain releases September trade data, while Switzerland has October trade data. In the U.S., the calendar is busy. The November Philly Fed index is forecast to fall back to 20.0 from 32.3. October existing home sales should hold steady at a 6.540 mln clip. Weekly jobless claims are due, with initial claims expected to dip to 700k from 709k, and continuing claims seen falling to 6.350 mln from 6.786 mln. October leading indicators are penciled in at up 0.6% from 0.7% previously. The Treasury will announce 2-, 5-, and 7-year notes, along with reopened 2-year notes FRN and will auction $12.0 bln of reopened 10-year TIPS. The earnings calendar features reports from Intuit, NetEase, Workday, and Ross Stores.
FX OvernightN.Y. FX Summary (November 18) N.Y. FX trade was very quiet on Wednesday, with major Dollar pairings held to narrow ranges. The USD attempted to rally early on, though quickly turned modestly lower. The DXY topped at 92.45, later easing to a 92.27 low. Incoming U.S. data saw October housing starts rise more than forecast, though the outcome had little market impact. More positive Covid vaccine news helped Wall Street, as PZizer said its entry was 95% effective. In the meantime, rising cases in the U.S. as we enter the holiday season will likely keep enthusiasm hemmed in. EUR-USD traded from early lows of 1.1851 to 1.0877, while USD-JPY fell from 104.00 to 103.65. USD-CAD topped at 1.3099, later falling back to 1.3034 lows. GBP-USD advanced to 1.3312 from early lows of 1.3263. EUR-USD put in an inside day on Wednesday, ranging in N.Y. between 1.1851 and 1.1877. The USD continues to trade on a softer footing, with the DXY printing four-consecutive lower daily lows. Sharply higher Covid cases in the U.S. raise the possibility of a fizzling of the nascent economic recovery, a USD-negative, while the Fed lower for longer policy stance may hurt the Dollar as well in the coming months. As Fed Chair Powell noted yesterday, near term risks are to the downside due to the spike in the virus, hospitalizations, and deaths. EUR-USD’s next upside target is the November 9 high of 1.1920. Cable printed a one-week high of 1.3312 in N.Y. morning trade, up from `.3263 at the open, and overnight lows of 1.3246. The Brexit endgame drama is now reaching a climax. There is a lot of noise coming from officials and politicians, yet little response in the pound, with participants uncommitted, waiting on concrete developments. Neither the EU nor UK has blinked yet in trade talks. We expect that some sort of accord will be reached, and one potentially broader than is currently being anticipated in markets. This would spark a rally in the Pound should it materialize. USD-JPY headed from 104.00 in early trade to 103.65, before recovering over 103.80. Yen trade was relatively subdued, as was the case with most major Dollar pairings. Inflows into Japanese equities has been noted of late, which has seen the Nikkei 225 print 29-year highs this week, boosting Yen demand from foreign investors. General USD sentiment appears to be souring, as the Fed’s ZIRP and asset purchases could keep pressure on the Greenback in the coming months, especially should the economy recover more quickly due to the Covid vaccine rollout. The next USD-JPY support level comes at the November 9 low of 103.19. USD-CAD shrugged off the warmer Canada CPI figures early in the session, rallying from near 1.3880 to 1.3099 highs, since pulling back to 1.3072 lows. The CAD had firmed up in concert with modest oil price gains, with WTI holding near the $42.00 level. FX trade overall remains on the quiet side, with narrow ranges the rule so far this morning, and more of the same can be expected if current risk levels and oil prices continue on their current paths.Overnight Bullets
- Asia: Hong Kong unemployment seen rising to 6.7%; Singapore exports due
- Fed VC Clarida: FOMC will continue assessing effectiveness of bond buying
- Wall Street rallied on Moderna vaccine news; tech is lagging
- Treasuries were relatively quiet as variety of factors monitored
- U.S. Empire State index fell -4.2 points to 6.3 in Nov from 10.5 in Oct
- Canada’s manufacturing shipments grew 1.5% in Sep after -1.4% Aug drop
- Trump Fed nominee Shelton likely to be confirmed, unprecedented politicization
- Dollar softer amid risk-off positioning; MSCI Asia-Pacific hit best level since 1987
- ECB Vice President Guindos highlighted downside risks to economic outlook
- Even with Vaccine ECB Remains on Course to Strengthen PEPP
Key Drivers for the Week of Nov 16 – Nov 20
• Vaccine hopes vie with record surge in virus cases and muddy economic outlook
• Brexit talks front and center — “final final” deadline this week?
• Focus on U.S. fundamentals: retail sales, production, manufacturing, housing data due
• Fedspeak from Daly, Clarida, Barkin, Williams, Bullard, Kaplan, Bostic, George
• China industrial output, retail sales, fixed investment; Japan Q3 GDP, trade awaited0
• Bank of Thailand, Bank Negara, Philippines central bank all seen on hold
• Australia reports employment, wage prices; RBAspeak from Lowe and Kent
• ECBspeak: Lagarde, Schnabel, Villeroy to stress monetary support still paramount
• UK data: inflation, CBI industrial trends, confidence, retail sales, government spending
Week Ahead: Virus Versus Vaccine and the V-Recovery
On November 16, 2020
The longer term outlook for world growth became a bit less uncertain last week after Pfizer’s encouraging news on a vaccine. However, initial exuberance over the prospect that a vaccine could be available by early 2021 was deflated by escalating virus cases in the U.S. and Europe and the return of restrictions. Hence, faith in the sustainability of the V-shaped recovery wavered and will continue to be put to the test this week. In that light, fundamentals will come back into focus. Attention will be on retail sales and production data from the U.S. and China. In Europe, Brexit talks will be front and center.
U.S. equities surged last week with new historic highs on the Dow and S&P 500 as hopes for a vaccine lifted optimism over the “V” recovery. Stocks have also been underpinned by robust employment data, indications of a divided Congress, and dovish commentary from Fed officials. The Dow closed the week with a 4.08% gain to 29,479, with the S&P 500 up 2.16% to 3585. The NASDAQ was -0.55% lower as some of the steam was taken out of stay-home shares. Meanwhile, virus cases and hospitalizations have surged, prompting renewed tightening in restrictions that will again be a headwind. However, it appears that at this point authorities are not leaning toward the full lockdowns seen this past spring. Retail sales will dominate the data slate, along with industrial production, and manufacturing numbers from the Empire State and the Philly Fed reports. Housing reports also be of interest as we move into the holidays as this high-flying sector will be monitored for any signs of moderation. As-expected results on these key reports will support the view that the V-shaped recovery remains intact, despite increasing worries that the run-up in virus cases, associated restrictions and lack of additional stimulus will undermine the economy.
Consumer spending has been robust, conforming to our outlook for a V-shaped recovery even as the labor market remains below February levels. Pent up demand saw sales surge in May (18.3%) and June (8.6%) after steep declines in March (-8.2%) and April (-14.7%). Activity remained solid, though a bit more in-line with typical pre-pandemic monthly gains, from July to September. Sales are expected to advance again in October, rising 0.6% for headline retail sales (Tuesday) and 0.7% for the ex-auto figure, following September gains of 1.9% for the headline and 1.5% ex-autos. Unit vehicle sales dipped to 16.2 mln in October from a 16.3 mln pace in September, which should be offset by continued momentum for sales of clothing, furniture, electronics, and appliances. Also, Amazon Prime Day could be a factor — it was delayed from July to October 13-14, and hence should provide a significant boost for October sales as the seasonal adjustment factors are not expecting the Prime Day lift.
The November Empire State and Philly Fed diffusion indexes will offer the most up to date view on manufacturing and are seen remaining elevated as factory activity ramps up further. However, there could be backtracking in select regional surveys in some months as big cross-currents in the rebound add noise. Conditions have improved rapidly since Q2, as producers face remarkably lean inventories and rebounding demand in many industries above pre-pandemic levels. The Empire State index (Monday) is expected to rebound to 14.0 in November after falling -6.5 points 10.5 in October. The index posted an all-time low of -78.2 in April. The Philly Fed index (Thursday) is projected to erode to 20.0 in November after surging a robust 17.3 points to 32.3 in October, the highest since February. It tumbled to a 40-year low of -56.6 in April. Broadly, we’ve continued to see divergent oscillations in the various confidence metrics since June, but around levels that are in expansion territory despite huge fluctuations on the pandemic, on-and-off stimulus, vaccines, and the elections. The indexes remain well above readings from prior recessions.
The Fed’s industrial production measure has tracked the rebound in factory activity that is reflected in the diffusion indexes. We anticipate that industrial production (Tuesday) will jump 1.7% in October following the disappointing -0.6% decline posted in September. Of course, the fall in September production was accompanied by big upward revisions that partly capped the damage, leaving a four month string of solid gains through August before the September pull-back. Hence, an as-anticipated October increase would temper worries that the September drop signaled the end of the line for the factory rebound. Notably, the ISM manufacturing index is consistent with ongoing expansion in this sector and supports our industrial production projection — the ISM surged 3.9 points to a lofty 2-year high of 59.3 in October from 55.4 in September and a prior 2-year high of 56.0 in August. The index has handily recovered from an 11-year low of 41.5 in April.
The housing sector has been the star of the pandemic economy, as low rates and altered household preferences (detached housing) have driven sales, prices and construction sharply higher from depressed spring levels. On that theme, housing starts (Wednesday) are seen accelerating to a 1.460 mln pace in October, after picking-up to a 1.415 mln pace in September from 1.388 mln in August. Starts remain below the 13-year high of 1.617 mln in January, however, suggesting there is still room to run. Meanwhile, we expect existing home sales (Thursday) to dip -0.6% in October to 6.500 mln — but the mild projected slippage is from a 14-year high of 6.540 mln in September, leaving a still very robust sales clip.
Finally, Initial jobless claims (Thursday) for the week of November 14 should remain elevated, though we assume a -9k decline in the weekly pace to 700k, after a drop to 709k from 757k. Initial claims should average 684k in November, after averages of 786k in October and 855k in September. The 797k October BLS survey week reading undershot recent BLS survey week readings of 866k in September and 1,104k in August. Consequently, we assume a 750k November payroll rise after gains of 638k in October, 672k in September, and 1,494k in August as the economy continues to recover jobs. Trade prices for October are due Tuesday, with mild gains projected.
There’s another heavy Fedspeak slate, with many giving their views on the economy. On Monday, Fed VC Clarida discusses the economic outlook and Daly speaks on building a more inclusive economy. Tuesday sees four presidents, Bostic, Daly, Kashkari, and Rosengren, speaking on racism and the economy. Barkin also discusses the economy on a webinar. At mid-week, Williams in in a webinar discussion, Bullard provides his views on the economy, Kaplan moderates a panel discussion, and Bostic is at a Fed education event. Friday sees Kaplan and George speaking on energy and the economy. Barkin and Bostic discuss mobility and growth.
The corporate earnings calendar tapers off this week following the packed slates of the past few weeks. While earnings news has been mixed, the more positive guidance seen in recent reports has been encouraging. On Monday, BHP, JD.com, KE Holdings, Baidu, Palo Alto Networks, Tyson Foods, and GDS Holdings report. Tuesday brings Walmart, Home Depot, Sea Limited, Warner Music Group, Autohome, Aramark, and Kohl’s. Wednesday has NVIDIA, Lowe’s, Target, TJX, Copart, and ZTO Express. Thursday has Intiot, NetEase, Workday, and Ross Stores . Friday has Foot Locker. Canada’s calendar comes back to life this week after the sedate schedule last week. September retail sales (Friday) are expected to rise 0.2% after the 0.4% gain in August. The ex-autos sales aggregate is poised for a 0.3% increase after the 0.5% expansion in August. Consumers have returned to more normal spending amounts after the big pop that followed the reopening of the economy. Of course, the spending pattern has been transformed by the pandemic, leaving ample scope for a surprise in the retail sales report.
CPI (Wednesday) is projected to remain tame, expanding at a 0.4% (y/y, nsa) pace in October after the 0.5% gain in September. The month comparable CPI is expected to rise 0.1% after the -0.1% drop (m/m, nsa) in September. Gasoline prices fell about 1% compared to September, but a strong seasonal uptrend in prices during the month should more than offset. Yet, similar to retail sales, the shift in consumption preferences and the resulting supply bottlenecks leave ample room for a surprise with the CPI report. Manufacturing shipment values (Monday) are seen rebounding 1.5% in September after the -2.0% tumble in August. Housing starts (Tuesday) are pegged at a 215.0k unit pace in October from the 209.0k clip in September. Wholesale shipments (Tuesday) are due Monday, expected to rise 0.5% in September after the 0.3% gain in August. October existing home sales are expected on Monday. BoC Governor Macklem speaks (Tuesday) and Senior Deputy Governor Wilkins joins a panel (Wednesday). The basecase policy outlook remains for no change in rates until 2023.
The focus of the market will remain on Covid developments this week, as cases continue to spike in the U.S. and Europe, with death rates and hospitalizations rising as well, painting a more worrisome picture and impacting perceptions of the economic recovery going forward. This week’s regional calendar will feature key data from China, including October retail sales, industrial production, and fixed investment. Japan will reveal preliminary Q3 GDP, the October trade report, and October national CPI. Elsewhere, growth, trade, prices, and employment are due. There are several central bank meetings this week, including Thailand’s BoT, Indonesia’s Bank Negara, and the Philippines, though none are expected to change policy.
In China, October industrial output (Monday) is forecast to dip to a 6.8% y/y pace from 6.9%. It’s been steadily recovering from the -1.1% y/y collapse in March, and is 1.2% higher year-to-date. October retail sales (Monday) should accelerate further to a 4.0% y/y clip from 3.3%. This would be a third month in expansion after five straight months in contraction, with a low of -15.8% seen in March. October fixed investment (Monday) is penciled in nearly doubling to a 1.5% y/y rate from 0.8% previously. It’s bounced from -24.5% in February. Japan has the preliminary Q3 GDP report (Monday), expected to result in a 21.0% q/q rebound after the -28.1% Q2 plunge. Revised September industrial production is due (Monday) as well. The October trade report (Wednesday) is expected to see the surplus narrow to JPY 200.0 bln from JPY 687.8 bln in September as the contraction in exports and imports in expected to slow further from the respective -4.9 y/y and -17.2% y/y rates. October national CPI (Friday) is estimated falling into deflation at -0.5% y/y from unchanged. Inflation has been on a softening trend again since late 2018. And we see a decline to -0.6% y/y from -0.3% on a core basis.
Hong Kong’s October unemployment (Tuesday) likely rose again to a record 6.7% from 6.4%. It’s been tracking higher since holding at a 2.8% clip from April 2088 to June 2019. October CPI (Friday) is penciled in eroding to a -2.4% y/y pace from -2.2%. It’s been steadily slipping since March’s 2.3%, and was at 0.7% y/y in June. South Korea’s October PPI is due Friday. Taiwan October export orders (Friday) are forecast to slow to a 9.0% y/y rate of expansion from 9.9%. Q3 current account figures are due Friday as well. Singapore’s revised Q3 GDP is due this week. October non-oil exports (Tuesday) are seen slowing to 5.5% y/y from 5.9% previously. Thailand Q3 GDP (Monday) is forecast to have dripped to a -10.0% y/y contraction rate from the prior -1.2% drop. The BoT (Wednesday) should keep its overnight repo rate steady at 0.50%. Indonesia October trade (Monday) should see the surplus narrow to $2.2 bln from $2.4 bln. Bank Indonesia (Thursday) is also seen on hold, with its 7-day reverse repo rate expected unchanged at 4.00%. The Philippines central bank (Thursday) also should hold fire with rates not likely to move from the current 2.25% level.
Australia’s employment report (Thursday) is expected to show a -20.0k drop in October after the -29.1k decline in September. The unemployment rate is seen rising to 7.0% from 6.9%. The Q3 wage price index is due out Wednesday, and is projected to expand 0.2% (q/q, sa) after the identical 0.2% rise in Q2. RBA Governor Lowe delivers a speech (Monday) and participates in a panel (Wednesday) this week. Assistant Governor Kent delivers remarks as well (Tuesday). The minutes to the RBA’s October meeting will be released on Tuesday. At the meeting, the RBA increased stimulus to ensure recovery. As expected, the bank announced a package of measures designed to secure a rapid recovery from the crisis now that lockdowns have lifted. The RBA cut its key interest rate to 0.1% from 0.25%, as was widely anticipated. It also announced that it will buy AUD 100 bln of government bonds with maturities of around 5-10 years over the next six month. Furthermore, the bank announced that the rate paid to commercial banks for their deposits at the central bank will be cut to zero. The focus is on lowering refinancing costs. On negative rates, the Governor said he sees no appetite to go there.
New Zealand’s docket has Q3 PPI (Wednesday). Last week, the RBNZ topped up stimulus with a new Funding for Lending Program to start in December, aimed at reducing banks’ funding costs and lowering interest rates. The bank’s economic projections were less pessimistic on growth and inflation and cut back the projections for peak unemployment. The cash rate was left unchanged at a record low 0.25% and the Large Scale Asset Purchase program remained at NZD 100 bln. The statement reiterated the commitment to use additional tools if necessary, but markets have started to price out expectations that the bank will move towards a negative rate regime next year, on the back of the less pessimistic outlook. The balance of risks remains tilted to the downside, but it seems that in the central scenario further rate action won’t materialize.
Eurozone: Vaccine news overshadowed Brexit talks last week, but with little else on the calendar the issue of the rapidly approaching end to the transition period clearly is becoming increasingly important. Both sides had previously pinpointed October 15 as the deadline for a deal – to allow sufficient time to get an agreement through parliaments. However, that deadline is once again set to come and go, with talks resuming in Brussels on Monday. Bloomberg reported that the EU suggested it is prepared to continue the deliberations into December if necessary. The key areas of disagreement remain level playing field rules, fishing rights and the governance of any deal.
Fishing is the area where the EU will likely be able to make the most concessions to give Johnson something to sell as a victory to the Brexiteers at home. On level playing field rules and governance, the U.K.’s Internal Market Bill, which violates the Withdrawal Agreement, will only have hardened the EU’s resolve to insist on strict and enforceable guidelines for the future. Ultimately we still expect a deal to come off, but it is likely to be a narrow one that will be disruptive for both sides and add to the problems virus developments are creating. A no deal scenario meanwhile is still a possibility. The data calendar is very quiet. The final reading for Eurozone CPI (Wednesday) is widely expected to confirm the -0.3% y/y preliminary release, with some risk of a slight upward revision. Eurozone consumer sentiment meanwhile is likely to decline once again against the background of rising Covid-19 numbers and increasingly tight restrictions.
There are a number of ECB speakers, however, including Lagarde, Schnabel and Villeroy and we expect officials to continue to stress that substantial monetary and especially fiscal support will remain paramount to get economies back on track, even if vaccination programs can start this year. Lagarde made it pretty clear at in the current situation the ECB is focused less on inflation – which remains negative anyway – but on supporting fiscal policies by keeping asset purchases going and keeping rates low. A strengthening of the PEPP program then that will allow asset purchases to continue through 2021 at the current pace is likely to be announced at the December meeting at the latest. TLTROs – the ECB’s version of a loan for lending program – also remains a key weapon for the ECB.
U.K.: last week’s Covid vaccine rally was widely taken as a positive for the UK, and found expression in driving a rally in the pound. The UK government has already pre-ordered 40 million doses of the Pfizer candidate vaccine, alongside large pre-orders in for other leading candidates, and the argument is that this puts the UK in a front position to reap the benefits of a vaccination program. There is also the logic that as the UK saw the biggest peak to trough drop in its GDP this year out of the G20 economies, it will benefit the most in the route out of the Covid crisis.
Brexit remains front and centre. The coming week was being touted as the ‘final final’ deadline for a future relationship deal to be reached to allow time for the ratification process ahead of the UK’s departure from the common market and customs union on January 1, but it has become clear that negotiations could be pushed further out still. France’s EU minister said on Friday that a “fixed, scientific deadline” has never been set, but if this happens after the end of November “we will be in trouble.” There is even the possibility for a ‘technical’ delay, though the political mood in the UK is against this, with Boris Johnson set on following through on a fundamental manifesto promise after building up a notorious reputation for U-turning on policy decisions this year. Another consideration is political developments on Downing Street, with the government’s director of communications Lee Cain and prime minister advisor Dominic Cummings having left their positions. The take on this is that this weakens the influence of the ideologically Brexit ‘Vote Leave’ campaign, meaning there could be a softer and more pragmatic attitude to Brexit, although it is not yet clear what shape the new administration set-up will take.
There has still not been a breakthrough in negotiations between the EU and UK. Evidently, given the pound’s performance, the prevailing market expectation remains that there will be a last minute climbdown and the two sides will strike a deal, which is what we anticipate. Both sides will have to make concessions if a deal is to be achieved. There is an axiom that all things Brexit go down to the wire, and fitting this neither side has been willing, as yet, to make the first move in the concession game. Too much is at stake for both sides — surely — for there to be a failure in statesmanship. Given the emergence of pro-EU Biden as president elect in the U.S., news that Dominic Cummings is out of Johnson’s administration, and the backdrop of the Covid crisis, the scene is set for a deal to be made. It should be emphasized that the UK government has the option of exiting the common market in close alignment to EU rules, possibly much more so than has generally been expected, before diverging in an evolving process over time. The promise of future divergence would serve to mollify the powerful faction of Brexit ideologues in Johnson’s government. UK media, meanwhile, have been increasingly highlighting the likely disruptive impacts to cross border trade that are likely to be seen when the UK leaves the single market and customs union in just seven weeks time.
The UK data calendar this week features October inflation numbers (Wednesday), the November CBI industrial trends (Thursday), and the October reports for consumer confidence, retail sales and government spending (all due on Friday). Headline CPI inflation has a consensus forecast for a 0.6% y/y rate, which would mark a fractional lift from September’s 0.6%. The core CPI figure is expected at 1.3% y/y, unchanged from the month prior. The BoE acknowledged in its November Monetary Policy Report that CPI remains well below the 2% target due to the temporary impact of a sales tax reduction, lower energy prices and spare capacity. The bank is forecasting CPI to remain near 0.5% over the winter before rising sharply as the impact of the sales tax cut and energy price declines dissipate. The BoE’s central projection is for CPI to hit the 2% target at the two-year horizon, on the proviso that a free trade deal is made with the EU and that Covid restrictions are loosened in 2021. As for retail sales, a 0.3% m/m increase is expected, while consumer confidence is seen falling to a -34 reading from -31 in the month prior.
Switzerland: The Swiss data calendar is quiet this week. EUR-CHF has rallied from sub-1.0700 levels to
levels above 1.0800. Risk-on positioning weighed on the Swiss franc with investors factoring in a sea change in optimism about a vaccine solution to Covid-19.