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
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
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
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
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.
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