Last week, the rollout of covid vaccines looked to edge closer with the news that the Pfizer BioNtech vaccine has been approved for roll-out in the UK with vaccinations expected to start as soon as this week. Plus, Pfizer BioNtech filed for emergency use authorisation with the European regulators and Moderna filed for emergency use authorisation in both the US and Europe. After the risk-on rally in November, this news helped propel the S&P500 to another new high, with the index gaining 1.7% wow. Credit markets have also benefited from the recovery trade. Against this backdrop, USTs came under pressure exacerbated by Friday’s weaker non-farm payroll (NFPR) data as expectations built that signs of a weakening economy will put pressure on the Senate to agree to a fiscal stimulus. Over the week the UST curve steepened with the 2s30s spread widening 16bps to 158bps and the yield on the UST 10-year yield backed up 13bps to 0.97% at Friday’s close.
Friday’s non-farm payroll report came in below expectations with 245,000 jobs added against expectations (Bloomberg) of 460,000 jobs added. The prior month was also revised down to 610,000 from 638,000. The unemployment rate was in line with expectations edging down to 6.7% from 6.9% last month but the participation rate edged lower to 61.5% from 61.7%. The report confirmed warnings earlier in the week by Fed Chair Jerome Powell in his testimony to the Senate Banking Committee. While he acknowledged that recent vaccine developments are “very positive for the medium term” he emphasised “the outlook for the economy is extraordinarily uncertain and will depend, in large part, on the success of efforts to keep the virus in check.” More specifically on the labour market he noted that “the pace of improvement in the labor market has moderated.” Thus, his call for further fiscal stimulus looks pertinent. There were some developments on the fiscal stimulus front: House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer issued a joint statement agreeing to use a bipartisan Senate proposal for a USD908bn stimulus as a basis for bipartisan bicameral stimulus negotiations. They called on Mitch McConnell to move forward with negotiations stating: “In light of the urgency of meeting the needs of the American people and the hope that the vaccine presents, it’s time for Leader McConnell to sit down with Democrats to finally begin a true, bipartisan effort to meet the needs of the country.”
Elsewhere, following media reports earlier in the week, the Trump administration officially added SMIC and CNOOC, along with 2 other companies, to a blacklist of companies with military connections on Thursday. This takes the number of blacklisted companies to 35 and a recent executive order from President Trump will prevent US investors buying these firms' securities from later next year. The move is seen reinforcing Trump’s ‘tough on China’ legacy. Meanwhile, President-elect Joe Biden in recent commentary on China has said he will not immediately unwind restrictions, instead preferring a multilateral approach saying: “The best China strategy, I think, is one which gets every one of our – or at least what used to be our – allies on the same page. It’s going to be a major priority for me in the opening weeks of my presidency to try to get us back on the same page with our allies.” In Europe and the UK, the week closed out with Brexit talks continuing to run to the wire. After reaching a deadlock on Friday, a phone call between Boris Johnson and Ursula von der Leyen at the weekend has seen talks resume in what looks to be the final attempt to reach an agreement.
Aside from Brexit negotiations, one of the key events in the week ahead is the ECB meeting on Thursday with market participants looking for an increase in the Pandemic Emergency Purchase Programme (PEPP) and possibly an extension of the discount window on the TLTRO-III. This meeting will also see an updated set of economic forecasts released and follows the weak inflation November CPI data (-0.3% yoy) last week and continued strength in the euro. The EU Council meeting on Thursday will be an important focus not only because of Brexit but also because of the European Budget and Recovery Package as leaders try to find a way forward after Hungary and Poland vetoed it last month due to the linkage between rule of law and fund disbursement. In the US, the focus will be on new covid infections and the FDA meeting on 10thDecember to consider the Pfizer vaccine for authorisation for emergency use. The market will also be looking to Congress to make progress on agreeing a fiscal stimulus and with limited time ahead of the holiday period. Key data releases include US CPI and PPI data for November and the preliminary December University of Michigan Sentiment indicator. In Europe, the German ZEW survey for December is due on Tuesday along with October industrial production data for Germany, France, Spain and Italy over the course of the week. On Thursday, UK GDP data for October will be watched to see the impact of the regional restrictions with November expected to be even weaker due to the national lockdown. China data earlier today showed the November trade surplus expanded to USD75.42bn versus expectations of USD53.75bn: exports grew 21.1% yoy (USD terms) exceeding expectations of 12% yoy and imports expanded 4.5% yoy versus expectations of 12% yoy.