Last week, equity markets traded with a broadly optimistic tone on hopes that vaccine deployment is getting closer to creating a path for economies to reopen and to recover. Political uncertainty also appeared to reduce as President Trump gave the go-ahead for the General Services Administration to begin the transition to President elect Joe Biden. Biden revealed his nominations for key appointments in his administration noting that "America is back and ready to lead the world, not retreat from it": key potential appointments include Janet Yellen as US Treasury Secretary, Antony Blinken as Secretary of State, John Kerry as Special Presidential Envoy for Climate and Alejandro Mayorkas as Secretary of Homeland Security.
US bond and equity markets were shut on Thursday for the Thanksgiving holiday but optimism about vaccine supported equities and credit markets: the S&P500 ended the week +2.3%. The UST yield curve steepened with the 2s30s spread widening 6bps to 142bps over the week. The UST 10-year yield rose 1bps to 0.84%. Key news flow over the week included the Fed and ECB meeting minutes: the Fed minutes from the November 4-5 meeting indicated that the Fed may soon issue guidance on its bond buying programme stating: “Many participants judged that the Committee might want to enhance its guidance for asset purchases fairly soon” and “Most participants judged that the Committee should update this guidance at some point and implement qualitative outcome-based guidance that links the horizon over which the Committee anticipates it would be conducting asset purchases to economic conditions.” The ECB minutes released on Thursday broadly pointed to further easing at the December meeting reinforced by Chief Economist Philip Lane speaking and highlighting “worrying signals” about tightening financing conditions in some of the recent survey data.
In the UK, the Chancellor Rishi Sunak warned in his opening comments of the UK spending review: “Our health emergency is not yet over. And our economic emergency has only just begun.” It is not difficult to see why when one looks at the OBR forecasts: the central forecast assumes the economy will decline by 11.3% in 2020, its largest fall in 300 years, and will not return to its pre-covid level until 2022. The OBR central forecasts that the unemployment rate will peak at 7.5% in Q2’2021. Rishi Sunak said that £280bn had been spent to support the economy with another £55bn due to be spent next year. As a result, the UK is expected to borrow £394bn this fiscal year (~19% of GDP). Unsurprisingly, Sunak warned that this trajectory was not sustainable in the medium term.
In the week ahead, the impact of the US Thanksgiving holiday gatherings on the spread of covid will be a factor to watch given much of Europe is still struggling to bring another wave of infections under control and reopen their economies. Earlier today China official manufacturing and non-manufacturing PMI data for November exceeded expectations (at 52.1 versus 51.5 and 56.4 versus 56 respectively) suggesting the economic recovery remains on track. Tomorrow the Caixin PMI data for manufacturing and services in November is also due for release. Other key data releases over the week include the US ISM manufacturing data for November on Tuesday, the Beige Book report on Wednesday and the ISM services index for November on Friday along with the November non-farm payroll data. Survey expectations are for 500,000 jobs to be added and the unemployment rate to edge lower to 6.8%, a slower rate of job creation than October is expected given the rise in covid infections. European data releases include the flash Euro-Area CPI reading for November on Tuesday which is expected to add to concerns about the inflation outlook and downside risks. Later in the week German October retail sales and factory orders releases are also due while Euro area Finance Ministers are due to meet on 1 December. The main central bank meeting will be the RBA meeting on Tuesday although no change to policy is expected. Elsewhere the focus will be on central bank speakers: Fed Chair Jerome Powell is due to appear with US Treasury Secretary Steven Mnuchin to testify before the Senate Banking Committee on the CARES Act on Tuesday and on Wednesday Jerome Powell also appears before the House Financial Services Committee. Other Fed speakers over the week include Mary Daly, Charles Evans, Lael Brainard. ECB speakers include Christine Lagarde and Philip Lane, and BoE speakers include Silvana Tenreyro and Jonathan Haskel. Other events include the OPEC and non-OPEC ministerial meetings to decide on future supply and Brexit negotiations are due to continue again into this week.