Last week was a mixed week in terms of news flow. On an encouraging note, the UK started its vaccination programme with the Pfizer BioNtech vaccine and on Friday the US FDA also approved the vaccine’s use with vaccinations expected to start shortly. However, this was set against a backdrop of rising infections in the US and greater restrictions being imposed in states such as California. In Europe and the UK, covid infections persist limiting the scope to relax restrictions. Also, the Democrats and Republicans failed to reach agreement on another stimulus package. However, late on Friday the Senate did pass a stop-gap spending bill to avoid a government shutdown for a week allowing stimulus negotiations to continue along with finalisation of the omnibus spending bill. Data releases were mixed in the US: weekly jobless claims increased to 853,000 from 716,000 last week, this is the highest level since mid-September, although the preliminary reading for the University of Michigan consumer sentiment index for December surprised to the upside.
In Europe, the ECB announced further stimulus measures. As expected, the ECB left its key interest rates unchanged and increased the pandemic emergency purchase programme (PEPP) by EUR500bn to EUR1.85tn and extended the programme “to at least the end of March 2022” noting “we will conduct net purchases until the Governing Council judges that the coronavirus crisis phase is over.” The ECB also extended its programme of ultra-cheap loans offered to banks. The EU also passed the EUR1.8tn budget and recovery fund. Japan also passed a further USD708bn stimulus package. Brexit was also a focus with talks resuming after a dinner between Boris Johnson and European Commission President Ursula von der Leyen on Wednesday to try and break the deadlock but as the week progressed both leaders cautioned that there was a good chance an agreement would not be reached. Sunday was given as a deadline to reach a deal. Sterling weakened against the euro and US dollar over the week and gilts rallied.
Against this backdrop, the S&P500 closed out the week on a weaker note with the index falling 0.96% over the week. The backdrop of rising covid infections and restrictions, US stimulus uncertainty and the possibility that the Fed could extend the average maturity of its Treasury purchases were all supportive of USTs: the yield on the UST 10 year tightened 7bps to 0.9% at Friday’s close and the UST 2s30s spread tightened 8bps to 150bps.
On Sunday, Boris Johnson and Ursula von der Leyen agreed to extend Brexit negotiations again although Johnson warned both sides still remain far apart on some key things. Elsewhere in the week ahead, aside from the trend in covid infections, ensuing restrictions, vaccine developments/authorisations and the US stimulus negotiations the focus will be on a number of central bank meetings. The FOMC, BoE and BoJ decisions are due on Wednesday, Thursday and Friday respectively, but a number of other central bank meetings including Mexico, Switzerland, Norway and Russia are also taking place. In the case of the FOMC, market participants are looking for guidance on the asset purchase programme, and whether the Fed will increase the average maturity of its bond purchases which would help keep borrowing costs low but also support the longer end of the UST curve. In the case of the BoE the state of play on Brexit negotiations is going to be a key factor: under a no deal scenario further support measures are likely. The BoJ meeting will be watched to see if it extends measures aimed at reducing business funding strains. Economic data-wise a slew of preliminary PMI readings for December for Japan, the US and Europe will be a focus on Wednesday giving a feel for how economies are holding up. US retail sales for November are also due mid-week. The final reading for the Euro area HICP inflation for November is due later in the week and on Friday the German Ifo survey for December will be of interest, particularly the expectations reading for signs of weakness given continued covid infections and restrictions. In Asia, the Q4 Tankan survey for Japan is due on Monday and on Tuesday China’s November industrial output, retail sales and fixed asset investment data is also due.