The Daily Update: The Week Ahead

Last week, Joe Biden was sworn in as the 46th President of the United States. He signalled American’s return to a multilateral approach on key issues by re-joining the Paris Accord and remaining part of the WHO. On the domestic front, he called for greater unity and unveiled a covid virus plan that aims to deliver 100m shots of the vaccine in the first 100 days. In terms of economic policy, Janet Yellen’s confirmation hearing as US Treasury Secretary called for the US to ‘act big’ on stimulus. However, there are signs of Republican resistance in the senate to the full USD1.9tn proposal so soon after the USD900bn package in December. Biden would require some of their support to reach the 60-vote threshold in the senate for legislation to pass, likely leaving the administration with the choice of either having to scale back/modify the package to try and garner enough support, or to try and push through their plan using the reconciliation budget process which requires a simple majority of 50 votes. US economic data erred on the stronger side with the IHS Market PMI data coming in stronger than expectations for both manufacturing (59.1 vs prior reading of 57.1) and services (57.5 vs prior reading of 54.8). Housing starts, building permits and existing home sales for December were also stronger than expectations and weekly initial jobless claims were elevated at 900k but were lower than the prior week. Against this backdrop, the S&P 500 ended the week +1.94% although weakened into Friday’s close. Uncertainty about the stimulus package passing in its current form and concerns about the impact of continued covid infections and emergence of potentially more virulent strains were factors weighing on sentiment. USTs were little changed on the week: the yield on the 10-year UST ended the week +1bps at 1.09% and the 2s30s spread widened 2bps to 172bps.

As expected, the ECB made no change to its policy at this month’s meeting holding the deposit rate at -0.5% and maintaining the Pandemic emergency purchase programme (PEPP) at EUR1.85tn and reiterating that it will run at least until March 2022. The ECB reconfirmed its very accommodative stance to preserve favourable financing conditions while it judged the risks to the growth outlook to be “tilted to the downside but less pronounced”. However, the statement noted: “If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full.” This reference was viewed as slightly hawkish by some market participants but Lagarde emphasised the flexibility of the programme and “equally” that it can also be recalibrated. Moreover, continued covid infections requiring further restrictions to be imposed in Europe and the slow pace of the vaccine roll out continues to weigh on the outlook. The Eurozone Markit PMI Composite reading for January was also weak at 47.5. The BoJ also held its interest rate and asset purchase setting which was as expected ahead of the policy review due in March. At the post meeting press conference, BoJ governor, Haruhiko Kuroda, noted of the policy review: “Yield curve control has worked appropriately and I don’t think the framework itself needs to be changed,” and “from the standpoint of achieving more effective and sustainable monetary easing its operations are under review.”

The Week Ahead is expected to see continued focus on announcements from the new Biden administration for indications of future policy direction: details of Biden’s ‘Buy American’ plan are expected to be released Monday. It has also been announced that the House’s article of impeachment will be delivered to the Senate on Monday and Trump’s impeachment trial is due to start the week commencing February 8th. Progress of the vaccination programmes around the world and virus infections will also be closely monitored as further restrictions continue to constrain the growth outlook. In terms of central bank news, the focus will be on the Fed with the FOMC due to meet on 26-27th January with the market not looking for any change to policy at this stage, and Jerome Powell is expected to reiterate that it is too early to be talking about tapering bond purchases. ECB Chief Economist Philip Lane is due to appear on Wednesday at an online event hosted by the Bruegel think-tank on “In search of a fitting monetary policy: the ECB’s strategy review.” The World Economic Forum’s Davos event takes place online this year running through this week with ECB President Christine Lagarde, and Andrew Bailey, the BoE Governor lined up to speak. Other key speakers include Chinese President Xi Jinping, the German Chancellor Angela Merkel and the French President Emmanuel Macron.

The IMF is due to release its updated World Economic Outlook on Tuesday. Data-wise key US releases include the December reading for the Chicago Fed National Activity Index on Monday, US durable goods orders for December on Wednesday and Q4’20 GDP data is also due for release on Thursday with the Bloomberg survey looking for an annualised qoq increase of 4.2%. Personal income and expenditure data for December are also due for release on Friday. The US earnings season also continues with a slew of companies due to report this week. Elsewhere, China’s December industrial profits data is due for release on Wednesday. In Europe, Germany is due to release the January IFO business expectations reading on Monday. Other key data releases include the preliminary estimate of German, French and Spanish Q4 GDP on Friday with the Bloomberg survey looking for 0% SA qoq, -4% qoq, -1.4% qoq respectively. In Italy, Prime Minister Giuseppe Conte survived confidence votes in both the lower House and Senate last week. However, he failed to secure an absolute majority in the Senate and still needs to secure additional support.