News & analysis

The US dollar remained on the defensive this week, weakening over the beginning of the week and barely managing to avoid further losses against the euro and yen on Thursday and Friday. Broad risk appetite appears stuck between poor short-term news, with rising Covid-19 cases in Europe and the US, and encouraging vaccine data. Next week’s calendar offers a number of points of interest, including the UK Treasury facing up to this exact trade-off in its latest spending review, and FOMC meeting minutes set for release.

CALENDAR

Monday 23rd

Brexit headlines from last week suggested that UK and EU negotiators may be edging closer to a free trade deal, which provided modest tailwinds for sterling. The reports suggested the deal could be struck as early as Monday.

While markets keep a close eye on Brexit related headlines, both the eurozone and UK will on Monday see the release of flash Purchasing Managers’ Indices for November at 09:00 and 09:30 GMT respectively.

For the euro area, the consensus for the composite PMI is set at a grim 45.5, with the French figures being the main drag on the number as the French composite PMI is expected to print at 34.0, according to the median of forecasts submitted to Bloomberg. France witnessed a much larger surge in case count and stricter lockdown measures than Germany, whose composite PMI is expected to print just above the expansionary 50-level mark at 50.4. For the UK, the November reading does not look bright either, with the partial lockdown imposed in England at the start of the month likely weighing on the reading. The composite PMI is set to print at 43.6, far below October’s 52.1. During the first wave, the PMI numbers understated the decline in output for the same quarter, leaving the outlook for Q4 GDP grim. For both the UK and the EU, the PMI readings are likely to show that the services sector is bearing the brunt of the pain.

During the later trading session, US Purchasing Managers’ Index figures at 14:45 GMT are set to print only slightly lower than the October figures. While there are no forecasts available on Bloomberg for the composite figure, the manufacturing and services PMI are set to print at 52.5 and 55.8 respectively. Unlike the EU and UK, the American services sector is expected to have performed better in November. While this may sound promising, markets may be bracing for worse figures to come in the next months. With cases again rising at rapid speeds, California imposed a curfew on most of its residents earlier this week, while New York City closed down schools again.

Tuesday 24th

After the PMI data releases on Monday, markets will turn their attention to the German Ifo Survey data release at 09:00 GMT, which is one of the most accurate sentiment indicators of economic growth in Germany. The figures are set to drop only slightly from October’s reading, with the current assessment figure expected to fall from 90.3 to 87.7 in November, while the consensus for the expectations index stands at 93.8 down from October’s 95.0. A lower than expected reading would reflect the impact of the fresh virus containment measures and could, together with Monday’s PMIs, paint a picture of other activity indicators in both Germany and the eurozone. The Ifo reading is scheduled for release after the 07:00 GMT final Q3 GDP figures from Germany which are expected to remain unchanged.

Wednesday 25th

During Wednesday’s UK 1-year Spending Review, Chancellor of the Exchequer Rishi Sunak will announce spending plans for the upcoming fiscal year. Normally, the chancellor would set budgets for public sector spending over 3-4 years, but given the current climate of risks and uncertainty, Sunak will only be setting out spending plans for the next year. Much of the budget is already set with spending on NHS committed up to 2023-2024 and plans for schools spending up to 2022-2023. Earlier this week, Prime Minister Boris Johnson pledged £16bn for the military over 2021-2024. Reports from the Institute for Fiscal Studies showed other parts of the public sector may be facing a renewed squeeze. The Spending Review will be of high importance for PM Johnson’s popularity as well, as he promised to bring austerity to an end before the 2019 election. Along with Covid-related spending, Sunak will likely cover investment and infrastructure plans, Brexit-related spending decisions and a broader outlook for tax and public finances. These are discussed in greater detail below.

South Africa’s CPI data for October is set to be released at 08:00 GMT on Wednesday, with expectations sat at a 3% print. This would signal no change from September’s reading and see inflation continue to hug the lower bound of the SARB’s inflation target. Inflation data will begin to play an important role for the rand in the coming months after the central bank committed to holding rates at 3.5% by a slim margin of 3 votes to 2.

With the central bank expecting CPI to fall below the lower bound throughout much of 2021, it could only take a more aggressive downturn in inflation or a minor setback to the economic recovery to spur expectations for another 25bps rate cut by fixed income markets.

Thursday 26th

While the US enjoys Thanksgiving weekend from Thursday onwards, The Riksbank rate decision at 08:30 GMT and the ECB’s October minutes released at 12:30 GMT are on the Agenda for Thursday. Market consensus sees the Riksbank keep its monetary policy unchanged, at least until the ECB reveals its cards at the December meeting. New containment measures in Sweden are darkening the near-term domestic outlook, while the eurozone lockdown measures weigh on the Swedish economy as well, given Sweden’s small and open economy has the eurozone as a large trading partner. Governor Stefan Ingves is likely to signal caution and not rule out any expansions to the asset purchase programme. Nothing new is expected for this meeting, but hints for the February meeting will be closely monitored.

The minutes of the ECB October meeting will be scrutinised by markets for any hints on the form of monetary stimulus announced in December. The ECB was very clear in its latest policy statement and press conference: more stimulus is on the way. The question now is whether this means an increase in size or expansion in the Pandemic Emergency Purchase programme, and if there will be any changed to the targeted longer-term refinancing operations.

Friday 27th

Sweden GDP is on the agenda for Friday at 08:30 GMT, and is set to show a small fall in output. With Sweden still having had relatively loose containment measures in Q3 compared to other developed markets, the QoQ GDP figure is set to come in at 4.3%, while the yearly figure is expected to have fallen by -3.6%. By now, Sweden has adopted a way stricter lockdown approach, with containment measures imposed on restaurants for the first time since the initial outbreak. Friday’s GDP figures will however not include the new developments in the nation, which means that even if output numbers turn out to be better than expected, the Swedish krone upside is capped with markets fearing the worst for Q4.

 

GBP

UK TREASURY AND OBR MUST WEIGH VACCINE OPTIMISM AGAINST MOUNTING COSTS OF SECOND LOCKDOWN

Chancellor Rishi Sunak will present a shortened, one-year spending review on Wednesday 25th, accompanied by a new set of forecasts from the Office for Budget Responsibility.

Most department’s resource and capital budgets will be set for 2021-2022, although the NHS, education, and defense will be funded for longer.

However, the short term still leaves plenty of uncertainty for both the Treasury and OBR to grapple with, as well as significant scope for new spending from the Chancellor. The most recent statement from the Treasury suggested the focus will be short-term Covid-19 responses in areas such as jobs support and front-line services, as well as infrastructure investment.

The most important question is: how much spending with the Chancellor commit to? At March’s Budget, before national lockdowns were implemented, Sunak committed to resource budgets growing 4.4% above inflation between 2020-21 and 2021-22, bringing total department budgets to £361 billion in the latter year. Capital investment would grow by 12.5%. Given the overall trajectory of fiscal policy under the current Government, a tightening of the purse strings seems unlikely – although selective cuts in areas such as public-sector wages cannot be ruled out altogether. Previous touchstone commitments such as the NHS and Job Retention schemes have already locked the Government into a substantial loosening in fiscal policy in the near term. Any show of prudence will need to be made elsewhere, for example in public sector pay. The treatment of emergency Covid-19 funding will also be important – will extra funding be committed next week to specific projects, or will a large sum be left as a reserve to be used as needed? Finally, infrastructure spending aimed at encouraging a more rapid recovery is one major area where surprise announcements could be made, and have a material impact on the short-term growth outlook.

 

Monex Tree Bears Fruit in 2020

Much attention will be paid to the outlook for the economy, which a Financial Times article earlier this week said would be “scary”, according to Government sources, and would see the economy still suffering from the coronavirus shock as late as 2024. The OBR’s forecast for the economy is likely to match the Bank of England’s in predicting an 11% contraction in gross domestic product – the worst year since the “great frost” of 1709. Barring an unlikely bout of fiscal tightening, this will mean a substantial and sustained expansion in public debt, and the implication of tax increases in 3-4 years. The Institute for Fiscal Studies estimated that Government borrowing would reach $350bn, or 17% of GDP this year, compared to an OBR estimate of £55bn in March, and that the Debt-to-GDP ratio could reach 130% by 2024-25, without revenue increases. This is an issue that is unlikely to come up this week directly, given the deliberately short-term nature of the statement. Following the positive news on vaccine effectiveness over the last couple of weeks, there is a strong argument for the Chancellor to expand spending in the short run to mitigate as much “scarring” to the labour market and consumer behavior as possible. The Government’s track record so far suggests a high level of sympathy for this argument in Downing street, consistent with most other developed economies.  However, the ambition of any spending expansion will raise questions about long-run debt trajectories nonetheless.

 

USD

RISING COVID CASES ADDS DOWNSIDE RISK TO US LABOUR MARKET AT A TIME WHEN THE FED AND TREASURY ARE FIGHTING OVER FUNDS 

Optimism over the latest vaccine news has overshadowed the surging wave of Covid-19 cases in the US so far. As vaccine cheer settles down and patience over the speed of distribution is advised by public figures, contagion risks over the upcoming Thanksgiving will be in focus over the coming weeks. The third wave of infections in the US has accelerated since early October, when the number of cases and new restrictions in Europe and other areas weighed on recovery hopes. As the US lagged other regions in the imposition of such measures, a rising number of cases in the US may be far from over. Softer restrictions amid the elections contributed to the sharp increase of infections in the subsequent weeks, with daily new cases now trending towards 200k on Friday 20th, from 120K daily infections recorded two weeks earlier.

Efforts on the latest round of measures across the country provide some hope, as the rate of acceleration in new daily cases seems to be slowing at the margin. From the 47% record high increase of smoothed daily cases in the seven-day window up to November 11th, new cases have risen below 25% in the week up to November 19th. This downward trend in the rate of increase in new infections signals that the inflection point in new cases-count should arrive before year-end. During the second wave of contagion in July, the curve of daily cases flattened over a month, as the speed of daily infections turned negative from its record peak around 45% in the following four weeks.

However, risks to this path lay ahead in the form of the Thanksgiving holiday, when a national four-day burst of social interactions is set to take place. The American Automobile Association estimates that only about 10% of travel will be reduced with respect to last year, which means a significant spike in the number of Covid cases after the holidays are to be expected. According to previous patterns, this wave of massive socialization should reflect in infection cases in around two weeks-time, prompting a severe surge of virus cases by mid-December instead.

 

Thanksgiving celebration should derail the slowing speed of new cases

While the US economy battles with the increasing prominence of a third wave prior to the Thanksgiving holiday, the effects of the initial tightening of containment measures are starting to become visible in the labour market data. Thursday’s initial jobless claims showed harrowing signs of what may be to come for the US economy, which is struggling to contain the latest outbreak and release additional fiscal support. The regular state claims data has been in a strong downtrend since the re-opening of the economy in August after the Sunbelt outbreak. However, this downtrend started to plateau in last week’s data as the effects of tightening containment measures in some states starts to filter through to the hard data. Hard claims data from Wisconsin, the only state to produce daily claims data, along with Google searches for “file for unemployment”, suggests that the deterioration in the US labour market is set to continue in the coming weeks. This deterioration will only increase in magnitude with the rise in Covid-19 cases and the subsequent lockdown measures imposed, which is at the mercy of social mobilisation during the Thanksgiving holiday.

The rise in initial claims data isn’t the only worrying sign for the US labour market and the economic outlook. While 742,000 unemployment insurance claims were registered in the week of November 14th, with continuing claims sitting at 6.372m, these data points don’t tell the whole story. The total number of people claiming benefits in all programs ending October 31st was 20.319m. While this number has decreased by 841,245 from the week prior, some 8.681m people still claim Pandemic Unemployment Insurance – a pandemic related insurance programme which is set to expire at year end. Fiscal stimulus talks are key for this reason as a vast number of the US labour force are still dependent on Federal assistance to a much greater degree than the headline continuing claims data suggests. Bipartisan talks are supposedly set to resume in the coming days according to CNBC, but the level of support for the US economy continues to be debated.

 

US jobless claims data underreports the true level of damage sustained to the labour market as pandemic unemployment insurance programme is set to expire at year-end

 

FED AND TREASURY LOCK HORNS OVER THE FUTURE OF THE 13(3) EMERGENCY FACILITIES INTRODUCED IN RESPONSE TO THE PANDEMIC

A debate on how best to support the US economy wouldn’t be complete without the Federal Reserve. On Thursday, Treasury Secretary Steven Mnuchin wrote to the central bank’s governor, Jerome Powell, to request the return of unused funds from five emergency programmes set to expire in December. These facilities include: two schemes set up to purchase corporate debt; five facilities created to lend to medium-sized businesses, known as the Main Street Lending Program; one programme to lend to state and local governments; and another to support asset-backed securities. In total, this would amount to the Fed returning some $455bn that was used to backstop the lending programmes to the US Treasury, so Congress can use the money elsewhere. Treasury Secretary Mnuchin did ask Powell to extend four emergency credit facilities that backstop short-term funding markets, including commercial paper and money market mutual funds, for 90-days. The request comes as most lending facilities haven’t been tapped for more than the amount committed by the Treasury to backstop the programmes, suggesting market functionality is sufficient to warrant their expiration. Politics is naturally the starting point for such a request as there have been concerns by the Treasury and GOP that a democrat administration would tap the Municipal Liquidity Facility to extend credit to local governments.

The request wasn’t received lightly by the central bank, however, who issued the following response:

The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.

This response by the Fed won’t come as a surprise to those following the recent comments by FOMC members, the latest by St Louis Fed president James Bullard who said “even if Fed emergency programs are shut down at year-end, markets would know they can be reopened”. Bullard alluded to the fact that any strain in credit markets would be met by the reopening in the Fed’s programmes. The Fed’s stance will only gain more clout as fiscal stimulus is absent and the economy faces the threat of further lockdown measures brought about by the third wave, meaning the results of this debate won’t be apparent anytime soon.

With all of these dynamics currently in play during such a fluid economic backdrop, the latest FOMC meeting minutes released on Wednesday at 19:00 GMT are likely to already be too dated for markets to give too much attention to. The Fed’s stance on extending the 13(3) Emergency Facilities introduced in response to the pandemic is already known; meaning the only area of interest for markets will be on the composition, size and time period of asset purchases. Again, with Jerome Powell not giving too much away on the central bank’s preference for the future of its QE programme back in the November 6th press conference, little added information is likely to be forthcoming in the latest batch of meeting minutes.

 

Authors:
Ranko Berich, Head of Market Analysis
Simon Harvey, FX Market Analyst
Olivia Alvarez Mendez, FX Market Analyst
Ima Sammani, FX Market Analyst

 

 

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