Market’s Initial Reaction to American Rescue Plan Not Favorable

January 15, 2021

U.S. stock futures point to a decline of at least 0.5% at the open. Stock markets closed Friday with losses of 2.0% in South Korea, 1.1% in India, 0.9% in Indonesia, 0.8% in New Zealand, 0.6% in Taiwan and Japan. Equities are currently down about 1% in the U.K., Germany, France and Spain.

The 10-year Treasury yield fell back four basis points on today’s wave of risk aversion. WTI oil has slipped 0.6%, and the dollar has climbed 0.3% in trade-weighted terms, 0.8% versus the kiwi, 0.7% against the Mexican peso and Australian dollar, 0.6% relative to the Canadian dollar, 0.4% vis-a-vis sterling, and 0.3% versus the euro.

Investors chose to focus on budget deficit concerns and general concern about possible congressional gridlock after U.S. President-Elect Biden unveiled a $1.9 trillion proposed Covid relief package on top of the recent $900 billion plan approved last month. Biden’s plan includes direct checks to Americans, higher unemployment benefits, added aid for vaccine distribution, and $350 billion of support for states and localities, which had proven to be a contentious item in the last fiscal debate. Biden is trying to apply the lesson from recovery from the Great Recession when insufficient fiscal stimulus flattened growth in GDP and jobs and also caused inflation to undershoot target in a chronic way.

Central bankers in Peru and South Korea maintained record low interest rates and their first policy reviews of 2021.

  • The reference interest rate of the Central Reserve Bank of Peru has been at 0.25% since back-to-back 100-basis point cuts last March and April. Officials plan to complement the low interest rate with continuing injections of ample liquidity, and they foresee inflation hovering near the bottom of its target range nonetheless.
  • Officials at the Bank of Korea reduced their base rate by 50 basis points last March and an additional 25 basis points in May, since which the rate has been maintained at 0.50%. Today’s statement in the face of weaker growth than desired and only modest inflation pledges to maintain an “accommodative monetary stance.” Although the decision had been anticipated, the Kospi equity index experienced a 2.0% drop in response.

Fed Chairman Powell and other fed officials made news, too, projecting that present monetary stimulus is unlikely to be tapered anytime soon.

A 0.7% December decline in U.S. retail sales after -1.4% in November was much weaker than projected and resulted in just a 0.3% 4Q-over-3Q advance. Non-auto sales actually dipped 0.1% last quarter, raising the possibility of negative GDP growth in that period. The resurgence of Covid is hitting the U.S. economy and many others as well.

Japan’s tertiary index of service-sector activity fell 0.7% in November and almost tripled the 12-month rate of decline to 3.7%.

British industrial production underperformed analyst forecasts in November, dipping 0.1% on month (its first drop since April) and falling 4.7% compared to November 2019. Construction output in the U.K. rose 1.9% in November, in contrast, but recorded a year-on-year decline (this time of 1.4%) for the eleventh straight month. The British merchandise trade deficit swelled to GBP 16.01 billion in November, and the goods and services deficit of GBP 4.995 billion was the largest shortfall in 19 months. Today’s most eye-catching piece of released data, however, was news of a 2.6% monthly plunge in real GDP in November, which broke a string of six straight increases.

Brazilian retail sales dipped 0.1% in November, its first monthly decline in 7 months.

Euroland experienced a EUR 25.1 billion seasonally adjusted trade surplus in November. Last April in the first Covid lockdown, such swung to a EUR 0.1 billion deficit, but the January-November surplus this year of EUR 205.4 billion exceeded the year-earlier surplus by EUR 7 billion.

Chinese house price inflation of 3.8% between December 2019 and last month was the smallest on-year increase in 58 months.

December on-year consumer price inflation was zero percent in France, -0.5% in Spain, +0.5% in Sweden, and +2.4% in Poland. 

The New York Empire State manufacturing index dropped to a 7-month low of 3.5 in January from 4.9 in December.

U.S. producer price inflation held steady at 0.8% in December. That was the fourth consecutive 12-month positive change and the highest pace since 1.1% last February.

Today’s most encouraging U.S. statistic came from industrial production, which shot up 1.6% on month in December and 8.4% at an annualized rate during the fourth quarter. Capacity utilization increased 1.1 percentage points on month to 74.5% in December.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

 

 

 

 

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