Uncertain Economics, Public Health, and Politics

February 4, 2021

Investors continue to grapple with uncertainty on several planes.

  • Covid: The trend in new cases has slowed but remains well above what was seen in earlier waves of the pandemic. Hospitalizations are down, but two potential super-spreading events loom: the Chinese New Year holiday and Super Bowl Sunday in the United States. Vaccines are being distributed, but their roll-out has been disappointing in many countries. The emergence of several mutant strains in Covid introduces an additional element of uncertainty.
  • Politics: The U.S. Republican Party is deeply split between followers of Trump and members still loyal to traditional Republican values that in many instances are exactly opposite to the Trump agenda. Most people who voted Republican last November side with Trump, and many of the party’s leaders are unwilling to make a break with Trump even if their heart lies in that direction. All this is making Biden’s push for unity an increasingly elusive objective. The president has signaled that his $1.9 trillion pandemic relief offer is not a red line; he could be persuaded to compromise on size so long as the economic objectives are not jeopardized. Political strains are very high in several other countries, too. In order to avoid an election in Italy that nobody their wants, the kingmakers there have turned to former ECB President Draghi to attempt to assemble a viable coalition.
  • Economics: Covid is the factor that is stirring this drink. As the containment of the pandemic goes, so will go trends in economic activity and government policy responses. Given unusual uncertainty surrounding the public health crisis, considerable risks, up and down, continue to surround baseline economic forecasts. The Bank of England’s quarterly Monetary Report, released earlier today, revised projected 2021 GDP growth down to 5% from 7.25% predicted in November and inserted that prior prediction into the forecast for 2022. At the same time, monetary policy settings were left unchanged as had been expected. Amid doubt about what lies ahead, the choice of maintaining currently accommodative monetary policies rather than augmenting such has been the preference of a slew of central banks lately.

One reversal of late has been the trend in the dollar, which today touched 2-month highs both against the euro and on a trade-weighted effective basis. The dollar overnight climbed 0.4% against the euro, Swissy and peso, 0.3% versus the kiwi and loonie, and 0.2% relative to the yen to a new high of 105.33. The DXY dollar index gained 0.3%.

Equities in the Pacific Rim closed down 1.1% in Japan, 1.4% in South Korea, 0.9% in New Zealand and Australia, 0.7% in Hong Kong and 0.4% in China. The British Ftse is trading lower, but markets have risen slightly in Germany, France, Italy and Switzerland. U.S. futures are only marginally changed.

Oil (+0.8%) and gold (-1.1%) prices also diverged overnight.

An upward trend in sovereign debt yields has been a more consistent development. Ten-year British gilt and U.S. Treasury yields are 4 and 1 basis points above their Wednesday closings.

After plunging 5.7% in November as new Covid restrictions became necessary, Euroland retail sales rebounded in December by 2.0% in volume, which was a tad more than forecast and enough to push the year-on-year change in sales back above zero percent to 0.6%.

December 2020 versus December 2019 retail sales climbed 4.2% in Romania and 3.6% in Belgium but fell 4.0% in Hungary and 0.3% in Austria. A 6.7% monthly jump in Austrian retail sales in December was the most since +24.7% last May.

Britain’s construction purchasing managers index fell sharply to 49.2 in January from 54.6 in December, marking its first drop below the 50 neutrality level since last May.

Euroland’s construction PMI also plumbed lower last month to an 8-month low (44.1) and has now been below the fifty level for eleven straight months. France’s 39.5 reading was also at an 8-month low, while the German and Italian construction PMI indices were at 2-month lows of 46.6 and 48.7.

Swiss consumer confidence this quarter fell 1.6 index points to a 3-quarter low of -14.6, which also constitutes the second weakest level in a dozen years.

Across the world in Thailand, consumer confidence fell 2.3 points to print at 47.8 in December, its lowest value since 47.2 last April and well below 64.8 in January 2020.

Mexican business confidence in January matched December’s 9-month high but remained weak overall at 43.1.

Irish industrial production in December reversed almost half of November huge 50.7% revival and was 28.8% above the December 2019 level.

The National Bank of Poland‘s reference interest rate was left at 0.10%, which is the level since a 40 basis point cut last May. There were also 50-bp reductions in both March and April. The central bank is continuing to add liquidity through its bond-buying program. Inflation is at a 7-month low.

Likewise, the Czech National Banks 2-week repo rate was left unchanged at 0.25%. Following a 25-basis point hike a year ago and prior to the pandemic, such was cut twice last March by a total of 125 basis points and then reduced by 75 basis points in May to its present level.

The Bank of England‘s Monetary Policy Committee had reduced the base rate twice in March 2020, first by 50 basis points and a week later by 15 bps to 0.10%. Today’s statement¬†after maintaining 0.10% and bond-purchase ceilings of GBP 875 billion for gilts and GBP 20 billion of corporate bonds provides the following guidance to future policy:

The MPC will continue to monitor the situation closely. If the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit. The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably. The Committee judged that the existing stance of monetary policy remains appropriate.

There were 779k new U.S. jobless insurance claims filed last week, the fewest since the week of December 5 and lower than had been forecast.  Continuing claims in the most recently reported week of January 23rd of 4.592 million also were lower than in the prior week.

Quarterly changes in U.S. labor productivity (-4.8%) and unit labor costs (+6.8%) in the final quarter of 2020 were respectively greater than forecast and resulted in on-year increases of 2.5% in productivity and 5.2% in unit labor costs. For 2020 as a whole, productivity went up 2.6% following a 1.7% rise in 2019 and +1.4% in 2018. Unit labor costs climbed 4.3% in 2020 after gains of 1.9% in each of the prior two years.

Still to come: U.S. factory orders.

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

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