A Week of Transition Ends with Release of Weak Data and Fresh Investor Uneasiness

January 22, 2021

The Biden Administration has been busy reorienting American policies, but markets today are most fixated on alarming Covid trends and fresh evidence of their adverse impact on economic activity.

U.S. equity futures are set to open 0.5-1.0% lower today after markets closed down 1.7% in Indonesia, 1.6% in Hong Kong, 1.5% in India, 0.9% in Singapore, 0.8% in Taiwan, 0.6% in South Korea, and 0.4% in Japan and China. The French and Spanish stock exchanges have dropped over 1%, while the British Ftse and German Dax each show losses so far of 0.8%.

Ten-year sovereign debt yields are two basis points lower today in the U.S., Germany and Great Britain. Taking a cue from worried Congressional Republicans, investors are nervous that stronger U.S. pandemic fiscal relief may prove inflationary. For over ten years, such inferences based on the experience of the 1970s and 1980s have proven wrong time and again. In current circumstances with much fewer jobs than a year ago and other signs of enormous slack in productive resources, a lift in inflation ought to be cheered.

The dollar has been a beneficiary of greater risk aversion, rising overnight by 1.1% against the peso, 0.7% versus the Australian dollar, 0.6% vis-a-vis the Canadian dollar, 0.5% against sterling, 0.4% versus the New Zealand dollar, 0.3% relative to the yuan, 0.2% versus the yen. The euro, by contrast, is unchanged, and the Swissy has edged only 0.1% lower.

Prices for West Texas Intermediate oil and gold have fallen 2.4% and 1.0% overnight.

Preliminary purchasing manager indices for January mostly fell, and the surveys attest to increasing input price pressures, lengthening supplier delivery delays, but resilient business sentiment and steadier output price inflation than input costs would otherwise suggest. It should also be noted that even where PMI readings have dropped below 50, signifying a deterioration in overall conditions, they are nowhere near the extreme lows touched during the initial wave of the coronavirus pandemic.

Japan’s composite purchasing managers index dropped 1.8 index points to a 4-month low of 46.7. Services (a 5-month low PMI of 45.7) that require social contact typically took a bigger hit from tighter restrictions against Covid than did manufacturing (a 2-month low of 49.7).

Australia’s composite CBA PMI shed 0.6 points to a 2-month low of 56.0. Manufacturing set another high of 57.2, but services softened to a reading of 55.8.

Euroland’s composite PMI printed in sub-50 territory for a third straight month, a 2-month low of 47.5. Manufacturing proved resilient, powered by rising exports, but services slipped 1.4 index points to a reading of 45.0. The compiler of this survey, IHS, warned that the data seem consistent with a double-dip recession. But the extent of contraction in 4Q 2020 and 1Q2021 will be nowhere near as severe as seen last spring during the first Covid wave. Vaccines point to renewed positive growth emerging in the second quarter of 2021.

Within the euro area, the German composite PMI dropped to a 7-month low of 50.8 and included a services sector reading of 46.8 in January. The French composite PMI remained below 50 for a fifth consecutive month at 47.0, but the employment indicators at last moved above the 50 level.

The most disturbing PMI report today belonged to the U.K., where the impact of lockdowns to deprive Covid of oxygen has been magnified by the shock of Brexit. The British composite PMI dived 9.8 points to an 8-month low of 40.6. Manufacturing declined to 52.9 from 57.5 in the prior month, and services tumbled 10.6 index points to an 8-month low of 38.8. Supplier delays in January experienced the second most severe conditions in 30 years.

New Zealand’s December manufacturing PMI fell six index points to a 7-month low of 48.7.

In other economic news this Friday,

A 0.3% recover of British retail sales in December after November’s 4.1% plunge was only a fourth as much as what analysts were expecting. Sales in full-2020 dropped 1.9%. Also, U.K. consumer confidence edged down two index points to -28, and public-sector net core borrowing in April-December of GBP 270.8 billion was 4.7 times larger than a year earlier.

Australian retail sales sank 4.2% in December, almost twice as much as had been forecast.

Canadian retail sales far outperformed expectations in November, jumping 1.3% on month and 7.5% on year, but Covid has intensified more recently.

Japanese total consumer prices recorded a 1.2% year-on-year drop in December, their most deflationary reading in 128 months. Core CPI deflation of -1.0% was a full three percentage points below the Bank of Japan’s elusive medium-term target.

New Zealand CPI inflation last quarter matched the 1.4% on-year pace of the third quarter of 2020 and was 1.1 percentage points below the level in the final quarter of 2019.

Irish wholesale prices dropped 4.1% on month in December and were 14.5% weaker than a year earlier.

Business confidence in Hong Kong fell to a 3-month low of -17 this quarter from -8 in the fourth quarter of 2020, -11 in 3Q, -37 in 2Q, and -22 in the initial quarter of last year.

With a jobless rate of 3.76% in December, Taiwan had almost identical unemployment to the four previous months.

Italian construction output was 7.2% greater in November than a year earlier but still had posted an 8.9% on-year combined drop in January-November.

Globally reported Covid infections over the past 24 hours surpassed 775k, and the U.S. experienced more than 4k deaths yesterday from the disease.

Still to come: IHS-compiled U.S. purchasing managers survey and U.S. existing home sales.

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

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