Today’s podcast

https://soundcloud.com/user-291029717/asian-equities-hit-us-stimulus-delayed-aussie-inflation-today?in=user-291029717/sets/the-morning-call

Overview: Heat waves

“Heat heat waves; I’m swimming in a mirror; Sometimes, all I think about is you; Late nights in the middle of June; Heat waves been faking me out”, Glass Animals 2020

Triple J’s Hottest 100 winner was Heat Waves by UK band Glass Animals and a fitting backdrop to the heat wave felt across Southeast Australia on Australia Day yesterday. Looking at markets since Monday, the biggest move has been in yields with US 10yr yields down 5.4bps on Monday and little changed overnight to 1.04%. The major driver was a notion that the US $1.9 trillion stimulus package may be more hard fought than previously thought, and may not be approved until March (possibly via budget reconciliation) with Senate Democrat Leader Schumer stating “ we’ll try and get that passed in the next month, month and a half”. As for overnight news, there hasn’t been a lot with the most notable being: a warning from the PBoC of a bubble if it did not tighten policy; the ECB investigating recent Euro strength; while the IMF upgraded global growth forecasts on the back of policy support and vaccines.

Equities are little moved with the S&P500 +0.1%

Earnings continue to support with strong numbers from General Electric, J&J and 3M; so far 70% of companies reporting have beaten expectations on sales and earnings. In contrast, Asian equities fell sharply yesterday with Shanghai -1.5% and Hang Seng -2.5%. Major drivers of those moves were the notion that US stimulus could be delayed, as well as media reports citing comments from a PBoC adviser that the risk of asset bubbles “depends on whether monetary policy is appropriately changed this year ”. The withdrawal of net $12bn in liquidity through the PBoC’s open market operations was also interpreted in this light with the overnight repo right lifting to 2.8% from 2.5%, its highest level since late 2019.

As for US stimulus

Democrat Senate Majority Leader Schumer has suggested a package may not be approved until March and that approval may require budget reconciliation (“We can get a lot of the Covid bill done with reconciliation. And that’s something we certainly will use if they try to block this immediate Covid bill ”). Politico notes some centrist Democrats, like Manchin, insist that Biden’s package must be bipartisan, which if occurred would see some paring back of the scope of stimulus given Republican reservations around the minimum wage and funding of state and local governments. Uncertainty around stimulus though did not affect Yellen being confirmed as Treasury Secretary.

IMF 2021 global growth forecast

In positive news the IMF upgraded global growth forecast for 2021 and also pared back its estimate for how much output contracted in 2020. The IMF now estimate the global economy fell 3.5% in 2020, 0.9 percentage points higher than projected in October and reflected the stronger than expected momentum seen in the second half of 2020. The IMF now sees growth rebounding 5.5% in 2021, a 0.3 percentage point upgrade from October’s forecasts. Interestingly US growth was upgraded 2 full percentage points to 5.1%, while EZ growth was downgraded one full percentage point to 4.2%.

The expected US-EZ growth divergence will likely add to concerns around recent Euro strength. Overnight Bloomberg reported a sourced piece that policy markets had agreed to look deeper into the Euro’s appreciation against the dollar (note the Euro gained almost 9%, 5% of that in the final two months). Such an investigation will be looking at the relative impact of ECB and Fed policy on exchange rates. It is unclear though what action the ECB could take if they did think the Euro had appreciated too quickly or that its rise was unwarranted.

The Euro initially knee-jerked lower on the ECB headlines, but quickly reversed to end 0.2% higher with the USD DXY falling 0.2%. The declines in the USD were broad-based with commodity currencies outperforming with AUD +0.6%, NZD +0.7% and USD/CAD -0.4%.

Coming Up

Domestically all focus on Aussie CPI, though our core inflation forecast is unlikely to shift the RBA’s view on inflation. Also out domestically is the NAB Business Survey for December – no hints here. Offshore the ECB’s Lane may be asked about the Euro’s recent strength after the Bloomberg story overnight, while we do not expect any change to guidance from the FOMC meeting. Key details below:

• AU: CPI Q4: There is greater than usual uncertainty this quarter given widespread anecdotes of price increases, while housing costs could fall with unit rents falling in Sydney/Melbourne and the government’s HomeBuilder grant being treated as a price decline for new dwelling costs. Consensus for Headline is 0.7% q/q and NAB sees upside risks and has pencilled in a 0.9% print. Major drivers of the rise are the ending of the childcare subsidy which is estimated to add 0.3 percentage points to the quarter, as well as the usual tobacco excise increase. Excluding these two components inflation remains relatively subdued and we forecast the core Trimmed Mean measure at 0.4% q/q and 1.1% y/y. Our forecast of Trimmed Mean inflation is unlikely to shift the RBA’s view on inflation with the November SoMP having core inflation below the 2-3% target band in all three scenarios. Nevertheless, the RBA will need to upwardly revise their forecasts for the economy given the earlier and stronger than expected rebound seen in the economy in H2 2020 and the earlier fall in unemployment. Inflation forecasts thus should shift towards the RBA’s upside scenario, though we note inflation in the current upside scenario is below target.
• AU: NAB Biz Survey – December:
• CH: Industrial Profits: No consensus available.
• EZ: ECB’s Lane: Chief Economist Lane is speaking on a panel titled “in search of a fitting monetary policy – the ECB’s strategy review. Lane will likely be asked about the recent appreciation of the Euro given an earlier Bloomberg sourced piece that stated “ policy makers have agreed to look deeper into the euro’s appreciation against the dollar since the start of the pandemic, focusing on whether it’s driven by differences in stimulus policies compared with the U.S., according to officials familiar with the matter”.
• US: FOMC and Durable Goods: No change expected to rates or QE guidance. Chair Powell’s is likely to be asked about the trajectory for QE and under what circumstances it would be tapered. We would expect Powell to push back on such questions, re-iterating what he, Clarida and Brainard have recently said, namely: that December guidance “ clarifies that the pandemic asset purchases will continue at least at the current pace until substantial further progress is made on our employment and inflation goals”.
• US: Earnings: Facebook, Tesla and Apple or all report today. Note 77% of companies that have reported so far have beaten on sales and earnings.

Market Prices

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