Below trend growth to continue
The IMF has upped their forecasts for global growth but, as Tapas Strickland suggests on this morning’s podcast, markets don’t tend to pay a lot of attention to these numbers
“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.
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.
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.
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%.
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:
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