Today’s podcast

https://soundcloud.com/user-291029717/markets-take-a-breather-but-standby-for-more-vaccine-news?in=user-291029717/sets/the-morning-call

Overview: You can’t hurry love

• Caution pervades after yesterday’s vaccine-driven optimism as virus cases mount
• Expect more vaccine headlines though with Oxford/AstraZeneca results “imminent”
• GBP (+0.5%) outperforms on UK-EU trade hopes with “landing zones” seen for deal
• S&P500 -0.3%, US 10yr -3.4bps to 0.83%, USD (DXY) -0.2%, Gold -0.2%, Brent Oil -0.8%
• Coming up today: RBA’s Lowe, AU Wages, UK CPI, BoE’s Haldane, US Building Permits, Fed speak

“My mama said, you can’t hurry love; No, you’ll just have to wait; She said, love don’t come easy; But it’s a game of give and take; You can’t hurry love; No, you’ll just have to wait”, Phil Collins 1983

You can’t hurry love was a 1966 Motown classic by The Supremes (infamously covered by Phil Collins) and has some lessons for all of us as markets attempt to trade off a very positive medium-term outlook on well-founded vaccine hopes, against the current resurgence of the virus which is likely to slow growth in Q4 and perhaps Q1. While fiscal support will buttress household and business balance sheets in Europe, in the US there still appears to be little stimulus in sight given the partisan atmosphere in the lead up to the Georgia Senate run-offs on January 5 – important in deciding who has effective control of the Senate. It is becoming clearer that it will be up to the Fed to buttress the economy until the inauguration, though Powell overnight did not say anything new on the matter.

Equity markets

Equity markets in this atmosphere took a breather with the S&P500 -0.2% with most sectors lower. Yields fell with the US 10yr yields -3.8bps to 0.87%. Overall risk sentiment could yet be sustained with more vaccine headlines likely over coming days  – Oxford/AstraZeneca results are said to be “imminent” and if similar to the efficacy seen in the other candidates will be important given the amount of shadow production and supply agreements undertaken by AstraZeneca. One stock also worth noting is Tesla which is set to enter the S&P500 on December 21 with Tesla stock surging 8.6% on the news.

FX

FX moves were modest overall with the USD DXY down -0.2% to 92.43. GBP outperformed, up 0.5% and reaching a high of 1.3272 and now 1.3254. Yesterday media reported that a UK-EU trade agreement could occur as soon as next week with UK chief negotiator Frost telling PM Johnson to expect a deal “early next week”, reinforced overnight by Ireland’s PM who said he could see “landing zones” for the deal. We continue to remain optimistic that a deal can be inked at some point, that would push GBP higher – note GBP on a REER basis looks severely undervalued. EUR has also lifted in the wake of GBP, up 0.2% to 1.1862.

Consistent with the more cautious mood, global growth risk proxies underperformed with the AUD -0.2% to 0.7303 and NZD -0.0% to 0.6892. Yen rose with USD/Yen -0.3% to 104.20.

US data

US data was mixed, though is consistent with the view of growth slowing in Q4, albeit with stark sectoral differences. US retail sales were softer than expected with Core Control at 0.1% m/m against 0.5% excepted. Revisions to prior months though did see the level of the retail numbers actually be 0.5% higher, even if headline growth disappointed, and it is worth noting the level of retail sales remains well above pre-pandemic levels. The below-consensus October numbers were accompanied by a +0.5% net revision to the headline, so the level of sales last month was higher than implied by the consensus. Homebuilder sentiment (NAHB) surged to a new record high of 90 in November with the housing market remaining an area of strength, as it is globally. Industrial Production also largely met expectations (1.1% m/m v. 1.0% expected), though manufacturing production remains 5% below pre-COVID levels.

Financial regulation

Financial regulation looks like it may eased globally in an attempt to lift investment coming out of the pandemic. The BoE’s Bailey overnight said if the UK economy was going to recover successfully from the crisis, it would require business investment “on a much larger scale than we have seen in recent years”. “We live in a time where there appears to be no shortage of aggregate saving, but investment is weak ”. Bailey cited current limitations of pensions funds investing in illiquid long-term assets. Closer to home, the AFR also notes Australian Treasurer Frydenberg will tell regulators to ease up interpretation, stating overzealous intervention is hampering the recovery (see AFR for details).

The RBA Minutes yesterday shed little new light given recent speeches by Governor Lowe (note Dr Lowe is talking again today – see coming up for details). The Minutes conclude that “The Board is prepared to do more if necessary.” and the recent SoMP noted that this would likely entail more QE if necessary. Assistant Governor Chris Kent also spoke yesterday, noting the recent vaccine news improved risk sentiment in turn boosting the AUD – so once again the RBA rationalising the recent run-up in AUD.

Australian Payrolls

Finally, Australian Payrolls yesterday suggest a sharp rebound in the Victorian labour market is underway following the easing of restrictions early in October. High-frequency mobility indicators suggest this should continue. Victorian payrolls rose 1.0% over the fortnight to 31 October, while payrolls also rose strongly across other states. While it is tempting to conclude that the tapering of government support such as JobKeeper has not had a continuing negative impact on the labour market, there appears to have been a significant impact for small business employment. Small business payrolls (<20 employees) fell sharply in the week to 31 October (-0.4%) and since late September are down 4.9%. In contrast, payrolls at larger firms (>200 employees) rose strongly in the week (+1.2%), more than offsetting the decline in small business payrolls. It is not clear what is driving the divergence between larger firms and smaller firms, though the divergence does align with the tapering of JobKeeper and appears to be broad-based amongst states.

Coming up today

Domestically we get the Wage Price Index and RBA Governor Lowe is talking on a panel. Neither should be particularly market moving given subdued wages growth is likely to remain a feature for as long as elevated labour market spare capacity remains, while Governor Lowe has given extensive remarks already this week. Offshore it is also relatively quiet with most focus remaining on the UK and whether a UK-EU trade deal is closer, while there is also more central bank speak from the BoE and Fed officials. Details below:

• AU: RBA Governor Lowe Remarks: Governor Lowe is speaking at 10.40am AEDT on a panel at the The Australian’s Strategic Forum 2020. The Governor is unlikely to say anything new on the panel given his extensive remarks in recent weeks, where he again pushed back on negative rates (“extraordinarily unlikely”) and sounded cautiously optimistic on the recovery (“ the recent data have been better than expected and the easing of restrictions has lifted spirits…There is a lot of stimulus in the system, balance sheets are generally in good shape…So if we do get further good news on the health front, we could have a rapid rebound”).
• AU: Wage Price Index – Q3: Wages growth is expected to remain subdued with NAB and the consensus looking for 0.2% q/q and 1.5% y/y. Although normally market sensitive, the data is unlikely to be this time around given ongoing labour market spare capacity will continue to put downward pressure on wages. The RBA noted in their recent SoMP that their business liaison found that “ In the September quarter, more than half of reporting firms in this program indicated they either had a wage freeze in place or expected to implement one in the year ahead”.
• JN: Trade Balance – October:
• EZ: CPI Final Read – October: Unlikely to be market moving given it is a final read on CPI. Consensus looks for Core at 0.2% y/y.
• UK: CPI – October: Consensus looks for Core at 1.3% y/y.
• UK: BoE’s Haldane Speaks: The BoE’s chief economist Haldane speaks at the CityUK’s National Conference.
• US: Housing Starts/Permits – October: Housing is expected to remain an area of strength with permits expected to rise 1.5% m/m.
• US: Fed’s Williams/Bullard Speak: Four Fed speakers are scheduled (Williams, Bullard, Kaplan and Bostic) with the most interesting being Williams and Bullard. Williams will be looked at to see what the Fed may do regarding QE come December. The Fed’s Clarida earlier in the week said the Fed would continue to monitor developments and assess how asset purchases can best support achieving its objectives. Bullard will also be watched closely given he has led the trend within the FOMC in recent years and has been strikingly bullish on the rebound in contrast to the rest of his FOMC colleagues to date.

Market Prices

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