Bank of England readies the ground for negative rates, all the while waxing hawkish
- The Bank of England voted unanimously to leave rates on hold at 0.1% and total target asset purchases at £895bn at its 4th February meeting. The committee noted that the rate of asset purchases (currently £1.48bn per week) will be reassessed at the 18th March meeting, but we should expect this to slow later in the year unless they are to breach the November 2020 target.
- On policy rates, the committee was divided on their messaging for negative rates – whilst they were at pains to downplay the likelihood of a move to negative rates, they nevertheless requested that Bank staff begin technical preparations to prepare for such an eventuality and required commercial banks to be operationally ready within 6 months. On outlook, the committee are projecting a 4% GDP contraction in Q1, 5% growth in FY21 (previously 7.5%) and a strong recovery next year of 7.25% (previously 6.25%).
COVID lockdown takes its toll on European PMIs; China stronger; US much stronger, although payrolls underwhelm decidedly
- Final PMI readings in Europe were revised +0.3pts higher from flash estimates to 47.8 (last: 49.1). The revisions were mostly driven by the services sector. The German composite was left unchanged, but the French composite increased +0.7pts and the periphery +0.4pts. In the UK, the composite reading was revised +0.6pts higher to 41.2 (last: 50.4). The services sector continues to be the primary source of concern as all country services readings remain below 50, but it was the UK and Spanish services sectors that saw the biggest declines over the month.
- The Caixin China services PMI was lower than expected in January, falling to 52.0 (consensus: 55.5, December: 56.3). The detail shows slower expansion across sub-components and the employment index also reversed some of its recent recovery, -1.3pts in January to 50.7. The expectations index fell to a still-elevated 62.9 (from 66.4 the previous month). The manufacturing PMI also declined over the month -1.5pts to 51.5. Output, new orders and export orders all weakened over the month, -2.9pts, -2.4pts and -4.4pts (to 42.4) respectively. The labour reading was also weaker in the manufacturing sector, -0.3pts to 49.6. The official China Manufacturing PMI remained above 50 (as it has since March last year), although declining -0.6pts over the month (to 51.3, consensus: 51.6).
- The US ISM Manufacturing Index was lower than expected in January, -1.8pts to 58.7 (consensus: 60.0, December: 60.5). Production and new orders drove the headline reading lower, -4.0pts to 60.7 and -6.4pts to 61.1 respectively). However, there was some improvement in the employment index (+0.9pts to 52.6) this month and the final construction spending reading was +1.0% higher in December.
- US non-farm payrolls increased 49k in January, after a downwardly-revised decline of -227k in December (consensus: 105k). Job gains were seen in professional/business services and education, whilst leisure and hospitality and retail trade continued to shed staff. The unemployment rate improved to 6.3% (consensus: 6.7%) although the participation rate declined to 61.4%. Average hourly earnings were unchanged from last month +5.4% YoY. These numbers leave the total numbers of jobs lost at ~10 million since the peak in February 2020.
“De-grossing” appears complete – equity markets resume rally, led by the Value factor
- Equities shrugged off the volatility of the previous couple of weeks to resume rallying robustly, helped along by expectations of an imminent American Rescue Plan (in fact, the weak payroll print proved bullish for equities as it increased expectations for stimulus). The rally was firmly led by the Value factor (European bank stocks recording double-digit gains over the week and US small caps outperforming large caps).
- Helping the Value rally was the rise in 10-year US yields to briefly touch their highest level since last March, with bunds yields hitting their highest level since early September. Gilts though were the underperformer on the week after the Bank of England poured cold water on the notion of imminent rate cuts. Generally, global yield curves “bear steepened” materially (long-term yields rose more than short-term yields) as reflationary expectations rose whilst central bank policy rates are not expected to rise for some years to come. Credit spreads in developed markets pushed to fresh post-COVID tights. Inflation breakevens continue to surge and US 10-year breakevens at 2.2% are at their highest level since mid-2018.
- The US dollar was broadly weaker, particularly against “high beta” emerging market currencies like the Brazilian real, Mexican peso and South African rand. Precious metals came under pressure from the rise in bond yields, with gold touching two-month lows.