Market news 21 December 2020

US fiscal stimulus, Fed policy and currency manipulators

• In the US, lawmakers agreed on a $900bn (4% GDP) stimulus package deal after months of delay and deadlock and risk of government shutdown. The package includes direct payments to individuals ($166bn), boosts unemployment benefits ($120bn), as well as money for small businesses ($325bn), vaccine distribution ($29bn), and transport ($45bn). The package is scheduled for a vote in both houses of Congress on Monday.
• The US Federal Reserve left monetary policy unchanged at its December meeting, with only 5 (out of 17) expecting the Fed funds rate to change from its current level (0-0.25%) by the end of 2023. The median GDP forecast was revised upwards from a -3.7% contraction in Q4 (YoY) to a smaller contraction of -2.4%, followed by a 4.2% recovery in 2021. Inflation forecasts were left largely unchanged (expected to reach but not exceed 2% by 2023).
• The US Treasury designated Vietnam and Switzerland as “currency manipulators”, reinforcing the Trump Administration’s focus on international trade imbalances. The report highlighted that both countries had met all three criteria to be classed under Section 3004 as manipulating their currency for the purpose of supporting domestic trade - a material current account surplus, a significant bilateral trade surplus with the US, and persistent one-sided FX intervention. Although not expected to have any significant impact, the report laid out recommendations for policies that will feature in upcoming trade negotiations particularly with Vietnam.

European sentiment improves in December ahead of new covid-19 strain limiting activity

• The European composite PMI reading was stronger than expected in December, rising from 45.3 to 49.8 over the month (consensus: 45.8). Services drove the majority of the increase, improving from 41.7 to 47.3, but the manufacturing reading was also higher at 55.5 (November: 53.8). On a regional basis, the move in the French composite was notable (+9.0 points to 49.6) as restrictions were eased towards the end of the month. Germany also surprised to the upside although important to note that the flash report was released before the most recent closures of non-essential shops (16 Dec – 10 Jan).
• The UK composite PMI reading moved from 49.0 to 50.7 in December, as varying degrees of lockdown continues across the devolved nations using the tiered system. Manufacturing surprised to the upside reading 57.3 (consensus: 56.0, November: 55.6), artificially boosted by stockpiling and extended delivery times. The services PMI remained just below the expansionary line at 49.9 (consensus: 50.7, November: 47.6).
• At the Bank of England meeting on 16 December, the MPC voted unanimously to hold rates at 0.1% and asset purchases unchanged at £20 billion and £100 billion for credit and government bond purchases respectively. The committee noted heightened uncertainty in forecasting their outlook for the economy, as the virus continues to take its toll on the public health system and the 31 December Brexit deadline draws closer. The committee did provide some reassurance that it “does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”.

China’s economy continues to benefit from early virus control

• In China, economic activity continues to be strong, benefiting from an early control of the virus and exports of pandemic-related expenditure by lockdown countries in Europe and US. Exports grew 21.1% in November, retail sales were up 5.0% YoY, and fixed asset investment picked up pace to 2.6% YTD.