Making changes

The first few days of Joe Biden’s presidency have demonstrated the difficulty of his ambitions to change tack, while being stuck in positions that aren’t easily shed, by his predecessor. In the EU, there’s also an effort to manifest change in policy. The European Central Bank is trying to steer the massive monetary policy ship away from being the sole support mechanism of the EU, but is struggling under the burden of legacy.

With the inauguration behind us, President Biden has been contacting other world leaders and setting his agenda. Not surprisingly, his first call was to the UK in a show of respect for old alliances. However, securing a cross-Atlantic trade deal with the US may not be as easy as Boris Johnson had hoped. Incoming US Treasury Secretary Janet Yellen has since made it clear that providing relief and investment domestically is the first priority of Biden’s economic team, before addressing international trade. On the other hand, President Biden signaled support for Taiwanese independence, which is a relatively new position, a biproduct of the deterioration of the US–China relationship under Trump. It also suggests that trade normalisation under new US leadership is going to be a difficult goal, because the popular tide has soured on Chinese trade in the past four years. 

On the President’s domestic agenda, the agreement of a new stimulus bill is a top priority, although some cracks have shown in the past two weeks. The Democrats have reacted to their stronger legislative presence with a commensurately more aggressive stimulus plan, which includes a controversial doubling of minimum wage from $7.50 to $15.00 per hour. Given how Republicans took advantage of their majority under Trump, this seems mild, and likely just the start of this reversal. On the other hand, a massive minimum wage increase is perhaps a questionable policy and almost as populist as the 2017 Trump tax cuts. It looks like Joe Biden’s goal of restoring moderation under his tenure is going to be tested at the first legislative outing.

The Financial Times has characterised the difference in ECB policy leadership under Mario Draghi and Christine Lagarde, suggesting Draghi preferred to lead from the front, whereas Legarde established a more collegial approach. Part of the new strategy is to bring more decision makers along for the ride, instead of dominating the discussion through a superiority of technical understanding, a hallmark of Mario Draghi’s tenure. The induction of ECB member Isabel Schnabel, considered a like-minded voice by conservative ECB detractors, has helped bridge a support gap in the technocratic institutions longer-term objectives. 

One challenge that has plagued central banks, and the European Central Bank specifically, is the need to reduce the monetary policy as a support tool, in favour of more democratic fiscal policy. Unfortunately, the pandemic has only made the problem worse.

It’s true that national governments have materially increased spending, but fiscal policy was woefully underrepresented before and has only made up a small proportion of the increased need under the crisis. It’s in this context that the ECB finds it needs to morph policy to react to the bloc's needs, where national politicians want neither an increase in the central bank’s role nor acknowledge the need for further fiscal action.

Bottom line: This week, the markets turns its attention for policy cues during the first virtual World Economic Forum, where Chinese President Xi Jinping is set to kick off proceedings today. Of course, the evolution of the US fiscal stimulus negotiations is also front and center, given how much of the continued risk rally is underpinned by spending optimism. Lastly, the second impeachment trial for Donald Trump is set t start in two weeks and could prove a serious distraction to a 2021 reset. It has the potential to devolve into a medium for partisan grandstanding for the far left of the Democratic party, who are unlikely to change minds and distract from the collegial atmosphere the new President is trying to instill.

The week ahead

GBP

On Thursday, Sterling continued its bullish trend, rising as much as 0.7% against the US Dollar to reach its highest level since April 2018. The UK is ahead of its European counterparts in the race to inoculate its population, with at least six million people having received the first dose of the vaccine. Even so, PMI data showed the current weakness of the UK economy with the services reading  contracting worse than market expectations. Bank of England Chief Andrew Bailey is due to speak at the World Economic Forum this week where markets will look for signs of negative interest rate policy intentions.

  • Unemployment Rate data is due for release this Tuesday, with an initial forecast of 5.1% up from 4.9%.
  • Claimant Count Change is also due on Tuesday, reading 64.3K in December 2020. 

EUR

Last week, the European Central Bank left all monetary policy decisions unchanged, with no major comments from President Lagarde, leaving the Euro outlook unchanged. Confidence around the US stimulus package is rising, with Joe Biden expected to push most of the deal through Congress. Successful legislative passage is likely to extend the risk-on move, driving the EUR lower against the Greenback. President Lagarde will speak this week at Davos 2021 and attention will be on the appetite for deeper negative yields. Economic releases this week are centered around Germany, with inflation and unemployment in focus.  

  • German CPI data is expected to read 0.4%, down on 0.5% previously. Meanwhile, unemployment is forecast to rise to 10K up from -37K.
  • GfK Consumer Confidence is forecast to come in at -7.9, with the previous reading of -7.3.
  • French Consumer Spending is predicted to reach 20.0%, after the previous month’s -18.9%.
  • German Unemployment Change is expected to print at 6K, following the previous month’s 37K.
  • Eurozone Consumer Confidence is pegged to read -15.5 after the previous -13.9 print.

 

USD

The US Dollar Index looks set to continue its downward trend from last week, as loose monetary policy conditions and the prospect of additional fiscal stimulus weigh on the safe-haven currency. New President Joe Biden is determined to deliver a $1.9 trillion stimulus package and ramp up inoculation rates with only around 16 million Americans having received their first dose of the coronavirus vaccine. An intensifying push for deficit spending encourages a greater drive towards risk assets in the coming weeks. This Wednesday, the Federal Open Market Committee meeting is likely to remain dovish, providing a receptive backdrop for the hoped-for fiscal spending.

  • FOMC Statement on Wednesday with dovish sentiment expected.
  • Q4 GDP is forecast to come in at 4.2%, down from 33.4% over the previous quarter.
  • Weekly Unemployment Claims are due on Thursday previously reading 900K.
  • Durable Goods Orders are expected to come in at 0.9% in December, the same as November.

 

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