The eleventh hour
The typical year ends with a quiet wind down from the middle of December, with Christmas parties and family get-togethers dominating most people’s agendas, not 2020 though. Given that this year's theme has been eleventh hour crisis management, it’s not surprising that we have some very important loose ends heading into the last weeks of the year. Just to name a few items on the agenda: Brexit, US stimulus, EU 7-year budgets, sanctions of Chinese officials, Covid vaccine roll out efforts, and US Presidential election certification. It’s fair to say, this year hasn’t gone to plan in virtually any way, so why should the ending be any different.
If we take just the most UK centric topic of Brexit, we can see that a lot remains to be done. Despite the ever-shifting deadline, a trade deal really needs to be agreed before January since so many alternative arrangements haven’t been made. Given that any deal requires an approval process before it goes live, it’s reasonable to conclude that this Thursday’s EU meetings are a last chance at getting all the decision makers in a room together. For the past several days, the Financial Times has run headlines about Irish Sea border and Calais-based procedure confusion. Northern Irish Trade bodies have warned that trade border plans are a ‘mess’, despite the creation of a £200m support service. They are seeking a one-year implementation period from the EU, although it is rumoured that no one seriously thinks that will happen. Unless we see some deal magic in the next few days, there will be no quiet wind down this December, it will be a mad rush to throw together some slap-dash plan to get us by for several months of 2021.
In the US, a stimulus plan is crucial to a revival of spirits in the early part of next year. The headlines have been brimming with vaccine related headlines discussing approval, delivery and roll out of Covid inoculation, but senior level officials- like Fed Chair, Jerome Powell, and incoming Treasury Secretary, Janet Yellen-have trumpeted the need for further fiscal support to cover the intervening period. The $908bn bipartisan package that is gaining support tackles many of the core issues that are required to keep the economy moving broadly at a steady pace into 2021. However, it is unclear whether the partisan bickering can subside enough for its passage. The delayed Presidential election certification process has already guaranteed a hectic December for the US government. A lack of stimulus, combined with soaring hospitalisation rates, could mean even more eleventh-hour deal making in this already unusual December.
Bottom line: Each year December brings a closing of old themes and trends, which are then replaced by a period of reflection in early January. In that sense, this year is no different than any other. What makes this year different is the sheer amount of game-changing uncertainties remaining to be resolved in the last three weeks of the year. We’re not only sure how things will end up, but we also don’t know what the knock-on effects will spell for January either. Since the US election all but concluded that Joe Biden was the next President, we’ve witnessed a Dollar sell-off due to a forthcoming easing of political tensions combined with vaccine optimism. There is no guarantee that economic fallout cannot occur before a vaccine solution is in place, nor can a moderate President guarantee to shift the massive oil-tanker of geopolitics in short order. Given recent headlines, it feels like we are due a correction, unless a large proportion of the above issue are resolved soon.
The week ahead
On a trade-weighted basis, Sterling ended last week relatively flat after choppy price action caused by conflicting headlines over the final Brexit negotiations. On Friday, GBP/USD climbed to its highest since May 2018, reaching 1.3539 on the interbank market before closing the week back below the 1.35 figure. The EU had set 4th December as a self-imposed deadline for talks to conclude in order to leave enough time before year-end to implement the deal. However, talks have been forced to continue beyond this date. Over the weekend, negotiation sentiment soured and Sterling has taken a hit early on this week, falling below the 1.33 level on Monday morning. Prime Minister, Boris Johnson, and European Commission President, Ursula von der Leyen, are due to speak on Monday evening which has been described as a make-or-break moment by UK officials. The outcome of the negotiations is likely to set the tone for Sterling sentiment for the week ahead, and even the final weeks of 2020.
- Thursday’s Industrial and Manufacturing production figures for October are both expected to show 0.3% growth in the sectors. This is down from 0.5% in Industrial production but improving from 0.2% in Manufacturing production.
- Thursday’s GDP figure for October is expected to indicate 0.2% growth, down from 1.1% in September.
The trade-weighted Euro Index climbed nearly 1% last week, posting its highest reading since April 2018. The common currency peaked at 1.2178 against the US Dollar on the interbank market as the US Dollar extended its decline. EU budget headwinds remain as Poland and Hungary continue to block the €750 billion package. Meanwhile, the European Central Bank is expected to extend its emergency bond buying programme and reiterate the need to break the fiscal barrier in their monetary policy announcement on Thursday. In addition, comments on the disinflationary pressures of a stronger Euro may re-emerge this week, potentially adding downward pressure on the common currency. The Euro starts the week lower ahead of Thursday’s main event.
- German Industrial Production for October came in at 3.2%, better than the 1.6% forecasted reading.
- Tuesday’s German ZEW Economic Sentiment survey is expected to show an improvement in the expectations survey from 39.0 to 46.0, but a deterioration in the current situations survey from -64.3 to -66.0.
- Tuesday’s Eurozone GDP figures are expected to be unchanged from previous estimates at 12.6% for Q3 2020 and -4.4% year on year.
- Thursday’s French Industrial production for October is expected to show 0.4% growth, slowing from 1.4% in September.
- Friday’s Italian Industrial Production for October is expected to show 1.0% growth after contracting 5.6% in September.
The US Dollar trade-weighted Index closed last week over 1% lower, extending multi-year lows as risk-assets continued to rally. Last week’s US labour market data was notably poor and may boost expectations of further economic stimulus, although monetary stimulus is expected to be unchanged during next week’s Federal Reserve policy announcement. For now, broader market sentiment is likely to continue to be the main US Dollar driver, ahead of some key inflation data this week.
- Tuesday’s NFIB Small Business Index is expected to tick lower from 104.0 in October to 102.5 for November.
- Thursday’s Initial Jobless Claims is forecasting 725k people became unemployed over the past week, up from 712k previously.
- On Thursday, US CPI for November is expected to read 0.1%, up from 0% in October, while the year-on-year figure is expected to tick lower to 1.1% from 1.2%.
- Friday’s US PPI figure for November is expected to tick lower from 0.3% in October to 0.1% in November.
- Friday’s University of Michigan Sentiment survey for December is expected to read 76.0, up from 76.9 posted in November.
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