The wait continues
Rather unfortunately, we start this week reflecting on the little Brexit progress that has been made. Having missed yesterday’s deadline, with neither the EU or the UK managing to find a resolve to the remaining issues, we’re still waiting for a Brexit agreement. UK businesses are acutely aware of the lack of government preparation for a no-deal scenario and are scrambling to make some headway themselves. However, it’s unclear what businesses can achieve in the last two weeks of the year.
At least the UK has moved quickly on coronavirus vaccine approval. The first vaccine doses were administered last week, although there is still a long road ahead until nationwide inoculation. We could be waiting for an ‘all clear’ situation to be later than hoped in 2021, but markets continue to drive risk assets higher. Last week, Crude oil had two sessions above the key $50 per barrel level, which suggests a good deal of support, while gold is nudging slightly lower towards the 200-day moving average.
Bottom line: Towards the close of this last full week of 2020 will be when the most meaningful data is published. Some of the most significant events will likely be monetary policy announcements from the Federal Reserve on Wednesday, Bank of England on Thursday, and Bank of Japan on Friday. The smattering of other data points mostly retells the story we already know—softening in the UK and Eurozone, while improvement in the US, Australia, and China. If we’re honest, we doubt the economic data will change the ongoing narrative. We need some finality to Brexit, the US election, and an indication of the next moves of central banks. The last two are very likely this week, which is where the focus of our attention should be.
The week ahead
Brexit sentiment remains the focus for Sterling as negotiations are set to continue this week with no ‘deadline’ in sight. Last week, sentiment soured after Wednesday’s dinner with Johnson and von der Leyen led into the weekend causing greater expectations of a no-deal. However, negotiators have been told to continue pushing forward after Sunday’s phone call between the two leaders. This could signal that a deal might be salvaged in the final weeks of 2020. Further Sterling volatility should be expected this week, as markets face thinner December liquidity as we near Christmas. Furthermore, the Bank of England will feature on Thursday with their final monetary policy announcement, although no change in interest rates or bond purchases is currently expected.
- Tuesday’s ILO Unemployment rate is expected to rise from 4.8% to 5.1%, indicating an acceleration in the increase in UK unemployment.
- Wednesday’s CPI for November is expected to read 0.1%, marginally higher than October’s 0% figure.
- Also on Wednesday, Markit’s preliminary December PMIs are expected to show expansion across Manufacturing, Services and the Composite reading, with Manufacturing expected to lead the expansion at 55.9 and Services trailing at 50.6.
- Friday’s GfK Consumer Confidence for December is expected to read -31, up from -33 in November.
- Friday’s Retail Sales for November is expected to show a decline of -4.2% from 1.2% growth in October. This reading covers the UK’s month-long lockdown which ended at the beginning of December.
On a trade-weighted basis the Euro traded in a tight range last week, holding onto gains made over the last three weeks. The European Central Bank policy announcement was the main event, as it boosted bond-buying by €500 billion–a decision that was expected by investors. ECB Chief Christine Lagarde, also announced the package ‘need not be used in full’ but commented on an expected contraction in the final quarter of 2020 following a strong economic rebound in Q3. Regarding fiscal policy, the EU’s dispute with Hungary and Poland came to an end, unblocking the €750 billion pandemic relief package which will be used to help rebuild European economies throughout 2021.
- Monday’s Eurozone Industrial Production figure for October is forecasted 2.0% growth, improving from -0.4% in September.
- On Tuesday, final French CPI for November is expected to be unchanged from previous estimates at 0.2%.
- Wednesday’s preliminary December Eurozone PMIs are expected to show contraction in the Composite reading at 45.7, with Services and Manufacturing forecasted 42.0 and 53.0 respectively.
- Thursday’s final Eurozone CPI for November, as well as the year-on-year figure, is expected to read -0.3%, unchanged from previous estimates.
- On Friday, IFO sentiment surveys for December are expected to show a downtick in the Business Climate and Current Assessment surveys, while the Expectations survey is expected to improve.
Last week, the US Dollar edged higher on a trade-weighted basis as risk appetite slipped across financial markets, before finishing the week relatively unchanged. We could see greater volatility this week as the last Federal Reserve policy announcement of 2020 is announced on Wednesday evening. Analysts expect no change in interest rates or bond purchases at this week’s meeting, but many expect a change in the Fed’s guidance of future policy changes. This may create some volatility for the US Dollar, especially as FX liquidity is thinner during these final weeks of 2020.
- Tuesday’s Empire Manufacturing figure for December is expected to improve from 6.3 last month to 6.9. November’s Industrial Production figure is expected to show slowing growth at 0.3% vs. 1.1% last month.
- Wednesday’s November Retail Sales is expected to show -0.3% growth after expanding 0.3% in October.
- Markit’s PMI figures for November are also released on Wednesday, with Manufacturing and Services both expected to post expansionary figures at 55.8 and 56.0, although worse than October’s figures.
- Thursday’s Initial Jobless Claims are expected to read 823k people unemployed, down from 853k last week.
- Thursday’s Philadelphia Business Outlook survey for December is expected to tick lower from 26.3 last month to 20.0.
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