Post date: 25/01/2021 11:59
In a continuation of recent trends, risk assets worldwide mostly rose and the dollar mostly fell last week. The catalyst this time appeared to be the senate confirmation hearings for Janet Yellen as Treasury Secretary. In them, she made the case for a much more aggressive fiscal spending in the US, confirming our view that political winds in the US have shifted decidedly in favour of ever larger fiscal deficits unless and until an accident happens.
For now, however, leading indicators of economic activity seem to indicate that the harsh lockdowns in Europe are dragging down the European economy compared to the more relaxed US approach. We look to this week’s meeting of the Federal Reserve to ratify the Fed’s ultra-dovish view. Thursday’s advance look at US growth last quarter of 2021 should confirm its short-term outperformance versus the major European economies.
The combination of the ongoing lockdown and Brexit nuisances led to a spate of poor data out of the UK last week. The sharp deterioration in the PMIs of business activity was perhaps the most alarming of these. Investors are, however, continuing to take some comfort in the rapid pace of vaccinations in the UK and sterling has held its ground against the euro while joining in the general rally against the US dollar. More than 6.5 million doses of the Pfizer and AstraZeneca vaccines have now been administered in Britain – around 10 doses per 100 people. This week’s labour data through November 2020 should have limited market impact, as recent events have rendered the data stale. That being said, the UK’s lead in vaccinations should keep sterling performing in line with risk assets and risk appetite worldwide.
Short-term economic difficulties are piling on in the Eurozone, as a result of the harsh lockdowns ordered recently. January’s composite PMI fell deeper into contractionary territory last week, and there are now genuine concerns the bloc’s economy could be on course for a ‘double dip’ recession. The slow rollout of the vaccination effort there is another cause of concern and we will be watching very closely the vaccination numbers. In the short-term, the euro will be held back by this economic gap, but buoyed by the openly inflationist stance being adopted by fiscal and monetary authorities in the US. We expect recent ranges to hold for now, but the trend for the long-term should be one of the euro appreciation.
We expect the FOMC on Wednesday to stick to the very dovish script of the last meeting. Chair Powell will probably restate the Fed’s new found tolerance of above target inflation if and when it develops. There will, however, be no ‘dot plot’ or updated macroeconomic projections, so we don’t envisage any major market moves this time round. Two key data points should focus market attention this week. The first read of growth in the last quarter of 2020, and December PCE inflation. The former is expected to show modest, but positive expansion in the final three months of last year. We think there is room for some upside surprise in the latter which may be a short-term negative for the US dollar.