In the early stages of the new year, the reflation dynamics discussed pre-Christmas have largely held up, with a steepening in US Treasury yields at the long end of the curve at the centre of developments. Where there has been some modest divergence from this theme has been in the US dollar, which has found some support on the back of the lift in rates. US politics continues to dominate the headlines following the events at the Capitol last week, but for markets, the outcomes in the recent Georgia runoff elections have been more influential after the Democrats won the two Senate seats being contested to secure the 'blue sweep' where the incoming Biden administration will (on paper at least) have the numbers in both houses. This clears the way for large-scale fiscal stimulus to be injected into the economy to support the recovery together with the roll-out of vaccines. Details of the fiscal agenda the Biden administration will pursue were unveiled this week with a $1.9 trillion package on the table. The proposal includes around $1.5 trillion in economic stimulus and aid for state and local governments, including cheques of $1,400 for most Americans following on from the $600 payments that went out in December, a $400 per week enhancement to unemployment benefits through to September, and around $0.4 trillion of pandemic-related health measures.
Over the past few weeks, market-based measures of inflation expectations have continued to build up and currently sit at around their highest since late 2018 at a little above the Federal Reserve's 2% target. While there has been some speculation from Fed officials that the dynamics could lead to a faster recovery than anticipated, possibly opening the door for a tapering in asset purchases from their current $120bn/mth pace later in the year, the consensus within the policy-setting FOMC is that it is too early to be having those discussions — a point highlighted by Chair Jerome Powell and Governor Lael Brainard this week. Certainly, the data flow is a long way from where it needs to be for any change in policy under the Fed's new average inflation targeting framework to be even coming across the radar after non-farm payrolls fell for the first time in 8 months with a 140k contraction coming through in December; while both headline (1.4%yr) and core CPI (1.6%yr) remained soft in December, and retail sales posted their third consecutive monthly contraction with a 0.7% decline in December as control group sales came in much weaker than expected at -1.9%m/m.
Over in Europe, it has been an eventful start to 2021 with national governments across the continent moving towards extending shutdowns and tightening restrictions in an attempt to limit the spread of the variant strain of the virus. At this stage, shutdowns appear likely to remain in place for much of the first quarter and it is a similar situation in the UK, with the latter in the process of ramping up its vaccine roll-out strategy. But at this stage markets are looking through the implications and are focusing on reopenings from Q2 onwards. The same could be said of the European Central Bank with President Christine Lagarde in a Reuters forum this week outlining that the bank's forecast for GDP growth in 2021 of 3.9% was "still very clearly plausible" given that its current set of macroeconmic projections that were tabled at the December meeting were conditioned on the basis of shutdowns persisting through the first quarter of the year. Meanwhile, the account of the ECB's policy meeting in December outlined that while there had been "broad agreement" by members of the Governing Council to expand the size of asset purchases under its PEPP program by €500bn to €1,850bn some had advocated for a more moderate increase, judging that "keeping some powder dry" was wise in the circumstances of highly elevated uncertainty, though arguments for a larger increase to the envelope were also put forward. Ultimately, though, the main element of the PEPP program the Governing Council continues to emphasize is its flexibility, providing it with the ability to adjust the pace of purchases in line with prevailing conditions. Also gaining focus this week was Italian politics with the ruling coalition government plunging into crisis after it lost the support of Matteo Renzi's party over a range of grievances relating to the pandemic and economic matters, with reports indicating PM Conte will attempt to hold the administration together through support from opposition ranks.
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Switching the focus onshore, there was positive news on the pandemic front after recent concerns around outbreaks over the Christmas/new year holiday period with zero cases of local transmission recorded nationally over the past couple of days, while a snap 3-day lockdown implemented in Brisbane was lifted as planned after the Queensland authorities determined the risks of transmission emanating from hotel quarantine had receded. The domestic economic data through the week remained consistent with the strong momentum that was building into year-end. A wider reopening in Victoria from the state's second shutdown and the effect of the Black Friday promotional period drove a 7.1% acceleration in retail sales for the month in November, with the pace up 13.3% through the year — its fastest in more than 19 years (reviewed here). Key to the momentum in retail sales since the reopening of the national economy (shown in the chart of the week, below) has been the very significant level of savings that households have built up via fiscal stimulus measures that have supported incomes through the pandemic as well as shifts in consumption patterns in response to restrictions on activity.
Chart of the week
Also benefitting from policy stimulus has been the housing market with the value of borrower-accepted financing commitments lifting by a further 5.6% in November to a new record high level at just below $24bn, with strong rises for both the owner-occupier (5.5%) and investor (6.0%) segments (reviewed here). Outsized gains came through in Victoria with the reopening enabling stimulus measures from low rates, the HomeBuilder scheme, and first home buyer incentives to gain traction. Also highlighting the effects of policy stimulus on the housing market, detached dwelling approvals advanced by 5.9% in November to stand nearly 35% above their level from a year earlier (see here). There was also upbeat news on the labour market with the ABS job vacancies series surging by 23.4% in the 3 months to November with all states outside of Victoria rising above their pre-pandemic levels. Lastly, the nation's trade surplus pulled back to $5bn in November in the latest data published last week with spending on imports rising at their sharpest monthly pace in nearly 18 years (see here).
