December 16, 2020
December 16, 2020
- Cyclical stocks riding high on vaccine optimism
- ECB measures show Europe’s recovery remains a way off
One Big Takeaway
Christine Lagarde’s announcement of further monetary policy measures after last week’s European Central Bank meeting occurred with little fanfare. The market was well prepared for the ECB to continue its accommodative stance, amidst a new wave of coronavirus infections and lockdown restrictions, which has hit Europe’s recovery.
The ECB’s major bond-buying Pandemic Emergency Purchasing Programme (PEPP) will be extended by 9 months into June 2022, adding a further €500bn liquidity (on top of the existing €1.35tn) into the market over the coming 18 months – that’s around €100bn per month. Interest rates, as expected were unchanged.
The new measures may have generated little surprise, but the ECB’s actions have highlighted that a return to economic normality after the Covid crisis is along way off. Particularly striking in Lagarde’s announcement was the dovish stance on the economic recovery. The Bank expects a 2.2% contraction of GDP in the last quarter of 2020, which is a dramatic change compared with itsSeptember forecast of a 3.2% increase. Perhaps just as worryingly, the ECB only expects a modest 3.9% rebound in the first quarter of next year.
There was still some cause for cheer amidst the winter gloom. Industrial production has ticked up, down just 3.7% year-on-year, with strong production of consumer goods, intermediate goods and capital goods. The service sector continues to lag, but with vaccines soon rolling out across the continent, a big rebound in leisure and hospitality can be expected next year.
Chart of the Week
After taking a pasting in the early part of the year, cyclical stocks have enjoyed a late-year resurgence.This week’s chart shows the remarkable performance of basic resources and autos stocks, which have outperformed the market since November and now stand above average for the year. The banking sector has also responded very strongly but is still lagging cyclical stocks and remains below its level at beginning of year. What’s behind the new lease of life? Certainly, some companies exposed to Chinese economy have benefitted from its strong recovery. But generally, it’s down to investors piling into cyclical stocks on a wave of vaccine optimism, which has fueled risk appetite across the market.
Chinese inflation sags, but little chance of PBoC changing course
Inflation numbers out of China have shown a surprise reversal in fortune. November’s year-on-year consumer price inflation dropped to -0.5% for the first time since2009, after a 0.5% increase in October. The sudden drop into negative inflation territory can be attributed to a sharp drop in food prices, especially pork, but also a lagging effect of weak oil prices. But don’t expect the People’s Bank of China to make any knee-jerk changes to its monetary stance in response to food price changes. November’s inflation figures are likely to be a blip, with deflationary pressures moderating somewhat if the latest PMI figures(indicating improved manufacturing performance) are to be believed.
US labour market continues to struggle, but consumer demand could yet fuel inflation
Labour costs account for around 75% of businesses’ costs, typically acting as a leading indicator for inflation by about 3 quarters. But in a Covid environment, which has distorted the macroeconomic picture, inflation watchers will need to look beyond the US’s weak labour market performance for a picture of what is to come. Other elements, such as services margin could come into play, with a spike in consumer demand possible. It’s too early to tell whether the almost $2trn savings glut since the start of the pandemic will translate into a Christmas spending boom, but some retailers have already increased prices on the back of increased consumer demand.
Data to Watch
- 23 Dec: Often seen as a proxy for business spending plans, momentum in US Core Capital Goods Orders is expected to slow again in November’s figures.
- 25 Dec: Policymakers in the US and Europe will be looking out for the possibility of a spike in coronavirus infections as families gather for festivities. And a Happy Christmas to you too!