Stimulus And Consumers, Keys To US/Global Economic Recovery – Part I

At this point in our lives, we are hoping the new COVID-19 vaccines will do their part to help move the world towards more normal consumer and economic activities.  The US Senate recently a new $1.9 Trillion stimulus package that should continue to provide assistance to various levels of consumer, state governments, and corporate enterprises.  The next question in our mind is “what will the recovery look like if/when it happens?”.  We need to look at three critical components of the global economy to help answer this question: Consumer Activity, Debt, and Supply/Demand Functions.

Consumer activity makes up more than 60% of the US GDP.  It also drives money flow as consumers engage in economic activity, create credit for new purchases and help to balance the supply/demand equilibrium functioning properly.  The participation of the consumer within an economy is essential for a healthy growing economy.


The US has passed more than $4 Trillion in COVID-19 stimulus over the past 12+ months.  At the same time, global central banks have also engaged in various easy money policies to spark global economic activity.  When we combine the efforts of world governments and central banks, we’ve seen an unprecedented amount of money deployed throughout the globe recently – and that money needs to find its purpose and use in the global economy quickly of the global economy is going to recover enough to spark a new wave of economic growth.

We believe two key components of consumer engagement are at play right now; investing/trading in the US and global markets and Real Estate.  Whereas US consumers have been reducing debt exposure on credit cards and tightening their spending in other ways, trading volumes in the stock market Indexes and ETFs have increased dramatically over the past 12 months.  Additionally, low supply and low interest rates have kept the US housing market active, in addition to the boost in activity from people moving to more rural areas as the work-from-home phenomenon settles into the new normal.


This Case-Shiller 20-City Composite Home Price Index chart, below shows how quickly home prices have rallied over the past 12 months. Just prior to the COVID-19 pandemic, this index was flattening.  Then the moratorium on foreclosures and extended assistance for homeowners pulled many homes back off the market in early 2020.  That reduced supply and prompted a rally in home prices across the US.

The assistance provided to these “at-risk” homeowners accomplished two very important economic benefits.  It eliminated a wave of new foreclosures (albeit possibly temporarily) and it prompted a seller’s market because supply had been constricted.  The result is that many homeowners witnessed a 6% to 10% increase in their home values over the last 12+ months.


Unlike in 2006-2008 when delinquency rates skyrocketed during the housing crisis, throughout the COVID-19 pandemic, delinquency rates collapsed to the lowest levels over the past 25+ years.  Consumers took their extra capital, stimulus checks, and federal assistance and used the past 12+ months to eliminate certain debts.  Even though we are starting to see an uptick in delinquency rates in Q4 2020, these levels would have to climb considerably before we get close to the levels before the COVID-19 pandemic.

This suggests that a broad spectrum of US consumers are in a much better economic position related to revolving debt, or credit card debt, than they were before the COVID-19 pandemic.  If these consumers begin to engage in a new economic recovery by engaging in a healthy credit expansion, we may see a boost to certain sectors of the economy over the next 24 to 36+ months.


Unlike many other indicators, Real Personal Consumption has risen past the pre-COVID-19 peak levels.  This suggests that consumers are still spending money on Durable Goods and are continuing to buy essential items to support their lifestyles and families.  Yes, there are a number of people that are unemployed or have transitioned to other types of work, but the stimulus efforts and extended unemployment assistance has translated into real consumer engagement for Durable Goods, as we can see from the chart below.

Remember, Durable Goods are not typically found at Grocery Stores or Walmart.  They are items that have extended life-cycles (greater than three years); such as cars, planes, trains, furniture, appliances, jewelry, and books.  This rise in Durable Goods suggests that a large segment of the US consumer is actively engaged in making bigger-ticket purchases recently – possibly as a result of buying a new home, transitioning away from traditional work environments, and/or repositioning family essentials in preparation for a post COVID-19 world.  This type of economic engagement may continue for many months forward.


The following Consumer Price Index chart shows that general consumer prices briefly dipped when COVID-19 hit in March 2020, but they have since rallied to new highs.  This is partially a result of the rise in home prices and rising commodity prices, which contribute to a rise in price levels for consumers.

All of this data is showing that the US consumer is actually much more economically healthy than consumers were in the midst of the 2007-08 housing crisis. The stimulus efforts and partial economic shutdown did result in a large number of displaced or disadvantaged consumers, but it also shows that many US consumers were able to quickly transition into a different type of economic environment with very little extended economic risks.

The new $1.9 Trillion stimulus package will offer even more assistance to consumers.  This new stimulus will be spent as new COVID-19 vaccines are being rolled out, suggesting the US is quickly moving away from extended risks related to the pandemic.  This means consumers will likely start attempting to go back to normal in certain ways.  Does this mean that the recovery efforts will strengthen the bullish price trend in the future and the US stock markets will continue to rally?

In our effort to better identify opportunities for traders and investors as the post-COVID-19 recovery unfolds, we will continue to identify various market sectors that my research team and I believe have a strong potential for increased bullish price trends.  All of the data we’ve presented so far suggests the US consumer is much healthier than many people consider and that many US consumers are still actively engaged in some type of work/income solution.  The only reason why housing, durable goods, CPI, and other economic indicators continue to rise is because US consumers are actively engaged in buying/consuming bigger, durable goods.  This suggests the new $1.9 Trillion COVID relief effort may begin to push the US economy further into overdrive, and possibly pushing the supply/demand balance even further beyond the equilibrium zone.

Don’t miss the opportunities to profit from the broad market sector rotations we expect this year, which will be an incredible year for traders of my Best Asset Now (BAN) strategy.  You can sign up now for my FREE webinar that teaches you how to find, enter, and profit from only those sectors that have the most strength and momentum. Staying ahead of sector trends is going to be key to success in volatile markets.

For those who believe in the power of trading sectors that show relative strength and momentum but don’t have the time to do the research every day, let my BAN Trader Pro newsletter service do all the work for you with daily market reports, research, and trade alerts. More frequent or experienced traders have been killing it trading options, ETFs, and stocks using my BAN Hotlist ranking the hottest ETFs, which is updated daily for my BAN Trader Pro subscribers.

In Part II of this article, we’ll take the data we’ve reviewed already and apply it to current market conditions, trends, and technical setups as we look for new opportunities in consumer-based sectors.  My team and I believe some very big sector trends are going to set up as a result of everything that is converging on the US and global markets.  It’s time to get ready for some big trends.

For a look at all of today’s economic events, check out our economic calendar.

Chris Vermeulen
Founder & Chief Market Strategist


Is Gold an Inflation Hedge?

In this week’s market update, XTB’s Chief Market Analyst discusses how “Biden checks” can fuel a jump in sales, what is the outlook for the Gold market, which are the top calendar positions for the week, and more.

Watch the video to learn about:

  • How “Biden checks” fueled a jump in sales
  • Outlook for the Gold market
  • Surging US bond yields
  • Top calendar positions for this week

Other top news this week include:

  • IFO (Monday)
  • Powell in Congress, Conference board (Tuesday)
  • RBNZ, Powell in Congress (Wednesday)
  • Durable orders (Thursday)
  • Monthly data in Japan, US PCE inflation (Friday)

Don’s miss our latest market update:

Will Biden Overheat the Economy and Gold?

In January, Biden unveiled his plan for stimulating the economy, which is struggling as the epidemic in the U.S. continues to unfold. Pundits welcomed the bold proposal of spending almost $2 trillion. Some expenditures, especially on vaccines and healthcare, sound pretty reasonable. However, $1.9 trillion is a lot of money! And a lot of federal debt, as the stimulus would be debt-funded!

So, there is a risk that Biden’s package would overheat the economy and increase inflation. Surprisingly, even some mainstream economists who support deficit spending, notice this possibility. For instance, former Treasury Secretary Larry Summers said that Biden’s stimulus could lead the economy to overheat and that the conventional wisdom is underestimating the risks of hitting capacity. Although he doesn’t oppose the idea of another stimulus, Summers noted that “if we get Covid behind us, we will have an economy that is on fire”.

Indeed, this is a real possibility for good reasons. First, the proposed package would not only be large in absolute terms (the nominal amount) but also relative to the GDP. According to The Economist, Biden’s proposal is worth about nine percent of pre-crisis GDP, nearly twice the size of Obama’s aid package in the aftermath of the Great Recession.

And the stimulus is also large relative to the likely shortfall in the aggregate demand. I’m referring here to the fact that the winter wave of the coronavirus would be less harmful to the economy – and that there have already been big economic stimuli added last year, including a $900 billion package passed no earlier than in December.

Oh yes, politicians were really spendthrift in 2020, and – without counting the aid passed in December – they injected into the economy almost $3 trillion, or about 14 percent of pre-crisis GDP, much more than the decline in the aggregate demand. In other words, the policymakers added to the economy more money that was destroyed by the pandemic.

But the tricky part is that Americans simply piled up most of this cash in bank accounts, or they used it for trading, for instance. Given the social-distancing measures and limited possibilities to spend money, this outcome shouldn’t actually be surprising. However, the hoarding of stimulus shows that it has not yet started to affect the economy – but that can change when the economy fully reopens and people unleash the hoarded money. If all this cash finally reaches the markets, prices should go up.

You see, the current economic downturn is unusual. It doesn’t result from the fact that Americans don’t have enough income and cannot finance their expenditures. The problem is rather that people cannot spend it even if they wanted to. Indeed, economic disruption and subdued consumer spending are concentrated in certain sectors that are most sensitive to social distancing – such as the leisure, transport, and hospitality industries – rather than spread widely throughout the whole economy. So, when people will finally be able to spend, they will probably do so, possibly accelerating inflation.

As well, normally the Fed would tighten its monetary policy to prevent the rise in prices. But now the U.S. central bank wants to overshoot its inflation target, so it would not hike interest rates only because inflation raises to two percent or even moderately above it.

Another potential inflationary driver is dollar depreciation, which seems likely, given the zero-interest rates policy and the expansion in the U.S. twin deficit.

Hence, without the central bank neutralizing the fiscal exuberance, it’s possible that Biden’s plan would overheat the economy, at least temporarily. Of course, that’s not certain and given the small Democrats’ majority in Congress, the final stimulus could be lower than the proposed $1.9 trillion. But it would remain large and on top of previous aid packages and pent-up demand, which makes the overheating scenario quite likely.

Actually, investors have already started to expect higher inflation in the future – as the chart below shows, the inflationary expectations have already surpassed pre-pandemic levels.

From the fundamental perspective, this is good news for the gold market. After all, gold is bought by some investors as an inflation hedge. Moreover, the acceleration of inflation would lower real interest rates, keeping them deeply in negative territory, which would also be positive for the yellow metal.

So, although the expectations of higher fiscal stimulus plunged gold prices in January, more government spending – and expansion in budget deficits and public debt – could ultimately turn out to be supportive factors for gold. Especially if an easy fiscal policy will be accompanied by the accommodative monetary policy – in particular quantitative easing and a rising Fed’s balance sheet – and inflation.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get a 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

An act of Random Kindness

An act of Random Kindness

In Charles Dickens’s classic novel, a tale of two cities, he depicts the chasm and huge differences between two major cities in Europe. In the case of the book, as they revolve around France and England. In today’s modern society, a chasm continues to exist between the haves and the have-nots. It is an unequal playing field, but day-to-day realities differ like night and day between the two groups.

His famous line that reverberated around the world was, “it was the best of times; it was the worst of times.”

Although the characters were fictional, this landmark work is genuine. It is truly a classic novel, highlighting the dilemma the citizens of both countries face and both sides of the social and economic conditions.

Very quickly into the book, the narrator of the author says, ‘the period was so far like the present period,‘ indicating that any time, past or present, contains greatness and horror, brilliance and stupidity. It might be a far stretch his classic writing can be related to the global pandemic.

Because many individuals worldwide are experiencing either the best of times or the worst of times. One of the author’s accomplishments is that the storyline takes place in both cities, which allows him to contrast the distinct differences with one faction (the English) depicted as old-fashioned and conservative, and most importantly, out of step with the times.

It is a warning to us all that one has a choice as to how to deal with the pandemic and whether their actions and investments will make this pandemic subside more quickly and make it a better experience for those most in need

The use of short selling

This takes us to the point of today’s opening letter, and that is some act with valor and the consciousness of how it affects other individuals in a positive and prosperous manner. However, some will utilize legal but questionably ethical practices to line their pockets with profits. One of these techniques is known and labeled by Investopedia as “short and distort: bear market stock manipulation.”

Although there is nothing fundamentally wrong with short selling, in many cases, they use this type of strategy by creating untrue factors in attempts to drive the price down in attempts to manipulate price action. It is a classic inverse use of a “pump and dump scheme.”

We live in a world ripe with genuine and desperate need by individuals trying to live day to day or week to week. Some use a practice that genuinely hurts the weakest of our global citizens. Those that understand that act differently. While citizens of the United States that are divided cause the chasm to grow deeper. All people that have prospered can help those in need. My only suggestion is that each of us that have flourished during this challenging time performs “One Act of Random Kindness” to those in need.

For those who want more information, please use this link.

Wishing you, as always, profitable trading and good health,

Gary S. Wagner


Spain: Reform Momentum Key for Facilitating Recovery after Historic Economic Contraction

The economy in Spain experienced the largest recession among major euro-area economies in 2020. GDP contracted by 11%, slightly better than Scope’s estimate of a 12% contraction, but significantly worse than the 8.9% GDP decline in Italy, 8.3% in France and 5% in Germany.

Significant monetary policy support has helped the financing of sizeable countercyclical fiscal measures to protect the economy. Spain is set to have recorded a double-digit fiscal deficit estimated at 11% of GDP last year, despite better-than-expected tax revenues, resulting in debt rising to nearly 120% of GDP from 96% in 2019.

Despite the deterioration in public finances, the government’s financing costs remain low, with the yield on the 10-year Bono close to 0%. The Bank of Spain holds now more than 25% of Spain’s government debt.

Tackling labour-market inefficiencies, raising productivity vital for sustained recovery

Any fundamental improvement in Spain’s public finances depends on a sustained economic recovery, government efforts to address inefficiencies in the labour market and raise productivity, together with a credible medium-term fiscal consolidation strategy.

The uncertainty on the recovery this year is visible in diverging forecasts, ranging from 9.8% growth by the government, which expects a 2.6pp uplift from EU funds, to the Bank of Spain’s baseline forecast of 6.8% assuming a 1.3pp positive impact from EU funds. Our forecast, in line with the IMF, is for a more modest rebound of 6%.

The government is prioritising growth over budgetary discipline, which for the moment is appropriate given the large output gap. Spain will run a wide budget deficit for some time. For 2021, the authorities forecast a deficit of 7.7% of GDP, which is based on a rather optimistic economic scenario. Thus, should growth be weaker than expected in the coming years, Spain’s public finances would deteriorate further.

Sustainable growth over the coming years will depend, among other factors, on the effective spending of at least the EUR 78bn in grants Spain is set to receive as part of the Next Generation EU recovery fund as well as labour and product market reforms that raise the country’s growth potential. Spain has the highest structural unemployment rate in the euro area (14%) and almost 25% of employment is on temporary contracts, which has adverse effects on job security as well as on companies’ willingness to invest in human capital.

Pension reform would contribute to more sustainable government finances

In addition, reforming the pension system would also contribute to the sustainability of Spain’s public finances as the social security fund has run a deficit for the past 10 years and given the country’s ageing population.

The dire state of the economy and the European Commission’s conditions for access to the funds might spur the minority government’s reform efforts despite Spain’s fragmented politics. Indeed, the government has obtained parliamentary approval for the first full-year budget since 2016.

Given these politically costly reforms, tensions are likely to persist, challenging the minority government’s ability to facilitate Spain’s economic recovery and strengthen the country’s public finances. This uncertainty is captured in our A-/Negative sovereign rating for Spain.

For a look at all of today’s economic events, check out our economic calendar.

Alvise Lennkh is deputy head of Sovereign and Public Sector ratings at Scope Ratings GmbH. Giulia Branz, Associate Analyst, contributed to this commentary.

Bubblicious Asset Prices, Debt Dependency, Economic Collapse

And, while some might be more stringent in their terms of definition and applicability, investors in stocks, bonds, real estate, etc. – pretty much anything with a $ sign in front of it – might want to rethink the current state of affairs as it pertains to valuation of their financial assets.

According to Merriam-Webster, a bubble is “a state of booming economic activity (as in a stock market) that often ends in a sudden collapse”.

More accurately, though, the bubbles to which we are referring have more to do with price valuations, not economic activity.

The economy of the United States has improved considerably since April 2020; but it hasn’t recovered fully. Nor, has it exceeded its previous level from prior to the pandemic. So, the term bubble probably isn’t applicable to current economic activity.


However, in the case of prices for stocks, bonds and other financial assets, those prices are already discounting years of profitability.

Even allowing for a highly generous application of price-to-earnings ratios, current prices far exceed the most favorable expectations for future growth.

The problem is much worse, though, than simple overvaluation of assets. The US and world economy is debt-dependent. The excessive valuations showing in financial asset prices are a result of an abundance of cheap credit.

One example is bond prices, which have risen to excessively high prices as interest rates fall to unsustainable historically low levels. Financial risk appears to be non-existent amidst the clamor to own debt at almost any price.

Economic activity is funded primarily by cheap credit; whether it be mortgages, business activity, even retail consumption. Without the access to unlimited amounts of credit the world economy would come to a standstill. The situation is precarious.


The economy is not in a bubble, but it is very fragile and could collapse at any time. We saw how quickly this can happen last March.

Some are too quick to assume that the Fed will step in and take whatever steps are necessary to arrest the hellish descent when it occurs. Of course, they will try. But they likely won’t be successful.

We have advanced too far down the primrose path of money substitutes and cheap credit. And let’s not forget, that whatever the Fed’s intentions are (or were), they caused the Great Depression of the 1930s.

The Next Great Depression will be worse and last longer.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT  and  ALL HAIL THE FED!

A Draghi Government would have Longer-Term Implications not Only for Italy but Europe at Large

The former ECB president has accepted “with reservation” the responsibility of seeking to form a “government of national unity” to lead Italy out from the crisis as well as to ensure a robust spending and reform programme in exchange for EU recovery funds.

Draghi’s decision has reduced the likelihood of snap elections, which we have considered unlikely and which would otherwise consume government time and energy amid a severe public-health crisis. At time of writing, Draghi appears on route to consolidating a majority in Parliament and to forming a new government in the period ahead.

Draghi’s mission is to ease political uncertainty and enhance Italy’s budgetary response to this crisis, ensure efficient implementation of Italy’s share of EU recovery funds and produce a more effective strategy on vaccination – where Italy and the EU have lagged. According to a recent poll, more than half of Italians want Draghi to remain as prime minister until 2023, when the next general elections are due.

Italy needs an effective and stable government to remain in place for the duration of the current legislature till the middle of 2023. After 66 governments over roughly the past 75 years, Italy cannot afford to continue with policy paralysis. A very short Draghi administration only before presidential elections of 2022 would similarly maintain political uncertainty.

Ratings implications for Italy as well as for the remainder of the EU

With Italy’s debt at record levels of around 160% of GDP, the new government will need to emphasise a sustainable policy framework that favours recovery near term through the strategic investment of EUR 209bn of EU funds and that defines a vision for fiscal discipline longer term. How any Draghi premiership manages this difficult balancing act will inform credit-ratings implications; however, short term, a resolution of political uncertainty, accelerating a path out of crisis and any sustained easing of Italian borrowing rates would be positive for ratings.

Draghi has the advantage of his high standing with investors as well as with Italy’s EU partners. The support of European institutions has been fundamental in facilitating the ever-lower borrowing rates that Italy has benefitted from despite higher debt. The spread on Italy’s 10-year government bonds is currently trading below 100bps over Germany’s – the narrowest in more than five years.

Draghi is, moreover, well placed to ensure Italy’s voice is heard in regard to institutional reform in the EU, including as it pertains to the EU’s fiscal framework, such as the Stability and Growth Pact, or with relation to a common euro budget – this bears implication not only for Italy but for the remainder of the EU.

No easy political path

The scale of any parliamentary majority Draghi gains will be critical for ensuring the longevity of an administration and its capacity to undertake required regulatory and administrative reform in partnership with the European Commission.

Any very broad unity government with competing for internal policy preferences alongside a part-technocratic, part-political composition could, however, ensure also the same discordance over time that curtails governability.

Italy’s economy contracted 8.9% in 2020, less severely than the 9.6% slump Scope had anticipated. Italy has historically a weak track record for the efficient deployment of EU structural funds: over the 2014-20 EU budgetary period, Italy spent (only) 43% of allocated monies.

For a look at all of today’s economic events, check out our economic calendar.

Giulia Branz is Associate Analyst in Sovereign and Public Sector ratings at Scope Ratings GmbH.

Will Debt Bury the Markets?

In this week’s market update, XTB’s Chief Market Analyst discusses what the weak NFP report could mean for the markets, whether record debt levels are a cause for concern, and more.

Watch this video to learn:

  • Weak NFP report and what it means for markets?
  • Record debt levels – is this a concern?
  • USD comeback – has it been stopped?
  • Commodities – OIL and Silver

Other top news this week include:

  • Draghi as the next prime minister in Italy
  • US tech stocks are solid but expensive
  • The end of short-squeeze frenzy on the US stock market
  • No inflation pressure in Europe
  • BoE attempts to reverse markets’ bias towards negative interest rates implementation

Don’s miss our latest market update:

Limited Follow-Through Dollar Selling to Start the Week

Easing pressure from the pandemic as the surge in cases after the holidays may also be encouraging risk-taking to extend the global equity rally. Several markets in the Asia Pacific region, including Japan, China, India, and Thailand, rose by more than 1%. That was sufficient to lift the Nikkei and the Topix to their best levels since the early 1990s. Led by materials and financials, Europe’s Dow Jones Stoxx 600 is extending last week’s nearly 3.5% advance. US shares are enjoying a firmer tone, as well.

Benchmark 10-year bond yields are 2-3 bp higher in the US and most of Europe. Italian bonds are a bit more resilient, and the premium over Germany is near 95 bp, a new 11-year lows. The US 10-year reached almost 1.20%, its highest since the chaos last March. Gold marginally extended its recovery off last week’s two-month low, near $1785. A move above $1820 could spur another $10 rally. Meanwhile, oil continues to march higher. March WTI is up for the sixth consecutive session to build on last week’s nearly 9% advance. It has reached about $57.70, and there is little resistance ahead of $60.

Asia Pacific

China reported that its reserves unexpectedly slipped last month. A small increase from the year-end valuation of $3.216 was anticipated. Instead, reserves fell to $3.210, the first decline since October, but are $95 bln higher than a year ago. The decline may be a function of valuation adjustments. Major reserve currencies, outside the dollar, fell, and main investments, bonds, fell.

The PBOC estimates the value of its gold holdings fell by about $1.5 bln. Nevertheless, the yuan remains a heavily-managed currency. The large trade surplus and portfolio capital inflows are associated with an appreciating currency. Many suspect the yuan would be rising faster if it were not being checked. Pressing for greater transparency is the first step.

Japan’s December current account surplus eased to JPY1.17 trillion ($11 bln) from JPY1.19 trillion last November. The decline contrasts with the JPY350 bln increase in the trade surplus (JPY965 bln from JPY616 bln). Japanese investors stepped up their purchases of French and Italian bonds in December. Its French bond purchases of almost JPY450 bln was the most in more than a year. They also bought JPY424 bln of Italian bonds, the most in four months.

For the year as a whole, Japanese investors bought JPY3.75 trillion of Australian bonds and JPY1.48 trillion Canadian bonds. Both appear to be the highest on record. On the other hand, Japanese investors for net sellers of foreign equities for the first time since 2013. In 2020, foreign investors sold JPY2.79 trillion of Japanese bonds, the first annual net sales since at least 2014, but bought a record JPY21.4 trillion T-bills.

Taiwan reported record exports and imports last month to drive the trade surplus to $6.19 bln, about 20% more than economists forecast. Exports rose 36.8% year-over-year (12% in December), while imports jumped almost 30% (less than 1% in December). Exports to Hong Kong and China rose 57.0% year-over-year. Exports to the US and Japan rose 21.9% and 21.5%, respectively. Shipments to Vietnam increased by nearly 82%. On the import side, China and Hong Kong rose by almost 47%, almost 77% from South Korea and 66% from Thailand. Intra-Asian trade is impressive.

The dollar held above JPY105.30 support and continue to flirt with the 200-day moving average (~JPY105.60). The pre-jobs data high was a little above JPY105.75. Rising yields and rising equities are often seen as negative for the yen. The Australian dollar briefly and marginally rose above last week’s high but stalled a little above $0.7680. An option for A$1 bln at $0.7650 expires today and may attract prices. The PBOC set the dollar’s reference rate at CNY6.4678, a touch softer than expected. The yuan has traded broadly sideways so far this year. The offshore yuan has also been rangebound, mostly between CNH6.44 and CNH6.50.


Following last week’s disappointing factory orders (the 1.9% decline in December was nearly twice what was expected), Germany reported no change in industrial output. The median forecast in the Blomberg survey was for a 0.3% gain. The disappointment was mitigated by the revision in the November series to 1.5% from 0.9%. In contrast, Spain reported a 1.1% jump in industrial output in December. Economists had expected a 0.3% increase after a 0.9% decline in November. Italy reports its figures tomorrow, and the aggregate report for the euro area is due in a week.

Italy’s Draghi is holding the second round of talks, but it is increasingly likely that he will lead the next government. A cabinet could be named later this week, and confidence votes held in parliament next week. The Five Star Movement, the largest party in the lower house, initially seemed opposed, but going to the polls now would have dealt a blow to the party that grew out of the crisis a decade ago. The (Northern) League, on Italy’s political right, has also indicated support after initial hostility.

Several small and moderate parties also support Draghi. The far-right Brothers of Italy appears to be the notable holdout. A poll over the weekend found more than half of Italy wants Draghi to be prime minister until 2023, when the next parliament election is due.

The euro initially extended the pre-weekend recovery but stalled near $1.2055 before pulling back toward $1.2020 in the European morning. There are two option expirations of note today. One is at $1.20 for 1.1 bln euros, and the other is at $1.2050 for a little more than 625 mln euros. The limited follow-through buying after the key upside reversal after the US jobs data is somewhat disappointing.

However, so far, the price action is consolidative in nature, confining the euro to a relatively narrow range near the pre-weekend high. Sterling saw the least possible follow-through (it was worth 1/100 of a cent) and struggled to sustain a foothold above $1.3700. The pre-weekend low was a little under $1.3665, and a break of $1.3635-$1.3655 would weaken the technical tone. Of note, the euro is gaining on sterling for the second consecutive session. It does not sound like much, but it is the first time this year that the euro could post back-to-back gains.


While the rise in long-term US yields has captured market participants’ imagination, less noticed has been the slippage of short-term rates. The two-year yield fell to a marginal new record low ahead of the weekend, just above 10 bp. The Eurodollar benchmark rate is also at record lows. Other money market rates are lower, The system is awash with cash. The Treasury is drawing its cash balances at the Fed down, and this is expected to be a trend in the coming months.

Partly this is to pay for the stimulus, and partly it is a function of the budget process and the pending debt ceiling, which requires the cash holdings be reduced to a little less than $120 bln from over $1 trillion. One implication is that the US 2-year premium over Germany has fallen to almost 80 bp, the lowest level since last August. In contrast, the US 10-year premium over Germany has edged up to 1.61%. A 10-month high was set last month near 1.68% before falling to around 1.56% at the end of January. Another implication is that US T-bill yields may dip below zero.

Separately, the US quarterly refunding kicks off tomorrow. It will sell $126 bln in coupons. The backing up of yields offers a concession to investors. Demand at the long-end will be closely monitored, but recall that demand last month was robust. Assuming that these sales go off without a hitch, some post-auction bounce cannot be ruled out.

The US 10-year yield is higher for the eighth consecutive session. The yield has risen around 17 bp during this run. Most explanations focus on inflation expectations driven by the $1.9 trillion stimulus proposal that follows on the heels of the $900 bln packaged at the end of last year. Noted economists Summers and Blanchard seemed to play up the inflationary risks, even though inflation spurred by overheating of the economy has not been seen in more than 30 years, the link between deficits and inflation is far from clear, and that is before a discussion about modern monetary theory.

Meanwhile, oil prices are higher for the sixth session and have risen by about 10% during this run. It looks like it has been driven primarily by supply considerations, which will wane. Indeed, that is what the backwardation in the oil market means (higher prices near-term, lower prices medium-term).

The economic calendar of North America is light today. The week’s highlights include the US and Mexico’s January CPI and Mexico’s central bank meeting (February 11). The market expects a 25 bp rate cut that will bring the overnight target to 4%. The Fed’s Mester speaks today and Bullard tomorrow, but the highlight is Chair Powell on Wednesday at the Economic Club of New York.

The US dollar is pinned near the pre-weekend low against the Canadian dollar. It has not been able to distance itself much from the CAD1.2755 low, which is slightly above the 20-day moving average (~CAD1.2745). Initial resistance is seen around CAD1.28. Similarly, the greenback has held above the MXN20.08 area seen after the US jobs disappointment (and the 20-day moving average is around MXN20.02). Initial resistance is seen in the MXN20.20-MXN20.25 area, but only a move above MXN20.50 is noteworthy.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

EURUSD Analysis: Nearing Stimulus Approval Boosts the USD

The US vaccination plan and restrictions implemented resulted in a decrease of the new active cases.

Source: Worldometers

More and more trials and tests are ongoing in different pharmaceutical companies, and yet another giant – Johnson and Johnson reported that their vaccine is 72% effective against moderate and severe disease in the US, and 57% in South Africa. In South Africa, 95% of cases in the trial were due to a variant known as B.1.351, which is known to be more contagious and carries mutations. These mutations are most likely to be less responsive to antibodies. The spread of this variance is already confirmed in the UK and caused anxiety. Another best part of this vaccine is that it’s single-dose and affordable.

President Biden’s administration already signed a policy to lift the rate of vaccination among the US delivering more than 33 million shots. The European Union on the other hand is demonstrating a rather weaker approach to beating the Covid-19 spread, with Spain hitting new records of Covid-19 cases.

US GDP as per the final quarter of the last year, released on January 28, demonstrated a 4% growth, while the data from the EU, released yesterday, were rather unsettling. Europe’s GDP (QoQ) is down 0.7% and (YoY) is down 5.1%. Despite the released positive PMI data and a rather positive Core CPI (YoY) s per January, Euro still looks weaker against the US Dollar.

EUR/USD quote on Overbit

As seen on the chart above the pair is following it’s downtrend path within a descending channel. By the time of writing this article the pair is testing the $1.20120 support and lacks momentum to retrace from this level. Hence, EUR/USD will most likely break the aforesaid support level and drop to test the lower edge of the channel and find support at $1.19650-$1.19600. After the test of $1.20120 support, the pair retraced and tested the previous strong support at $1.12500 as resistance, hence this adds bearish sentiment to the pair.

The path of the downtrend on a 15M chart also demonstrates the same levels and a rather bearish sentiment of EUR/USD.

EUR/USD quote on Overbit

The Non-farm Employment change which is going to be released today and tomorrow’s Initial Jobless Claims will be significant for the USD, as the employment growth is the FED’s key metrics for the economic recovery.

For a look at all of today’s economic events, check out our economic calendar.

Biden’s Presidency from a Market Perspective

Chief Market Analyst of XTB group discusses Biden’s presidency from a market perspective.

Watch this video to learn:

  • Key themes of Joe Biden’s presidency
  • Chances and risks for the markets
  • Present market situation on indices, fx and commodities
  • Key calendar positions for this week

Other top news this week include:

AUD/USD Daily Forecast – Australian Dollar Continues To Rebound Against U.S. Dollar

AUD/USD Video 20.01.21

AUD/USD gained upside momentum and is trying to settle above the resistance at 0.7740 while the U.S. dollar is losing ground against a broad basket of currencies.

The U.S. Dollar Index is currently trying to settle below the nearest support level at the 20 EMA at 90.35. If this attempt is successful, the U.S. Dollar Index will move towards the psychologically important 90 level which will be bullish for AUD/USD.

Today, Australia reported that Consumer Confidence declined from 112 in December to 107 in January. Australia’s economy enjoyed a significant rebound thanks to the country’s success in virus containment and the economic strength of its main trading partner, China, so it remains to be seen whether the recent decline of Consumer Confidence is a start of a new downside trend.

Tomorrow, foreign exchange market traders will focus on employment reports from Australia. Employment Change report is expected to show that employment increased by 50,000 in December, while Unemployment Rate is projected to decline from 6.8% to 6.7%.

Technical Analysis

AUD/USD managed to get above the resistance at 0.7725 and is trying to settle above the next resistance level at 0.7740. If this attempt is successful, AUD/USD will move towards the next resistance level which is located at 0.7760.

In case AUD/USD gets above the resistance at 0.7760, it will head towards the resistance at 0.7780. A move above this level will open the way to the test of the resistance at 0.7800.

On the support side, a move below 0.7725 will push AUD/USD towards the next support level at the 20 EMA at 0.7700. In case AUD/USD declines below this level, it will head towards the next support level at 0.7675. A successful test of this level will open the way to the test of the support at 0.7660.

For a look at all of today’s economic events, check out our economic calendar.

Even When She Speaks Softly, She’s Yellen

After posting the first back-to-back decline this year, the MSCI Asia Pacific Index bounced back today, led by a 2.7% gain in Hong Kong (20-month high) and a 2.6% rise in South Korea’s Kospi. The Nikkei and Taiwan’s Stock Exchange rose by more than 1%. Europe’s Dow Jones Stoxx 600 eked out a small gain yesterday and is a little higher today. The S&P 500 fell in the last two sessions for a loss of a little more than 1% and is trading about 0.6% better now.

The US 10-year is firm at 1.11%, while European bonds are little changed, and the periphery is doing better than the core. Of note, France’s 50-year bond sale was greeted with a record reception. The dollar is lower against all the major currencies, but the yen. Most emerging market currencies are firmer as well. We see the dollar’s pullback as part of the larger correction that began almost two weeks ago.. Gold recovered smartly from yesterday’s test on $1800 to return to the 200-day moving average (~$1845). February WTI reversed lower ahead of the long holiday weekend and made a marginal new low today (~$51.75) before recovering nearly a dollar.

Asia Pacific

According to the recent government data, China’s rare earth exports fell by more than a quarter to what Reuters estimates are the lowest in five years. China attributed it to weaker global demand, but there is something else going on. Yesterday, China indicated that a new mechanism will be created to decide, coordinate, and regulate the rare earth supply chain (including mining, processes, and exporting).

Rather than exporting rare earths, China’s industrial policy aims to export products containing rare earths. Move up the value-added chain. The big push now apparently is for batteries for electric vehicles. The PRC has become a net importer of rare earths that it processes. Its imports often come from mines it owns outright or has an important stake. For example, the Democratic Republic of Congo is responsible for 60% of the world’s cobalt.

There are 12 mines, and reports suggest China has a stake in each, and more than 85% of the cobalt exports are headed to China. In 2018, China provided around 80% of US rare earths, and at least one mine in the US sends the material to China to be processed.

For the past several sessions, the dollar has forged a base in the JPY103.50-JPY103.60 area and is probing the JPY104.00 level. The high from January 14 was about JPY104.20, and there is an option for roughly $360 mln at JPY104.35 that expires later today, just shy of last week’s high near JPY104.40. The Australian dollar closed below its 20-day moving average yesterday (~$0.7100) for the first time in a little more than two months.

It rebounded earlier today to $0.7725. The session high may not be in place, and we suspect there is potential toward $0.7740. The dollar’s reference rate was set at CNY6.4883, practically spot-on median expectations in the Bloomberg survey of bank models. The dollar’s four-day advance was snapped today. It has risen from almost CNY6.45 and stalled in front of CNY6.50. Faced with an increase in interbank borrowing costs for the ninth consecutive session, the PBOC injected CNY75 bln in seven-day cash via repo agreements.

It is the first injection after draining for the past six sessions, and it was the largest supply of funds this month. Some liquidity appears to be going into equities, and Chinese traders reportedly bought a record $3.4 bln of HK shares today.


Despite Germany’s social restrictions, which may be tightened and extended, business sentiment held in better than feared. The ZEW survey assessment of current conditions did not deteriorate as economists expected, though it did not really improve, either. The -66.4 reading compares with -66.5 in December. However, the expectations component rose to 61.8 from 55.0. This is the highest since September and more than anticipated.

The UK Prime Minister, who holds the rotating G7 presidency, has invited South Korea, India, and Australia to the summit in June. Moreover, reports suggest Johnson intends on getting them involved right away, which seems aggressive. It appears to be causing some consternation among other members. Germany, Japan, France, and Italy are opposed.

Italy’s Prime Minister Conte survived the vote of confidence in the Chamber of Deputies yesterday, and today’s challenge is in the Senate. The government support is thinner. However, the ability to secure a majority is somewhat easier given that Renzi’s party will abstain, though it will still be close. A defeat could see Italian bonds sell-off, but Conte will seek to broaden the coalition in the existing parliament before elections are required. This could include independents or members of center-right parties.

Two central bank intervention announcements last week caught our attention. First, Sweden’s Riksbank announced a three-year plan to purchase SEK5 bln a month. The purpose is to fund reserve purchases in SEK and pay down the SEK178 bln fx loans from the National Debt Office, which is thought to be about 70% in US dollars.

The krona was trending lower this year against both the dollar and euro, which follows the krona’s appreciation in the last few months of 2020. The impact is minor in terms of average daily turnover, estimated to be around SEK300-SEK320 bln almost equally divided between euros and dollars.

Second, the Israeli shekel soared in recent months and reached levels not seen since Q1 1996. The Bank of Israel intervened and bought $21 bln in all of 2020, with almost $4.5 bln in December alone, and still the shekel appreciated by 7.5% and nearly 3%, respectively. Businesses and investors were crying for relief. The central bank announced it would buy $30 bln this year, which triggered a powerful short-covering rally that carried the dollar from nearly ILS3.11 to almost ILS3.29 by the end of last week.

Dollar sellers emerged yesterday. It is steadier today, but in wider ranges than typically seen before. Its preannounced intervention war chest may ultimately prove insufficient to prevent shekel appreciation. The $30 bln is roughly twice its current account surplus, but foreign direct investment inflows are nearly the same size as the current account surplus. And yet, net portfolio inflows should be expected, but most importantly, how Israeli offshore investment is managed can be impactful.

Profit-taking on foreign investments or hedging the currency risk, even on a small fraction of the roughly $470 bln of foreign stocks and bonds owned by Israelis, can be a significant force rivaling the current account and direct investment-related flows.

The euro was sold a little below $1.2060 yesterday, its lowest level since December 1st. It reached $1.2130 in the European morning, and the $1.2140 area is the halfway point of last week’s decline. The bounce has left the euro’s intraday momentum indicator stretched.

We expect North American dealers will take advantage of the upticks for a better selling opportunity. Also, note there are around 4.1 bln euros of $1.2190-$1.2200 options that roll-off today. Sterling recovered a little more than a cent from yesterday’s lows (~$1.3520) to today’s high. It faces resistance near $1.3635. Tomorrow the UK reports December CPI figures, and a small uptick is expected.


The Senate holds the confirmation hearing for Yellen. She was the first woman to head the Federal Reserve, and she will be the first woman to lead the US Treasury, and the first person to have held both posts. It is a reflection of our age. Like the current Federal Reserve, the former Chair can be expected to recognize the need for fiscal support, while at the same time acknowledging that deficits will decline on the other side of the emergency.

The stock of debt is elevated, but it not extreme in relative or absolute terms. Despite higher debt in 2020, the servicing costs appear to have fallen. Moreover, as the economy grows faster than the level of interest rates, debt will decline as a percentage of GDP. Her remarks on the dollar will be scrutinized. To demonstrate the Biden Administration’s multilateral thrust, at this juncture, it is sufficient for Yellen to acknowledge the G7/G20 position that exchange rates are best set by the market.

At the end of last year, the US Treasury cited Switzerland and Vietnam as currency manipulators. She may be asked about those, and of course, the yuan. The new US Treasury model had the yuan a few percentage points undervalued. However, it is interesting to note that when adjusted for GDP per capita, The Economist Big Mac index of purchasing power parity has the yuan slightly (~2.5%) overvalued.

The economic calendars for North America are light today. The Treasury’s International Capital (TIC) for November will be reported today at the end of equity trading. Capital flows were volatile at the onset of the pandemic, but long-term inflows averaged $23.56 bln in the first ten months of 2020 compared with an average of $27.21 bln in the same period in 2019 and $54.32 bln in the Jan-Oct period in 2018.

The week’s highlight includes the January Philadelphia Fed survey Thursday and weekly jobless claims, as well as Friday’s preliminary PMI. Canada reports the December CPI tomorrow, shortly before the outcome of the Bank of Canada meeting is announced. Although the consensus is for a standpat outcome, a “mini-cut” cannot be ruled out given the official rhetoric. The current overnight target rate is 25 bp. The main feature for Mexico is the December unemployment figures on Thursday. Brazil’s central bank meets tomorrow, and the is little chance of a change in the 2% Selic rate.

Last Thursday, the US dollar recorded its lowest level against the Canadian dollar since April 2018 (~CAD1.2625). Between the modest greenback strength seen yesterday and expectations that Biden cancels the XL pipeline, the US dollar tested CAD1.28. It has come back offered today and is testing the CAD1.2720 area in the European morning.

It can fall a bit further in the North American session, but we look for support in the CAD1.2690 area to hold. That said, a break could signal a move toward CAD1.2640. The greenback held below MXN20.00 yesterday and reversed lower, closing a little under MXN19.69. It has taken out yesterday’s low (~MXN19.66) but struggles to maintain the downside momentum. A move above MXN19.75 would suggest a return to MXN20.00 is likely.

The dollar fell from BRL5.5160 last week, its highest level since mid-Movember, to BRL5.20. The low from earlier this month was around BRL5.12, and there is scope for a re-test.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

Italy’s Government Crisis adds Risk to Outlook for Economic Recovery and Public Finances

The collapse of Prime Minister Giuseppe Conte’s coalition after the withdrawal of junior party Italia Viva, led by former prime minister Matteo Renzi, brings three risks to the fore for Italy.

First, prolonged political uncertainty could impede effective decision making if Conte struggles to reconstitute a robust ruling coalition. Secondly, fresh parliamentary elections, even if unlikely at this stage, could result in victory for Italy’s right-wing anti-EU political parties according to the latest polls.

The third risk is potential damage to Italy’s relations with Europe: effective management of the pandemic response and successful deployment of EU budget funds to stabilise and kick start Italian growth are in the interests of Italy’s regional neighbours – interests undermined by internal policy disagreements among Italian political groupings.

Political impasse might sour relations with other EU members

European institutions may be concerned that Italy’s political parties are embroiled in domestic power disputes rather than focusing on tackling the pandemic and putting to good use the large amount of resources that European partners have entrusted the country with. Italy had a credibility gap at the onset of the pandemic, with an uneven record in fully and efficiently absorbing EU funds. The country is one of the primary beneficiaries of the Next Generation EU recovery fund with allocated loans and grants of about EUR 209bn.

So far, political tensions have had no significant impact on investor confidence, however, unlike in earlier Italian political crises, due to the ECB’s supportive monetary policies. The spread between 10-year Italian government bond yields and that of German bunds rose to around 120bps before declining to around 113bps at the moment, leaving Italy able to borrow at near record low rates.

Italy’s large budget deficit is a concern without a robust economic rebound

The pandemic is still spreading fast. The government has extended a state of emergency to end-April as vaccination scales up.

Pandemic-related government spending – including an additional EUR 32bn (1.8% of GDP) support package announced last week – and a wider fiscal deficit continue to adversely affect the outlook for Italy’s public finances. We forecast a budget deficit of around 9% of GDP this year, after an estimated 11.5% in 2020, with public debt increasing to nearly 160% of GDP and continuing to rise thereafter, underlining the urgency of addressing the public-health crisis promptly.

Conte’s government has agreed on measures to solve structural economic bottlenecks within its national recovery and resilience plan (PNRR). The integration of NGEU and national fiscal stimulus would result in EUR 311bn allocated to six strategic missions over 2021-26, including accelerating digitalisation and the green transition, encouraging innovation and addressing social inclusion. The government has identified accompanying judicial, civil service and tax reform, without, for the moment, providing details.

Rome is counting on fiscal stimulus, ambitious reforms to generate faster growth

The government is counting on the PNRR to boost the economy by 0.5% of GDP in 2021, with the cumulative impact on output equivalent to more than 3pp by 2026, which, together with high forecasted primary surpluses, could return Italy’s public-debt ratio to pre-crisis levels by 2031.

This upbeat scenario from the Italian authorities relies on accelerating reforms to ensure the Italian economy sustainably grows faster – hence the danger of any prolonged political impasse in Rome that stymies decisive economic and fiscal policy making.

For a look at all of today’s economic events, check out our economic calendar.

Giacomo Barisone is Managing Director of Sovereign and Public Sector ratings at Scope Ratings GmbH. Dennis Shen, Director, and Giulia Branz, Associate Analyst, contributed to writing this commentary.

Will Inflation Return?

Chief Market Analyst of XTB group discusses key topics and potential market scenarios.

Watch this video to learn:

  • Inflation outlook for 2021
  • What higher inflation would mean for markets
  • Market situation on Gold, DE30, EURUSD
  • Key events for the week ahead

Top news this week include:

  • Biden’s inauguration (Wednesday)
  • US housing starts (Thursday)
  • Flash PMIs (Friday)

For a look at all of today’s economic events, check out our economic calendar.

Darkest Before Dawn

This includes the release of the preliminary January PMI figures at the end of the week. Japan is extending its national emergency to another five prefectures, which collectively account for over half of the nation’s GDP. Germany’s Merkel, not given to hyperbole, warns that the lockdown may last ten more weeks. The Dutch do not appear far behind. England is talking bot tightening its restrictions. Even China appears to be experiencing a flare-up. The pandemic is out of control in the US, although the curve appears to be flattening in some areas.

It was widely recognized that the virus and vaccine are going to dictate the economic story in 2021. The new variant of the virus is more contagious and the roll-out of the vaccine has been frustratingly slow in most countries. The recovery in Q3 seen among the high-income countries was a dramatic snapback but for many, it was not the beginning of a sustained recovery. That recovery may be several months away. The point is that the economic risks for the remaining Q4 20 data and for Q1 21, which just began, are on the downside.

If that is indeed the case, then why have bond yields risen? Is this another disconnect between Main Street and the House of Finance, like stocks rallying during the pandemic? It is darkest before dawn and whether it is four months or six months, the investors expect better news in the second half of the year. At the same time, there will be a new stimulus push in the US. The UK Chancellor of the Exchequer will have to extend aid as the lockdown is extended and intensified. It is likely Germany will have to, as well. Italy’s projected debt issuance is a third higher than it was a couple of weeks ago.

At least four Fed officials have said they could consider tapering before the end of the year. To be specific, the four are regional presidents, while the governors, including Powell and Clarida, have played this down. Currently, the Fed is buying $80 a month of Treasuries (about 55% have been notes of 4.5-years or less before maturing and about 13% in the 20-30 year bucket) and $40 bln a month in Agency mortgage-backed securities. No one is saying that tapering is imminent and a majority of officials that have spoken suggest it does not look particularly likely this year at all. That was also the thinking in last month’s primary dealer survey conducted by the Federal Reserve.

Yet if tapering is not the real culprit for the sharp rise in US yields this year, what is the driver? Where you begin your narrative points you in the direction of the answer, In one telling, the US 10-year yield has risen by around 45 bp since the election as investors discounted greater supply and became more committed to the reflation trade, which means higher real rates, and arguably a sensitivity for higher inflation. At the same time, the price of oil has surged.

The February WTI futures contract closed in October near $36.5. It approached $54 a barrel before profit-taking kicked-in ahead of the weekend. Recall that end of last January it was around $50.50. The deflationary thrust from oil prices has ended. Inflation expectations often track significant moves in oil prices.

Asian demand, including China’s apparent inventory accumulation, drove industrial metal prices higher at the end of last year. On the other hand, supply concerns following last week’s disappointing report on US plantings saw corn and soy prices rise to 6-7 year highs, and cotton traded at a two-year high. The CRB index has risen by over 22% since the end of October.

Even the coming Treasury supply may be exaggerated by partisans. The idea from both sides is that Biden will press ahead with the Democratic control of the legislative branch to push through the rest of the $3.2 trillion bill passed by the House of Representatives last year. However, we suspect it is more likely that Biden, judging from his disposition and that he learned from his experience with Obama, will avoid antagonizing the opposition and souring the relationship from the get-go. Instead, he is likely to find a compromise and make it bipartisan even if it results in a small package. In appointments and temperament, Biden is moderate.

Biden will be inaugurated on January 20. The day before, Yellen will speak at her confirmation hearings. In addition to broad economic issues, she will likely be asked about the dollar. As an economist, she recognizes that ideally one wants the currency to move in line with policy, otherwise it blunts or undermines it. At the Federal Reserve, she recognized that dollar policy is a Treasury remit. That makes it her call now.

The “strong dollar” mantra that existed before 2016 cannot simply be returned to now. A new formulation is needed to confirm that the US will not purposely seek to devalue the dollar to reduce its debt burden or for trade advantage. To signal a multilateral spirit, Yellen may be best served by reiterating the G7 and G20 stance that markets ought to determine exchange rates, that they should move in line with fundamentals, and avoid excess volatility. It does not have to be the final word, but as the first word, it would be reassuring.

Four G10 central banks meet in the coming days. The gamut of outcomes is likely, with the ECB, ironically, being the least perhaps the least interesting. Since it met on December 10, the pandemic has gotten worse and social restrictions and lockdowns have intensified and lengthened. The uncertainty of the US election and UK-EU trade negotiations has been resolved. Key hurdles to the EU’s budget and Recovery Fund were lifted.

The day before the last ECB meeting, the euro settled near $1.2080. It settled last week around $1.2150. March Brent was trading a little below $49 is rallied to almost $57.5 last week before consolidating. The 10-year German Bund yield has risen around 10 bp (to around minus 50 bp) and Italy’s premium has softened from almost 120 bp before the December meeting to almost 100 bp before widening again (115 bp) amid the political challenges in Rome. There is little for the ECB to do now.

The extension of the emergency in Japan to cover the area which generates more than half of the country’s output raises the downside risks. The central bank is likely to formally recognize this in one or two ways. It may shave its downgrade its qualitative assessment. It could also adjust its forecasts. In its last forecasts, issued in October, it anticipated the economy to contract 5.5% in the current fiscal year. Its previous forecast was for a 4.7% slump. The BOJ could also reduce the projection of growth for the next fiscal year, which was seen at 3.6%, up from 3.3% last July.

While peak monetary policy may generally be at hand, the Bank of Canada may be an exception. The overnight target rate sits at 25 bp. It is clear that officials do not want to adopt a negative rate, but Governor Macklem has suggested the lower bound for Canada maybe a little lower than where it is now but still above zero. Given the economic consequences of the spreading virus and some disappointing high-frequency data, the market (overnight index swaps) has a few basis points of easing discounted. It may not exactly be clear what a small rate cut achieves, but last year, the Bank of England and the Reserve Bank of Australia delivered small moves of 15 and 10 bp respectively.

Before this intensification of the virus, the Bank of Canada had seemed to be a candidate for an early exit from emergency policies. Now Norway’s Norges Bank appears at the front of the line. At its last meeting in the middle of December, the central bank brought forward its anticipated first hike to the first half of 2022. Since the December meeting, the high-frequency data points suggest that economic activity and prices are more resilient than feared.

The economy contracted by 0.9% in the three months through November. It was also half as bad as economists projecting. Underlying CPI, which adjusts for tax changes and excludes energy, rose by 3% year-over-year in December. The record drawdown from the sovereign wealth fund provided an early and strong fiscal cushion.

Two emerging market central banks of note meet as well next week. Turkey’s new central bank governor Agbal has made several steps that have given notice that there is a new economic regime. On Christmas Eve he delivered a 200 bp hike outstripping median forecasts for a 150 bp move. The one-week repo rate now stands at 17%. Inflation reached 14.6% last month.

Since the end of last October, the Turkish lira has been the strongest currency in the world, appreciating by about 13.4% against the US dollar. It is still off a little more than 19% since the end of 2019. Over the past three months, the yield on its 10-year dollar bond has fallen by about 105 bp to 5.60%. The market is signaling another rate hike is not needed.

The South African Reserve Bank can also stand pat, though for different reasons. SARB cannot afford to cut any further. Its repo rate is at 3.5% and December CPI stood at 3.2%. After cutting by 300 bp last year, the central bank held steady at the last two meetings of 2020. The implied policy path of SARB’s projections points to a rate hike in Q3 and Q4 this year., though we are a little skeptical that it can be delivered.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

Stimulus Doesn’t Always Stimulate – Pushing On A String

According to the dictionary,  stimulus is “a thing that rouses activity or energy in someone or something; a spur or incentive”.
Besides spur and incentive, other synonyms for stimulus are boost, impetus, prompt, provoke, etc.
Much discussion recently has centered on ‘stimulus’ checks to individual citizens and taxpayers. Within a nine-month period, two specific rounds of stimulus checks were issued.
The legislation that authorized the issuance of stimulus checks to individuals also included liberal increases in unemployment benefits and financial aid for small businesses.
The checks, increased unemployment benefits, and aid for small businesses are forms of financial stimulus; but, the legislation is referred to as an “economic stimulus package”.
The distinction between the terms financial and economic should not be overlooked.
The purpose of the financial incentives included in the legislation is to promote economic activity. It was a response to the horrendous decline in economic activity that was precipitated by the response to the Covid-19 pandemic.
Very literally, though, the financial incentives were an attempt to stave off economic collapse; or at least buy some time. This is true notwithstanding attempts by politicians of all stripes to justify the measures in more humane terms.


The first fifteen years of this century were spent in reverse and recovery modes. The trillions of dollars that have been created and spent were reactions to financial and economic catastrophe, which continue to increase in volatility.
Which brings us back to the title of this article. With artificial stimulants, such as certain drugs, there is an expectation of desirable positive effects from its use.
Over time, the positive effects of the stimulus become muted and lose their potency. It takes higher doses and more frequent use of the stimulus to create the same original results. Remember how long it took to bring the economy back to a level reasonably commensurate with its activity prior to the credit collapse in 2007-08?
Some were expecting an overwhelming inflationary surge due to the (at that time) historically large amounts of money and credit creation. Some even expected runaway inflation, but it did not happen.
Also, over time, the cumulative negative effects of the stimulus take their toll. For example, the Federal Reserve has been inflating the supply of money and credit intentionally for more than a century.
The cumulative negative effects of that intentional inflation have resulted in a loss of purchasing power for the US dollar of ninety-nine percent.
An excellent example of the declining effects of continued money and credit creation by the Fed is seen on the chart (source) below:



It is clear on the chart that each dollar of increasing debt provides for less and less economic output (GDP, Gross Domestic Product).  The results of debt stimulus for the economy have grown weaker and weaker since 1980.
Noteworthy is the fact that it now takes more than one dollar ($1.27 in October 2020) of debt to produce one dollar of GDP. Anything in excess of 100% (a 1:1 ratio Debt/GDP) is a losing effort; the losses are growing.


Sometime after the distribution of stimulus checks to individuals last April and since then, there has been a growing resistance to sending out additional stimulus checks. When the recent checks were authorized, the amount ($600) was significantly smaller than the first ($1200) checks.
Some of our representatives did not think that the first round of stimulus checks to individuals had their desired impact. It was hoped, and intended, that recipients would spend the money; but evidence indicated that much of it was held or saved.
The huge amounts of dollars and cheap credit gifted to us by the Federal Reserve and the US government seem more illustrative of emergency patchwork rather than stimulus. We should all hope it works as good as Flex Seal.

Earnings Season vs Stimulus. Is SP500 Setting for Pullback?

President Trump took to Twitter last night in a +2 minute video saying the people who stormed the Capitol “do not represent our country” and that lawbreakers “will pay.” He conceded that Congress had certified the election results and that “a new administration will be inaugurated on January 20”. Trump also added, “Serving as your president has been the honor of my lifetime.”

Democrats were declared the winners in both Georgia Senate runoff elections last week but the real headlines came from DC where the Capital went into lockdown, officials were evacuated, additional National Guard troops were called up, and a female Veteran was shot and killed.

Wall Street seems to be viewing the violence, upheaval, and Georgia elections as just another day. However, if the violence spreads to more cities and things continue to escalate between now and the inauguration, I suspect some large investors might get increasingly nervous and a bit uncertain which could shift the dynamics.

Fundamental analysis

Most large investors also believe the Treasury, which is slated to be led by a very dovish Janet Yellen (pending confirmation), will push against any big tax hikes as such moves could impede the economic recovery and slow job creation. Remember, Yellen is a huge proponent of working towards and deploying tools to reach full-employment.

Some on Wall Street are now arguing that the so-called “old economy” stocks in the Dow can benefit greatly from more economic stimulus from the Democrats while tech stocks could be at risk from stricter antitrust scrutiny.

Expectations are also very high for additional and generous stimulus with the Democrats now controlling the Senate. Bulls see the extra government help keeping the economy supported until we are “over the hump” so to speak.

Economists expect the labor market will probably remain sluggish as the U.S. moves through this wave of the virus. Bulls argue that weakness in some areas of the economy is being more than made up by big gains in other areas, such as Housing and Manufacturing. Most of the experts see vaccinations being widespread and a return to normal taking shape by this Summer or possibly sooner.

Turning to new trading week, there is quite a bit of key economic data on the calendar including the Consumer Price Index and the Fed’s Beige Book on Wednesday; Import/Export Prices on Thursday; and Business Inventories, the Producer Price Index, Empire State Manufacturing, Retail Sales, Industrial Production, and Consumer Sentiment on Friday.

Fourth-quarter earnings season also gets its “unofficial” start with big banks JPMorgan, Citigroup, and Wells Fargo announcing results on Friday. Earnings season can become a fundamental trigger for deep pullback in the stock market.

Technical analysis

SP500 is approaching 168.8 Fibo extension at 3860. Cycles and Intermarket Forecast point possible peak between January and February. Advance Decline Line has been just light in the darkness for SP500 traders during recent years. It is neutral now and likely it will take another few weeks for ADL to form some signal.

Fed Funds Forecast continues to support bullish bias in the stock market. With all that in mind investors have to be cautious with their positions as the risk of deep pullback is increasing.

For a look at all of today’s economic events, check out our economic calendar.

Brexit: Preliminary Trade Deal avoids No-Deal, but “Slow Burn” of EU-Exit Costs Stresses British Economy

While the UK is expected to ultimately maintain significant access to the single market, the new customs border and uncertainties around the access to the single market for UK services sectors raise the economic consequences of Brexit.

We had expected that the UK would strike a free-trade agreement with the EU despite the market’s concern about a possible “no-deal”, so the last-minute accord in December was no surprise.

The rolling over of tariff- and quota-free trade in goods was largely in line with the roll-over of existing preferential trade arrangements that the UK has pursued with other trading partners outside the EU as an intermediate step in exiting first the customs union.

However, exit from customs union – to be itself phased in over three stages and in full force only from 1 July 2021 in the case of imports to the UK – has created trading friction and produced immediate economic losses as companies see longer delays, higher operating costs and lower productivity. This is even though grace periods granted – such as a one-year standstill on rules of origin documents – have eased disruption at the border.

UK gains sovereign privileges; trading regime to gradually reduce areas of long-run divergence

The trade and cooperation agreement has prevented a devolution to WTO-based trading rules with the EU. In addition, a principle of “managed divergence” implies either party reserves the right to retaliate in the case the other side is considered to have gained an unfair trading advantage.

The UK has secured greater sovereign privileges in determining its own laws, but cooperation with the EU on regulation under a new “partnership council” and capacity for the other side to impose tariffs – in the case deregulation is considered unfair – are expected over time to reduce disparities.

The mechanism should space out any areas of divergence and resulting trading frictions over a longer period. While December’s arrangement largely excludes services, this is consistent with the highly incremental and drawn-out Brexit that Scope has long anticipated, under which divergence with the EU is taking place over successive phases after extensions of Article 50, a transition state, lately an exit from the customs union with associated grace periods, and, in the end, agreements around additional, complementary trading agreements with the EU for sectors excluded from December’s preliminary arrangement.

New trade deal only initial step in shaping new long-term EU-UK economic partnership

December’s trade agreement, while thin, was never intended as a singular settlement. It is rather a first fundamental framework around which a more extensive set of trading agreements will ultimately be agreed to define the long-term EU-UK economic relationship.

As services were hardly discussed to date, with an agreement on goods trade the priority during the limited 10-month negotiating period in 2020, the focus will now be on reaching supplementary arrangements for critical services sectors including financial services.

The two sides are seeking a non-binding memorandum of understanding by March 2021 on the export of financial services, including services such as euro clearing currently operating with temporary access to EU markets as talks continue. However, more time is likely to be required than March before Brussels ultimately grants fuller EU access for UK financial firms even after a non-binding framework is in place.

We expect any such agreement or agreements around financial services to be “dynamic” – granting regulatory equivalence and thus full market access for select UK financial industries to “passport” to the single market, and vice versa, but with an understanding that such equivalence can be retracted should regulatory standards diverge – mirroring the agreement in goods.

A soft Brexit, but “slow-burn” from drawn-out exit process to incur further costs

Long term, we expect that the outcome of negotiations to reflect a “soft” Brexit. Non-regression clauses embedded in trade agreements and other limits on UK-EU trade divergence – such as the Irish Backstop that would reproduce any friction in trade with the EU with friction in trading inside the UK itself, damaging the UK’s internal market – will limit the degree of separation in the longer run. This will support preferential access to the single market for UK businesses long term.

The final EU-UK relationship could resemble something akin to a Swiss-like framework except with a faster-track negotiating process given support in accelerating talks from the series of self-imposed cliff-edge Brexit deadlines – and negotiated in reverse with the UK having started from fully-frictionless trade.

However, there will be persistent uncertainty due to the constant risk that changes in UK law could reduce access to the single market, so UK-based businesses are likely to continue to relocate activities to the continent – ensuring a steadily growing cost from a “slow-burn” Brexit even as the cliff-edge form of an abrupt no-deal exit has been repeatedly avoided.

City of London faces permanent damage after losing full single-market access

In addition, the City of London faces permanent damage in waiting for a definitive agreement on financial services in the months ahead during which select UK financial services have at least transitionally lost passporting rights, such as investment banking and securities trading on behalf of clients in those EU countries where national regulators have not as yet extended grace periods to UK firms. In the end, the UK has secured a deal for the trade in goods where it has a trading deficit with the EU, but not one as comprehensive to date in services where it stands to see losses to a trading surplus.

The UK enters this new Brexit phase amid the near-simultaneous introduction of a third national Covid-19 lockdown, which will add to stress on its public finances. We see upside pressure on government debt already estimated at more than 110% of GDP this year, up from 85% in 2019 in view of the double-dip economic contraction we have anticipated and the additional fiscal stimulus to address economic fallout from lockdown plus the economic and fiscal costs of the exit from the single market and customs union.

The latter costs, while more modest and much more spaced out by comparison with the sudden, severe cost of the Covid-19 crisis near term, might pose more significant long-term economic and institutional consequences.

Download the full Scope Ratings comment.

For a look at all of today’s economic events, check out our economic calendar.

Dennis Shen is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.

Consumer Prices Are Not Reflecting Higher Inflation; Neither Is The CRB

When the Federal Reserve responded to the financial crisis of 2007-08 with hugely unprecedented monetary expansion efforts, many thought that it would lead to runaway inflation and collapse of the U.S. dollar. It didn’t; and the expected higher inflation rates did not occur.

What did happen is that consumer prices remained reasonably stable and we even saw lower prices in 2009 and 2015.

Noteworthy is the fact that the CPI rate of increase has trended lower ever since the summer of 2008. In other words, since the Fed began large scale bond purchases in 2008 and engineered lower interest rates, the expectations for much higher rates of inflation have gone unfulfilled.

That seems to be the case now, as well. Even in light of huge money creation by the Fed during 2020, consumer prices are not signaling inflation to any worrisome degree, if at all.

Inflation rates have actually been trending down for more than forty years. The last double-digit rates of increase for the CPI occurred in 1979, 1980, and 1981. Also, the average annual rate of inflation has declined in every decade since the 1970s.


Commodity prices are a barometer for higher rates of inflation. Below is a chart of the Commodity Research Bureau Index (CRB) reflecting price action for the past twenty-five years…

After peaking in 2008, the CRB has trended down in a series of lower highs and lower lows.

Some facts for consideration:

1. At its low point earlier this year in April, the CRB was down seventy-five percent from its peak in 2008.

2. Even though commodity prices have increased significantly since April, the CRB is still down thirteen percent for 2020.

In general, higher prices are a reflection of the loss in purchasing power of the US dollar. The loss in purchasing power of the US dollar and the higher prices are the effects of inflation.

At this point in time, both the CPI (consumer prices) and the CRB (commodity prices) indicate that the effects of inflation are not meeting expectations. No wonder the Fed is concerned. The money drug is losing its potency.

(Also see Fed Inflation Is Losing Its Intended Effect)