EC Always Darkest Before Dawn

The upcoming economic news is likely to be dreadful. And if it is not dreadful, it will mostly be ignored. 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 drawn to hyperbole, warns that the lockdown may last ten more weeks. The Dutch do not appear far behind. England is talking about 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 seen among the high-income countries in Q3 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 away, 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 billion 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 billion 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.

1 2 3 4
View single page >> |

Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

more
How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.