Macro Drivers While COVID-19 Remains Out Of Control

The new COVID-19 outbreak, social restrictions, business closures, and lockdowns render most of the upcoming data mostly irrelevant. Given the serious spread of the infection and the seemingly slow rollout of the vaccine, the economic data will be distorted even though the impact may not be as severe as last March and April. Policy settings are also considerably more accommodative, though it does little to address the loss of capacity, especially in services.

Manufacturing is holding up better than services, as one may expect. That is what the PMI reports showed, and what the industrial production data from Europe (November) and the US (December) are likely to show in the days ahead.

Some production will meet current demand, but it also appears to be getting a boost from replenishing inventories. The importance of the economic data may lie in the broader picture that emerges. Two elements seem particularly notable: trade and inflation.

The US reported its November trade deficit last week. The shortfall was the most in 14 years ($68.1 billion), and this is despite the US becoming considerably less dependent on foreign sources for energy. Indeed, oil and autos previously drove the deficit, in general terms. The 2020 shortfall through November was about 10% larger than in 2019.

In November of 2019, the US reported that goods trade adjusted for inflation was in deficit by approximately $77.2 billion. In November 2020, the real goods deficit stood at $96.5 billion.

China will report its December surplus. It is expected to remain largely around $70 billion, but perhaps narrowed a bit, as exports may have slowed and imports risen. Its large surplus offers prima facia evidence that the currency remains competitive, though admittedly, it is too soon to expect the impact from the yuan's 8.2% appreciation in H2 20.

Japan reports its November trade figures as part of its balance of payments report. Japan's trade balance improved in 2020. Its average monthly surplus has risen from JPY33 billion in the first ten months of 2019 to JPY148.5 billion in the Jan-Oct period of 2020, which still seems modest.

However, Japan's current account surplus is a magnitude larger (averaging JPY1.46 trillion in the first 10 months of 2020), driven by licensing fees, royalties, dividends, interest, and profits from foreign operations. Traders often do not make the distinction.

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Read more by Marc on his site Marc to Market.

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

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