Key events in developed markets next week

The economic strains from the spike in Covid-19 are becoming increasingly apparent. There was already a loss of momentum in the US November jobs report, but the latest initial claims data suggests the containment measures to try and protect healthcare systems are closing businesses which, in turn, are laying off staff. We should be braced for more bad news on jobs given it is likely that the containment measures and business closures will spread to more and more states.

Consumer confidence is already under pressure as health worries mount and this is prompting a decline in travel, restaurant trips and hotel stays. There is also evidence from high frequency credit and debit card transactions that spending took a downward lurch more broadly in late November. Car sales also fell in the month so we are looking for a soft figure with overall retail sales likely down by around 0.4 percentage points on the month. There could be an even bigger fall in December in the absence of a rapid and aggressive fiscal support programme given the prospect of lower employment and incomes.

Industrial production will hold up better given decent readings from surveys of the sector. There are significant order backlogs and this should ensure robust production figures this month.

Given this situation, the Federal Reserve will retain a dovish bias and continue to emphasise the need for ongoing fiscal support. With interest rates at record lows and financial conditions extremely loose there is little more the Federal Reserve can do itself. Additional quantitative easing looks unlikely, but they could potentially focus more of their current purchases at the long end of the curve, which would flatten the yield curve. But given the 10Y is still below 1%, there seems little need to do it at this stage.

Negotiators have set a deadline for Sunday to agree a deal, but like the number of deadlines that have come and gone so far in the Brexit process, there is a general sense that talks could stretch into next week.

Talks reportedly remain stuck on the issue of level playing field, and specifically what happens if either side decides to tighten up the likes of their labour/environmental standards in future. Prime Minister Boris Johnson has publicly pushed back on the idea that the UK could be open to tariffs should the EU decide to unilaterally increase these standards in the future.

But there are various solutions knocking about, not least reverting to the EU’s original proposal for a ‘ratchet clause’ – the idea that both sides would need to mutually agree to tighter standards, and only then could there be punishment should either side deviate from this new baseline.

The optimistic way of looking at this is that there is a landing zone in sight, but both sides need to signal that they have fought hard for their respective voters. But ultimately time is on nobody’s side, and while ratification on both sides of the Channel could happen in the days after Christmas, there is only so long talks can go on.

This poses a challenge for the Bank of England, which meet next week and there’s a reasonable chance there will have been no conclusion to talks before their announcement. In reality, we shouldn’t expect too much at this point – policymakers have already expanded QE and have flexibility to increase the pace of purchases if needed.