Key events in developed markets next week

Joe Biden will be keen to build momentum behind his $1.9tn fiscal support package for the US economy, but given many in the Republican party have re-discovered fiscal conservatism it may not be straightforward. Democrats will need to work with moderate Republicans to get past the Senate filibuster that require 60 Senators putting the proposals to a vote. This is obviously possible, but if it isn’t, there is a work-around via the budget reconciliation process. This allow a simple majority to adopt certain bills addressing entitlement spending and revenue provisions, thereby prohibiting a filibuster. However, it is not available for all of the package, including the money for local and state governments. This implies some compromises will end up being made.

We also have a Federal Reserve policy meeting, but no changes are expected. The recent pick-up in market inflation expectations and bond yields is likely going to have to be addressed in the Q&A session that follows. We suspect the Fed will retain the line that there are still economic risks and significant spare capacity in the economy that will help to keep inflation contained while they are likely to dismiss talk of a near-term tapering of their $80bn of Treasury purchases and $40bn of MBS purchases every month for similar reasons.

Data-wise the highlight will be 4Q GDP growth. Expectations have been lowered marginally on the back of weaker consumer spending numbers and falling employment in December, but we should still expect a 4%+ growth figure. We are more worried about Q1 given the loss of economic momentum following the latest Covid spikes and the reintroduction of containment measures in many areas. Nonetheless, with vaccinations getting underway and household savings levels at record highs there are clear reasons for optimism regarding 2Q21.

The UK’s furlough scheme was originally due to expire last October, to be replaced by a condition that staff were brought back on a part-time basis to be able to continue receiving some state wage subsidies. While that ultimately didn’t happen – and the original scheme was extended until this April – redundancies increased ahead of that original deadline as firms hard-hit by the pandemic prepared to reduce headcount.

Next week’s job figures will give us a more complete picture of how this increased unemployment. There’s some evidence firms began taking action weeks before the changes – redundancies peaked in September, and weekly data shows the jobless rate had correspondingly climbed by around 1 percentage-point to 5.5% in late October. It is likely this will have pushed towards 6% in November (though remember the headline figure we get is a three month average).

Will it rise further in 2021? Quite possibly, though a lot depends on how/when the furlough scheme is unwound. If this happens before the hardest hit sectors are reopened, then we could see the unemployment rate rise towards 7-8%