Weekly View - Soothing sounds
The ending of election uncertainty and welcome news on the vaccine front propelled the US Composite PMI figure in November to its sharpest monthly expansion in over five years, whereas in Europe the Composite PMI fell back into contraction territory on the back of renewed lockdowns. But even in the US, the rebound in consumer spending is slowing and consumer confidence declining as the US experiences a resurgence in coronavirus infections while fiscal support for households brought in to deal with the first wave of the coronavirus has faded. And while the pandemic is showing signs of receding in parts of Europe, it is still spreading in the US: we therefore think economic activity in the US is liable to lag Europe on the way down and on the way back up. This means another fiscal package in the US would be all the more welcome if economic momentum is to be maintained until vaccines are rolled out. But as we move closer to a vaccine, so the prospects of meaningful stimulus diminish—something upbeat markets need to take into consideration.
As things stand, the likely scenario of a gridlocked Congress and limited fiscal stimulus mean it is likely to fall to the Fed again to do the heavy lifting to help the US economy towards a sustainable recovery. The nomination of former Fed chair Janet Yellen as Treasury Secretary is therefore welcome, marking a consensus choice that will facilitate smooth relations between the Biden administration and the Fed. Yellen lacks practical business and international trade relations experience but her nomination is one of a number that indicates a return to a more conventional US administration. We expect more consideration given to European relations as the new administration looks for allies to counter China’s influence.
In Europe, we could see the ECB soon move to prop up Europe’s faltering recovery, raising its pandemic-emergency asset purchases by some EUR500bn. Other stimulus options remain open. Overall, central banks continue to play their role in economic policies, ensuring that risk markets continue to rev up. Next worth watching out for will be any signs of a lifting of bans on dividend payments by the euro area’s healthier banks.