January 29, 2021 | 13:12
Pan´de·mo´ni·um: n. a wild, lawless uproar.
So, let’s see what transpired in the markets this week. There was a moderate risk-off move amid concerns over a sluggish vaccine roll-out and virus variants. This saw 10-year U.S. Treasury yields briefly dip below 1%, before ending the week almost unchanged at 1.07%. The U.S. dollar broke its downward trend with a modest upswing, even as the Fed pledged to keep policy wide open. Commodity prices were broadly unchanged, but with a slash of strength in silver. Major equity averages pulled back from last week’s all-time highs despite some high-profile Q4 earnings beats. Oh, and all hell broke loose in a handful of previously beaten-down stocks—as you may have heard (in fact, your dog and/or cat likely also heard)—which pretty much absorbed all the market’s oxygen.
While great sport to watch from afar, and potentially an important power-shifting development in coming years, broader market moves largely responded to traditional factors this week—and not the spectacular fireworks in a few isolated names. Still, one can’t help but get the sense that this is but one glaring example of unintended consequences from ultra-easy monetary and fiscal policies. Is it enough to actually prompt some re-think of said policies? Judging by Chair Powell’s brush-off of the question on the volatility, it certainly doesn’t seem so at this point. However, a case can be made that such speculative outbursts could hasten the end of extraordinary policies as the economy eventually returns to something close to normal. The conventional wisdom has been that the Fed’s new 2% average-inflation goal would readily allow the economy to run hot for longer. That view is going to be at least partially in doubt if we see repeats of this week’s wild action.
Meantime, back at the economy, traditional market drivers didn’t make many waves this week because there were so few surprises. The FOMC came and went with barely a ripple, with zero change in policy and almost no language change in the Statement. Powell’s comments were mildly interesting, but the key theme was that inflation posed little serious risk, and the job market was much weaker than the headline unemployment rate would suggest (he said the true rate was closer to 10%).
U.S. economic indicators were a mixed bag, but generally positive. Initial jobless claims retreated further after the concerning spike at the start of 2021, providing some hope that next week’s jobs data will hang in there (we’re calling for flat payrolls in January, albeit with a wide confidence band). There were a few upside surprises, including home prices, consumer confidence, core durable orders, the leading indicator, and the Chicago Fed’s national activity indicator. Of course, there were also a few sour notes, including a weak hand-off from consumer spending in December, and a slightly sub-consensus read on Q4 GDP. The latter was respectable at +4.0% annualized, and down 2.5% y/y; while a bit below expectations, it brings overall growth numbers back within the range of normal (after the wildly abnormal readings in the two prior quarters). We expect growth to fade further in Q1 to +1.5%, but continue to look for a robust 5% growth rate for all of 2021.
That projected U.S. rebound lines up precisely with what we now expect for Canada this year. After taking our forecast below that mark in a brief foray last week, a much-stronger-than expected pair of readings on monthly GDP for November (+0.7%) and December (+0.3%) has taken it right back up again. The main message is that the Canadian economy is dealing with the second round of restrictions much better than anticipated. We still look for a drop in January activity, but that may prove to be the low point. With the strong momentum from late last year (growth likely topped 7% in Q4), we now look for about a flat reading in Q1. As a result, we are lifting our 2021 call to 5.0% (from 4.8%), but shaving next year to 4.5% (from 4.8%).
The slightly improved growth backdrop is not confined to North America. Even the early read on Q4 activity in Europe was a bit less-bad than expected, with Germany clawing out a small gain and France’s drop not as deep as feared. Overall, it looks like Euro Area GDP likely slipped at a 2% annual rate in the quarter amid tough shutdowns—not good news, but a more manageable setback than many assumed. Elsewhere, South Korea's Q4 GDP posted a similar gain to the U.S., and its economy fell by less than 1% for all of 2020, supported both by its reliance on exports and its much better virus management.
Even prior to some of this mildly better news in many key economies, the IMF upgraded its call this week for 2021 global growth to 5.5% (from 5.2%) and 4.2% for next year. That squares almost precisely with our view (a rare occasion when we are in sync with the IMF), albeit we have some heavy-duty quibbles with the specifics. For example, they are looking for growth of just 3.6% for Canada this year (versus our 5%, and even below the BoC’s cautious 4% call), while they are a tick above our view on both the U.S. and China.
The IMF also struck an understandable note of caution on the upbeat view. Its chief economist put it succinctly: “Much now depends on the outcome of this race between a mutating virus and vaccines to end the pandemic, and on the ability of policies to provide effective support until that happens”. On that front, the latest news on the virus was generally positive this week, with new cases and hospitalizations fading in many jurisdictions. Still, the spreading new variants are keeping health authorities on high alert, especially as vaccine distribution has faltered in some regions (e.g., Canada). On the vaccine front, J&J’s highly anticipated Phase 3 results (66% effectiveness globally) were seen as mixed; our take is that it will still help bring an end to this traumatic episode.
Next weekend’s Tom Brady Bowl… sorry, Super Bowl… will bring a welcome source of entertainment in the depths of winter. Relevance to economy? The price of tickets in the re-sale market for the big game is running at a cool $12,470, up nearly 50% from last year’s game (which, in turn, was up 70% y/y from 2019; source: Statista). True, this partly reflects the fact that supply is constrained. But it also gives a very specific example of how prices can spark higher with limited supply in some service sectors in a world of steady demand. Apparently the Chiefs are the fan (and bettors’) favourite, although the Bucs will have the bizarre advantage of playing in their home stadium. The age of the quarterbacks will be a major focus, with Brady (now 43.5, but who’s counting?) almost a generation older than Pat Mahomes (25). But if you really want to feel your age, note that a certain Wayne Gretzky just celebrated his 60th birthday this past week… yes, 60.