Macroeconomics: The Day Ahead – 19 January 2021

Good Morning: The Long & the Short of it and The Bigger Picture

Written by Marc Ostwald, ADMISI’s Global Strategist & Chief Economist

• Minimalist data and events schedule to focus on German ZEW, Yellen confirmation hearing and Italian Senate confidence vote; US corporate earnings, Finland 10-yr auction, UK 25-yr Gilt syndication
• U.S.A.: spurious debate on Biden ‘dollar policy’, key remains ability to pass fiscal and other legislation in finely balanced SenateU.K.: austerity ghouls continue to stalk the halls of the UK Treasury,  a poor signal in the face of dual Covid-19/Brexit challenge

EVENTS PREVIEW

Outside of the backward looking German ZEW survey, there is nothing on today’s data schedule that is likely to have any significant impact, while the events schedule is equally meagre, featuring Yellen’s confirmation hearing as Treasury Secretary, the regular EU EcoFin meeting and the annual Atlantic Council Global Energy Forum. The forecasts for the ZEW survey are wholly unsurprising, with the Expectations seen up to 59.4, mirroring the DAX, while the Current Situation forecast to dip to -68.3 reflecting extended  restrictions on movement, and the country’s struggle to rein in a stubbornly high infection and rising mortality rates. The Italian Senate confidence vote in PM Conte’s govt will be the other point of focus for the day.

In terms of Yellen’s testimony, there appears to be some debate about her comments committing to a “market determined” rather than a “strong” USD, this is agreed G20 policy as well as being in the text of the USMCA and the phase one agreement with China, so the debate looks to be spurious. This is perhaps all the more so, as previous US regime commitments to a ‘strong dollar’ policy have all too often been nothing than empty rhetoric. In effect all Yellen is reverting to is the official dollar narrative that had been in place since Rubin was Treasury Secretary up until the Trump administrations. The real test for Biden and Yellen will come almost immediately with the already announced $1.9 Trln spending package, given that the Democrats are very clearly divided between the fiscally conservative, and those on the left such as Saunders and Ocasio-Cortez who want much more spending and taxation, with any dissent from the Democrats in the Senate set to torpedo legislation. During Yellen’s tenure as Fed chair, there was little evidence of her being able to build bridges across the political divide, which will be critical to passing a good deal of legislation, not just fiscal. Tangentially to this, the rise in longer-term US Treasury yields (see chart) is almost completely a reflection of higher inflation expectations, rather than a rise in ‘real’ yields, which for the Fed is welcome (as per last week’s speeches by Powell and Clarida); it would be a rise in real yields that the Fed would be far more concerned about.

In the UK, news that Chancellor Sunak is planning to raise corporation tax at the April budget serves as a reminder that even in the face of the enormous dual challenges of fashioning a Covid-19 and post Brexit recovery, the ‘austerity ghouls’ remain very much a powerful force in the UK Treasury, which suggests that the risk of a premature withdrawal of fiscal support that well hobble the UK economy for a number of years thereafter is a very  real one. This is not to say that corporation tax should not be raised as the economy eventually gets back on to its feet, but hardly fits with Johnson’s poorly conceived ‘Singapore on Thames’ idea, nor encouraging a more dynamic economy outside of the EU. In fiscal terms, timing and indeed the need for spending to be well planned and implemented in the most efficient way possible has never been more important, not just in the UK but across the developed world (in that respect Singapore does serve as a good example, and ironically Germany does not!).

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