The return of the Queen

The Trump impeachment vote was overshadowed by momentous scenes at 0530 this morning in South Jakarta, as Queen Cricket returned to her palace. The unannounced royal trip, lasting two nights, led to frantic searches of the wider realm by her servants. Her feline highness announced her arrival loudly at the front door of the palace in the early hours.

In other news, financial markets diverged once again overnight. US equities traced out a modestly positive day with technology outperforming as usual. US yields fell overnight after an excellent bid to cover ratio for the 30-year bond auction overnight. That appeared to assuage inflationista’s after US inflation printed right on expectations at 1.40%. Interestingly, the US dollar rose overnight, perhaps buoyed by bond inflows after a very heavy issuance by the US Treasury this week. That pushed gold slightly lower and sparked some profit-taking in oil.

Fed sends out dovish message

Fed officials also calmed inflation worriers overnight with Governor Harker, Rosengren, Clarida and Brainard all speaking. Harker said that the Fed would basically keep rates lower for longer. Brainard, always an uber-dove, said much the same and added that the Fed could increase bond purchases if necessary. Governor Clarida noted that when the Fed does raise rates, they will only have to raise them a short distance to reach a neutral policy stance. He added that the Fed would like to see one year of two per cent inflation before tightening.

All in all, the Fed produced more doves than a soap factory and US bonds duly rallied pushing yields lower. It was all the more surprising than that the US dollar strengthened overnight. The move lower down in US yields could be a short one, as only Governor Brainard suggested that the Fed could increase bond-buying, thus capping yields even if inflation rises. Depending on your point of view, you could cut the comments cake either way. US yields could still advance with inflation if the Fed chooses to hold rates low and decline to cap yield increases Bank of Japan-style. That may explain why the US dollar continued to rise overnight and implies that the dollar short squeeze still has room to run.

President-elect Biden will announce his follow-on fiscal stimulus wishes today. Current thinking is that USD1.3 trillion will be added to the wish list. CNN is reporting that Biden aides are throwing around a USD2 billion number. More visibility on other Biden initiatives and their price tags should start appearing in the coming days. Therefore, the move lower in US yields may be relatively short-lived, potentially giving more momentum to the US dollar short squeeze. The Byrd Rule will probably make the last number particularly challenging to get through the Senate, with 60 votes needed to circumvent it. Markets are likely to concentrate on the headline, and ignore the nuts and bolts detail, as is their wont.

This morning, in Asia, Japan’s Machine Orders for November defied expectations, rising 1.50% MoM, vastly higher than the fall of 6.20% anticipated. We may yet see December’s number reflecting the Covid-19 woes in Europe and the USA. Overall, it dovetails nicely with the strength seen in manufacturing worldwide, despite the virus resurgence.

For December, Japan’s PPI was also surprised, rising 0.50%; well above the expected zero per cent. Before readers get excited about inflation finally reappearing in Japan after 30 years, I would note most of the increase can be attributed to rising energy costs. South Korean Import Prices fell 10.20% YoY for December, with Export Prices dropping by 5.40% YoY. The falls can be attributed to the won’s impressive appreciation. The market’s attention is more focused on the Bank of Korea rate decision tomorrow morning, where we expect the BoK to remain unchanged.

China’s Balance of Trade has just been released and shows another impressive set of data. In dollar terms, Exports YoY rose 18.10% (15.10% exp), and Imports YoY rose by 6.50% (5.0% exp). The Trade Balance expanded to USD78.17 billion, again, well above expectations. The data may cause some upward changes in forecasts to China’s GDP release due on Monday and be a market positive today. China’s economic leadership in 2021 continues unabated and bodes well for the regional Asian recovery as well.

With President-elect Biden shooting for the moon on stimulus, and China data suggesting its economic juggernaut remains on track, financial markets should enter the last part of the week on a positive frame of mind. Any rise in US yields and the US dollar should not be enough to derail further rallies in equity markets and support energy.

Another boost for markets could come from Johnson and Johnson, who have released preliminary data from their phase one and two trials for their Covid-19 vaccine. Early data showed encouraging results with initial phase three data due at the end of the month. The J&J vaccine is a potential game-changer in that it is a one-shot vaccine and does not require special cold storage. Success in phase three could see another burst in activity in the cyclical recovery rotation trade at the end of the month.

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