While we know November was an amazing month for markets and the world on the heels of the Pfizer and Moderna vaccine news, what has really surprised me is the behavior of long term interest rates that instead lived on its own island. The 30 yr bond yield (the maturity I like most right now for market messaging) started November at 1.66% and closed it at 1.57%. The 10 yr yield went from .88% to .84%. Now REAL rates did fall as inflation expectations rose in the month, as they should have with the CRB commodity index up 10.5%. Is the action saying the Fed is going to extend their maturity purchases in their QE5 program (to further goose the housing market? why?), is it focused on just the short term drag in the coming months from the Covid flare up? Is it not confident that even with a vaccine, economic growth will still take a while to heal? I’m not sure but surprised by the bond response. The 10 yr yield jumped 10 bps on the day of the Pfizer news to .92%, peaked at .98% two days later and gave it right back. The 30 yr yield did the same. I still think 2021 will be a world of hurt for long duration fixed income as the vaccine rollout picks up steam but the action this month definitely was a surprise.
5 yr 5 yr US inflation swap, highest since May 2019 at 2.23%
With respect to the S&P futures, it got as high as 3668 on November 9th when Pfizer released its efficacy news so that’s obviously the level to watch here.
China’s private sector weighted November manufacturing PMI rose 1.3 pts m/o/m to 54.9 and that was above the estimate of 53.5. Caixin said “the economy increasingly returned to normality as fallout from the domestic Covid-19 epidemic faded. Both demand and supply accelerated as the subindexes for total new orders and output reached 10 yr highs. Overseas demand improved substantially as the measure for new export orders stayed in expansionary territory for the 4th month in a row, rising from the previous month.” Just as we saw in the US though, “There are clear signs that manufacturers were adding to their inventories.” Also, all this growth came with rising cost increases. “Inflationary pressures grew as prices rose at a faster pace.”
Finally, I do want to highlight this quote from the press release because it is something that every central bank will face in 2021, “deciding how to gradually withdraw the easing policies launched during the epidemic will require careful planning as uncertainties still exist inside and outside China.” The Shanghai comp closed up 1.8% and the H share index by 1% in response. Also, the yuan is higher, as are all currencies again vs the dollar. Copper is up by 1.4% and back to yesterday’s intraday high.
Here are the other Asian manufacturing PMI’s: Australia revised to 55.8 from 56.1 initially but up from 54.2 in October. South Korea 52.9 vs 51.2, Taiwan 56.9 vs 55.1, Japan 49 vs 48.7, Thailand 50.4 vs 50.8, Philippines 49.9 vs 48.5, Indonesia 50.6 vs 47.8, Vietnam 49.9 vs 51.8, Malaysia 48.4 vs 48.5 and India 56.3 vs 58.9.
Also out was the South Korean November trade data where exports rose 4% y/o/y, about half the estimate of up 7.5% while imports fell 2.1% as expected. When looking at the value of daily shipments saw export growth was even better, up by 6.3% y/o/y. Tech exports led the growth.
The Japanese October employment data was as expected with an unemployment rate of 3.1% vs 3% in September as the rise in unemployed offset the job gain of 30k. The jobs to applicant ratio rose to 1.04 from 1.03. This was 1.57 in January though.
Shifting to Europe, the November Eurozone manufacturing PMI was revised up slightly to 53.8 from 53.6 initially but that is down 1 pt from October. Markit said “Although the rate of expansion cooled from October’s 32 month high amid new lockdown measures, the sustained expansion should help to soften the economic blow of Covid 19 restrictions, which have hit the service sector hard. The survey therefore adds to evidence that the region will avoid in the final quarter of the year a similar scale of downturn recorded in the 2nd quarter.” Germany was the main driver of growth as “Excluding Germany, output growth came close to stalling, and new order inflows fell for the 1st time since June. The resulting divergence between Germany and the rest of the region in terms of production growth is now the widest on record.” While the Eurozone reported another decline in CPI in November, cost inflation grew in the month. “Shortages of inputs are meanwhile contributing to higher price pressures, with suppliers’ increasingly able to raise prices amid a sellers’ market for many key inputs. Such a restoration of pricing power bodes well for profits and helps ease broader deflationary concerns.”
That November Eurozone CPI print was down .3% y/o/y, the same fall as seen in October. The core rate was up by .2%. I see prices only going higher from here and the markets are too as the 5 yr 5 yr euro inflation swap is up 1.5 bps today to 1.24%, just off the highest since February. The ECB shouldn’t look at the CPI stat and say ‘let’s do more’ but should instead ask ‘why hasn’t what we’ve been doing for almost a decade hasn’t worked?’ All they need to do is look at a chart of European bank stocks and they’ll have the answer.
5 yr 5 yr euro inflation swap
The UK manufacturing PMI was revised to 55.6 from 55.2 initially and that is up from 53.7 in October. Much of this was inventory restocking. “The weak point was the consumer goods industry, which saw lower output and new order intakes amid depressed household sentiment caused by mounting job losses and the UK re-entering lockdown.” With respect to price pressures, “Input cost inflation accelerated to a 2 yr high in November. Companies responded by raising their average selling prices to the greatest extent in the year so far.”
Separately, there is hope that we can have the outline of a Brexit deal by the end of the week based on comments from the Irish PM and French European Affairs Minister.