Gary Gleeson
Principal | MFM Group
As we move into the holiday period, we are monitoring seven key issues in coming days and weeks:
- Will the global economy continue to surprise on the upside?
- The global economy continues to run hot by aggregate measures of GDP and other indicators. However, this is driven largely by industrial production.
- Stimulus measures have held up consumer spending but there has been a shift from services to goods. As a result, production is running hard as depleted inventories are restocked. This is evident in commodity prices and activity data such as US railcar loadings and trucking stats.
- There are signs of weaker consumer activity in the US under the current wave of COVID. This has been felt most in areas such as dining and entertainment. Retail spending remains strong although growth has slowed.
- The jobs front in the US remains reasonable. Continuing jobless claims – probably the best real time measure – are slowly but surely continuing to trend down.
- The impact of the latest northern hemisphere COVID wave needs to be watched — but at this point the economic situation remains solid. This is also reflected in credit markets, which are signalling a benign view.
- Will the US see harder lockdowns?
- COVID case data has re-accelerated in the US as post-Thanksgiving reporting flows through. The potential for harder lockdowns poses a risk to the current economic situation.
- Localised restrictions have been enacted in some areas – particularly in California last week.
- Hospitalisations and Intensive Care Unit (ICU) admissions remain the key factors to monitor. Hospitalisations are up 7% week-on-week. The rolling seven-day average of net new daily hospitalisations is around 1000 patients. This is down from 2000 in mid-November, but the next week or two will tell if this re-accelerates due to the Thanksgiving lag.
- Overall, ICU occupancy continues to sit at high levels but has not deteriorated. Average ICU occupancy in metro areas is running at about 75%, while 14% of metro areas are running at 90% or greater and a quarter are at 80% or greater. This is the same as last week but bears watching. We are moving into a period where traditional flu cases rise dramatically. So far this has not happened – but it could also be an important variable in pressure on the medical system.
- Will new vaccine trial data identify any material issues?
- Following initial positive news on high efficacy rates for the Moderna and Pfizer vaccines, subsequent news flow has raised some questions about health impact at the margin. For example, data released on the Pfizer trial has shown incidence of Bell’s Palsy, lymphatic swelling and even appendicitis are all higher in trial groups taking the vaccine.
- The Moderna trial will release more data this week while the UK vaccine roll-out could see other issues identified. Something to watch out for in coming weeks.
- Ability to deliver an effective vaccine on the necessary scale
- The market seems quite jumpy at any noise regarding the availability of vaccines. It’s important to remain aware of any issues regarding the supply chain. We also need to watch how effectively Moderna can handle its distribution.
- At this point surveys suggest people’s propensity to take a vaccine continues to rise. However, this is closely linked to views on its efficacy. This may become an issue in Australia given our agreements with AstraZeneca and Novavax – and lack of agreement with Moderna.
- Policy updates
- Policy support remains the single greatest factor supporting the recovery in markets. Any signal from central banks that questions this support would be a negative. We are not seeing any sign of this now.
- The Fed meets this week and at the moment consensus is 50/50 on whether it will announce a lengthening of the maturity of the bonds they are willing to buy, with a view to containing the current sell-off in bonds.
- Last week the European Central Bank extended the length of its current bond-buying program, without adding to its intensity. The ECB struck a cautious tone, offering no comment on how much it planned to buy each month, saying only it would respond to conditions. This suggests there is greater push-back on the level of stimulus within Europe.
- On the fiscal side, the odds of a near-term deal are also around 50% — and have probably deteriorated in recent days.
- The tide of liquidity supporting the market is manifesting in several interesting ways. Equity market valuations look very high by historical standards in the US. Although the relative yield between equities and other asset classes is also at high levels, which is supportive.
- Georgia Senate runoffs
- Runoff elections due to take place in the US state of Georgia on January 5 have the potential to move markets. Recent polls suggest a close-fought race. If the Democrats ended up with control of Congress, it would shift expectation on a fiscal package, prompting a further sell-off in bonds and rotation to value within equity markets.
- Brexit
- A potential wildcard. The situation remains fluid, and it seems negotiators have bought themselves more time.
Yours faithfully,
Gary Gleeson
BBus(Ec&Fin), MAppFin, CFP®, SSATM
Principal | MFM Group
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