Vaccine Optimism

IMMINENT VACCINE ROLLOUT

Optimism that an end to the pandemic crisis is drawing nearer provided further support for risk appetite in global financial markets. The national lockdown ended in England on 2 December (although almost all of the nation is now in tier 2 or 3) and the UK became the first country to approve the Pfizer/BioNTech vaccine, with the rollout expected to begin as early as next week. The most vulnerable parts of the population and care workers will be prioritised. Other vaccines, including Oxford/AstraZeneca, may also be approved soon. It will be some time, however, before a critical proportion of the population will be vaccinated, and there remains uncertainty about whether the disease can still spread after immunisation and whether doses will need to be topped up in the future. Still, optimism was evident in business surveys, including the Lloyds Business Barometer which revealed a revival in confidence after the first encouraging vaccine news was reported, while the November services PMI showed a notable pickup in business expectations. NEW EU TRADING ARRANGEMENTS LOOM Meanwhile, a new trading relationship with the EU on 1 January also looms for UK businesses. At the time of writing, a final deal has yet to be agreed, but reports suggest it could happen at the weekend or early next week, although sticking points remain. EU leaders would then decide whether to give their approval to a deal at the European Council meeting starting on Thursday. The sensitivity of sterling asset prices was evident this week when he pound fell briefly below $1.33 before climbing above $1.35 on deal optimism. Any accord will lead to less EU trade frictions from next year compared with no deal, but it will also introduce frictions compared with the current transition period. Chart 1 shows survey evidence on firms’ preparedness for new trading arrangements with the EU.

UK GDP MAY HAVE STARTED TO FALL IN OCTOBER

The main UK data release next week is October GDP. Despite the composite PMI printing above 50 that month, an outturn typically consistent with expansion, highfrequency indicators suggest GDP may have fallen in October following five consecutive months of increase. Based on a range of indicators, including the ONS Business Impact of Covid-19 Survey (BICS) and Apple/Google mobility data, we expect a fall of 1.0%m/m which would leave GDP about 9% below the February level. This reflects the impact from tiered local restrictions being introduced across England from around the middle of the month and measures in other parts of the UK. Most notably, with restrictions targeted to those areas of the economy that require more face-to-face interaction, the services sector is likely to have felt the bulk of the impact, while output in the manufacturing sector may have risen as uncertainty about post-Brexit relations led to some stockpiling. A further fall in GDP in November is likely as national lockdown restrictions took effect in England. ECB TO EXTEND PEPP AND TLTRO BEYOND MID-2021 The European Central Bank (ECB) is set to announce additional policy stimulus on Thursday, which was widely telegraphed at its last policy meeting in October. The rationale is that additional Covid restrictions implemented across the continent are weighing on economic activity, with new economic projections from the ECB likely to show the Eurozone economy contracting in the current quarter, as opposed to its previous September forecast of expansion. Despite vaccine hopes, the forecasts may also show downward revisions to growth and inflation further out. Hence, a key message will be that ECB support for the economy will be maintained for a considerable period of time to come. Policymakers have indicated that measures to ease credit conditions for the wider economy are likely to revolve around the PEPP (Pandemic Emergency Purchase Programme) and TLTRO (Targeted Longer-Term Refinancing Operations). The current target for asset purchases under PEPP is €1.35 trillion, with the programme continuing until at least the end of June 2021. The ECB is expected to announce a further increase in the target by about €500bn and to extend the programme until at least the end of next year, but the risk is that they may do more, both in terms of the amount and duration. One of the ECB’s concerns has been its latest bank lending surveys showing a tightening of credit conditions for businesses, including SMEs. As a result, the TLTRO3 programme, which provides cheap loans to banks especially if lending targets are met, is expected to be extended until at the least the end of 2021. Markets will be watching to see if some of the conditions attached to the programme will also be eased, for instance, whether banks can obtain loans for a longer period or whether the interest rate for the loan is reduced further. Although the ECB’s official deposit rate is -0.5%, and is not expected to be lowered, banks can currently obtain loans via TLTRO3 at as low as -1%. The other interesting aspect of Thursday’s meeting is to what extent ECB President Lagarde is able to verbally push back on the euro’s recent appreciation towards $1.22, a level last surpassed in April 2018. The recent rise in the currency has occurred after the likely cut-off date for the ECB’s new projections and, if sustained, would represent a tightening of monetary conditions. That might point to the risk of more policy stimulus next week than central forecasts would suggest.

RELATIVELY LIGHT US CALENDAR

The US calendar is relatively quiet next week. There are no Fed speakers ahead of the following week’s FOMC policy decision. Key data include CPI inflation and weekly jobless claims on Thursday and the University of Michigan consumer sentiment survey on Friday. Focus will remain on whether a new, albeit reduced, fiscal stimulus package will be agreed.

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None of the information in this article is, nor should be construed as, financial advice. All foreign exchange transactions involve risk and you should always seek your own independent financial advice before entering into any foreign exchange transaction.