US President Joe Biden hits the ground running

• US President Joe Biden hit the ground running after his inauguration yesterday, signing into effect a raft of executive orders. Some of these, such as requiring face masks in federal buildings, were related to the pandemic crisis, while others were aimed at the more long-term climate crisis. Biden cancelled the permit for the Keystone XL pipeline between the US and Canada, and put in motion the US rejoining the Paris Climate Agreement. In another signal that multilateralism will find favour again under his government, Biden is also halting the US’s departure from the WHO.
• The Bank of Japan kept its benchmark policy rate on hold at -0.1% this morning with a 7-1 majority vote, as had been widely anticipated. This was despite a downgrade to its 2021 growth projections owing to the resurgent pandemic crisis in Japan and new restrictions that have been imposed in recent weeks as a result. The ECB is meeting later today where no change is also expected.
• The Bank of Canada also left its key rate on hold yesterday, at 0.25%. Again, there was no expectation of any change, although the language in the bank’s communiqué did lay the groundwork for potential tapering of its QE programme later in the year. The bank recommitted itself to ‘extraordinary monetary policy support’ to the economy, but it also upgraded its growth and inflation outlook, talked up the relative strength of the economy, and said that ‘as the Governing Council gains confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required.’

• Dubai's CPI declined -0.4% m/m in December on the back of monthly declines in food, housing, and recreation & culture costs.  Housing & utilities prices fell -1.4% m/m in December, the largest drop last year.  On an annual basis, headline CPI declined -4.3% y/y, down from -3.7% in November and also the lowest reading in 2020.  We expect consumer inflation to rise modestly this year, off a low annual base and as activity normalised and demand recovers.  

• CPI inflation in the UK modestly overshot expectations in December, coming in at 0.3% m/m and 0.6% y/y, compared to consensus projections of 0.2% and 0.5%. Clothing, computer games and travel were amongst the highest risers, though with so few people travelling during the month, this highlights the question as to how effective the measure is when compared to previous years, given the erratic swings in people’s spending habits month by month over 2020 while the CPI basket is changed just once a year. The December print was twice the rate of November’s 0.3% price growth, and inflation will likely head higher still over the course of the year as a VAT holiday for the hospitality sector comes to an end in April, the demand recovers from the pandemic shock, and the effect of new trading regulations with the EU make themselves felt.

UK CPI inflation, % y/y

Source: Bloomberg, Emirates NBD Research

Fixed Income

• Benchmark bond markets showed little change overnight as traders were more likely watching news screens and the inauguration of Joe Biden as President of the US. The implications for a Biden administration on fixed income markets were outlined earlier in the week when Janet Yellen had her confirmation hearing for Treasury Secretary, with ambitions to do large scale spending and expecting rates at low levels for years going forward.
• Markets have likely already priced in the impact from Biden taking office and enacting new spending plans. Now the politics will need to catch up with markets and we are still a little circumspect how Biden will be able to narrow the gap between expectations of stimulus worth as much as USD 1.9trn and the reality of bipartisan policymaking.
• The BoJ has left its policy rate and yield curve control programme unchanged at its first meeting of the year but downgraded its expectations for growth in the fiscal year ending in March. 
• Similar to Japan this morning, the ECB meeting will likely result in no policy change later today but perhaps a re-framing of the economic outlook as Q1 looks as though it will be a write-off as many economies have had to re-impose lockdown measures.
• Overnight the Bank of Canada held policy rates at 0.25% and will continue buying up to CAD 4bn in government securities each week. However, governor Tiff Macklem said there was “clear reason to be more optimistic” about the outlook for Canada’s economy. Bond yields ticked higher following the announcement and the governor’s comments.
• Brazil also left its policy rates unchanged at 2% overnight while Bank Negara Malaysia kept rates on hold at 1.75%. In the emerging markets, Bank of Indonesia holds a policy meeting later today while the CBRT in Turkey is also expected to keep rates steady.
• Bahrain priced a triple-tranche USD deal overnight with a 7yr USD 500m at 4.25%, a 12yr USD 1bn at 5.25% and a 30yr USD 500m at 6.25%.

FX

• Despite ending the day flat the DXY index has since slipped to 90.3 this morning, marking a third straight day of losses for the greenback and its longest losing streak in over a month.
• The Trump to Biden handover went smoothly and a risk-on tone has sent US stocks to record highs but the USD remains soft. The JPY slipped by over 0.3% and has held steady at 103.55. This comes in spite of a downgrade in economic assessment from the BoJ where monetary policy was unchanged. 
• Commodity currencies led gains against the greenback, with the AUD and NZD rallying by over 0.95% and 1.15% to reach 0.7770 and 0.7210 respectively, the former buoyed by upbeat Australian jobs data. Sterling is up by around 0.4% this morning while the Canadian dollar reached its highest level in more than two years after the BoC kept rates unchanged. 

Equities

• New record highs were hit by US stocks in the wake of President Joe Biden’s inauguration yesterday, as the S&P climbed 1.4%. The NASDAQ saw even greater gains at 2.0%, while the Dow Jones was a little more muted, climbing 0.8%.
• The optimism extended to Europe, where the FTSE 100, CAC and DAX gained 0.4%, 0.5% and 0.8% respectively.

Commodities

• Oil prices nudged higher overnight but have unwound most of the gains in early trading today with Brent slipping back below USD 56/b and WTI holding at around USD 53/b. The API reported a build in crude stocks of 2.6m bbl last week while official EIA data will be released later this evening.
• In some of his first acts as president, Joe Biden focused on the energy industry. The President signed executive orders that mean US will now rejoin the Paris climate change agreement, will block oil leases in the Arctic wilderness areas from being developed and scrapped the Keystone XL pipeline between Canada and the US. Other action on fuel economy standards may follow.
• Whether these actions have a meaningful near term impact on oil market will be hard to dis-entangle from the effects the Covid-19 pandemic has had on oil demand and production. Nevertheless, going forward we would expect to see a much shallower trajectory for the development of oil and gas assets in North America, perhaps to the benefit of producers across the MENA region.
• A more substantive impact from the new administration could come in what policy action it chooses to take on Iran. We don’t expect any immediate lifting of US sanctions on the country, limiting the ability of Iran to export volumes in a commercially meaningful way.
• A weaker dollar on inauguration day along with a drop in US TIPS yields helped gold to recover late in the session. Gold prices had their strongest day since early January, rallying 1.7% to USD 1,871/troy oz. Industrials metals were broadly higher as well although the impact of any new infrastructure plans from the US have likely already been priced into the market.

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