- India’s budget provided plans for increased government spending in the current fiscal year, due to end on March 31. The blueprint provides for additional borrowing of USD 11bn over the next two months as the government will seek to boost growth through massive capital spending. The revised deficit target is -9.5% of GDP. Spending next year will also be higher than previously signalled (planned deficit of -6.8% of GDP), and signals a change in tack towards expansionary policy, providing upside risk to growth forecasts. Reforms for the banking sector were also announced, including the privatisation of two public-sector banks, and spending on healthcare will be doubled.
- The Eurozone's final IHS Markit manufacturing PMI (Purchasing Managers' Index) slipped to 54.8 in January from 55.2 in December, just slightly above the initial 54.7 “flash” estimate. While renewed lockdowns and supply shortages dented activity, overall manufacturing growth remained resilient. The sub-index measuring delivery times dipped to 31.6 from 34.4, suggesting factories were struggling to obtain the raw materials they need on time. Another index measuring output, which is seen as a good indicator of economic conditions, fell to 54.6 from 56.3, remaining comfortably above the 50-mark separating growth from contraction.
- The US ISM Manufacturing PMI slipped to 58.7 last month from 60.5 in December; however, the reading remains relatively robust. Manufacturing was supported by strong demand for goods like electronics and furniture, as almost a quarter of the US labour force works from home due to Covid-19. The forward-looking new orders sub-index fell to 61.1 last month from 67.5 in December, while the manufacturing employment gauge rose to 52.6 from 51.7 in December. The survey's prices paid index spiked to 82.1 last month, the highest since April 2011, from 77.6 in December, supporting expectations of a pick-up in inflation in the coming months, though high unemployment could limit manufacturers from raising prices.
- The UK's IHS Markit/CIPS manufacturing PMI fell to 54.1, down from a three-year high of 57.5 in December and below the level in the euro zone. Input price inflation hit a four-year high, reflecting raw material shortages and transport delays, driving the steepest inflation of selling prices for 28 months. Separately data from the Bank of England (BoE) showed unsecured lending to consumers dropped 7.5%y/y in December, the biggest decline since monthly records began in 1994. While the BoE showed mortgage approvals remaining close to 13 year-highs despite slipping back slightly in December.
- US construction hit a record high in December, as spending increased 1.0% m/m to USD 1.49tn. Spending on private construction projects rose 1.2% m/m after a 1.5% m/m jump in November, as cheaper mortgages boosted investments in single-family homebuilding. Spending on residential projects went up 3.1% m/m after increasing 3.0% m/m in November; however, outlays on non-residential construction declined 1.7% m/m in December.
Today’s Economic Data and Events
- FOMC Member Mester Speaks 23:00
- FOMC Member Williams Speaks 23:00
Source: Bloomberg, Emirates NBD Research
Fixed Income
- Benchmark US treasuries showed little change to start February with yields on the 2yr and 10yr USTs holding at around current levels of 0.109% and 1.08%. Democrats in Congress have begun to draft a budget reconciliation bill as a means to approve President Joe Biden’s USD 1.9tn spending package. A reconciliation bill would allow them to bypass the two-thirds majority required by the Senate for major spending plans.
- Bond markets were mixed in Europe although moves were relatively limited. Gilts managed a modest gain overnight with yields slipping to 0.319% while bunds and French bonds slipped modestly. The jerky rollout of Covid-19 vaccines in the EU is threatening to write off a considerable portion of H1 2021 as consumers endure restraints on activity.
- Indian bonds sold off sharply following large new borrowing plans in the union budget. Yields on the 10yr bond jumped nearly 16bps to over 6%. The RBI meets later this week and market attention will likely focus on what capacity the bank will have to absorb the additional borrowing.
FX
- The USD gained some positive momentum on Monday, bolstered by weakness in the EUR amid growing concern over potential delays in the distribution of Covid vaccines. The DXY index breached the 91 handle for the first time since mid-December and currently trades around 90.860. Similarly the JPY advanced to its highest level since mid-November at 105.
- The EUR continues to waver under mild pressure despite a modest reversal this morning and trades at 1.2080, while Sterling has fallen to just below the 1.37 handle.
Equities
- Following the parlous end to January, global equity markets started the month on the front foot. Concerns over social media-driven market volatility appear to have abated for now as the focus turned to the silver market, allowing for a modest pick-up in stocks around the world.
- In the US, the NASDAQ led the charge, closing 2.6% higher, while the Dow Jones (0.8%) and the S&P 500 (1.6%) also gained. In Europe, the DAX gained 1.4%, the CAC 1.2% and the FTSE 100 0.9%, while the composite STOXX 600 closed 1.2% higher.
- Asian equity indices have followed suit this morning, with the major benchmarks all gaining in morning trading. All of these benchmarks remain lower w/w however.
- Indian equities received a boost from big government spending plans announced yesterday, as the Nifty gained 4.7%.
Commodities
- Oil prices have been caught up in a risk-on move as optimism over the roll-out of vaccines in the US is supporting a better growth outlook for the rest of 2021. Brent futures gained 0.8% to close overnight at USD 56.35/b but are up an additional 1% in early trade today while WTI gained nearly 2.6% to settle overnight at USD 53.55/b before pushing above USD 54/b today, around its highest level in a year.
- OPEC producers increased production in January but only by a collective 220k b/d, far short of the 500k b/d that those participating in the OPEC+ cuts had agreed to in December. Saudi Arabia, the UAE and Kuwait all raised output but output was down slightly in Iraq, Nigeria and Libya.
- Redditors failed to ignite the silver market as much as they did to over-sold equities although prices did bounce nearly 8% over the course of the day, closing out at USD 28.60/troy oz. There appears to be disagreement on online forums as to whether silver is actually in a short position—it’s not—thereby stemming the momentum toward the metal.
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