US Democrats are confirmed to have gained control of the Senate

Chris Scicluna

As Democrats gain control of Senate, US equity futures rise and UST yields remain higher even as Congressional confirmation of Biden win disrupted as protestors storm Capitol Hill
The focus remains on US politics. On a constructive note, counting confirmed that the Democratic candidates won both of the Senate run-off races in Georgia – handing control of the Senate to the Democrats via VP-elect Harris’s casting vote. Indeed, Raphael Warnock’s lead over Republican senator Kelly Loeffler has extended to a decisive 1.6ppts, while Democrat Jon Ossoff lead over Republican candidate David Perdue now stands at 0.8ppt – outside of the 0.5ppt margin that would allow Perdue to request a recount.

Sadly, of course, the dominant news story has been the disruption of the joint session of Congress that had begun to count the electorate college votes required to confirm Joe Biden as President. Incited by incendiary remarks made by President Trump, protestors overwhelmed security forces and stormed the Capitol buildings, including the debating chambers and offices. Labelled an “insurrection” by both sides of the political divide, but not by the President who praised their actions, the protestors were eventually removed from the Capitol buildings and associated grounds, but not before damaging property and the loss of life. Some commentators have asked whether VP Pence and the necessary majority of Trump’s cabinet should invoke the 25th Amendment to remove a President who is clearly unfit for office (an action that seems unlikely as it would risk inflaming Trump’s extremist supporters). And Washington DC is now under a 6pm-6am curfew, with the Mayor declaring that the public emergency will remain in place for the next 15 days (coinciding with Biden’s Inauguration).

The restoration of order on Capitol Hill allowed Congress to resume at 8pm EST. Since then, objections from pro-Trump Republican lawmakers to Biden’s victory in several battleground states have one by one been overwhelmingly rejected. With the Senate a little while ago having rejected an objection to Pennsylvania’s electoral votes, this objection is also about to be voted down in the House. And the remaining count – which presently has seen Biden accumulate 244 of the needed 270 Electorate College votes – is highly likely to proceed without a valid objection.

The S&P500 closed yesterday with a 0.6% gain, even as ADP reported a 135k decline in private payrolls in December, paring a rally of as much as 1.5% after the aforementioned events in Washington DC. Meanwhile, the likelihood of more expansive fiscal policy stance saw the upward trend in UST yields continue. With order being restored in DC, S&P futures have firmed 0.5% and the yield on 10Y UST’s has returned to yesterday’s intraday high of 1.05%.

In the Asia-Pacific region, equity markets also focused on the likelihood of more expansive US fiscal policy. Japan’s TOPIX jumped 1.7% even as labour cash earnings proved much weaker than expected in November (more on this below) and as broadcaster NHK reported more than 2,000 new cases of coronavirus in Tokyo – a new record. PM Suga is due to hold a press conference at 6pm local time, during which he will announce a state of emergency in Tokyo and the neighbouring Saitama, Kanagawa and Chiba prefectures from midnight until 7 February – or at least until infection rates fall to levels that don’t overwhelm public health services. As reported previously, Suga will request that residents avoid going out after 8pm, ask bars and restaurants to close at that time, and limit attendance at sporting and other events to 5000 people.

Elsewhere in the region, stocks rose an even greater 2.1% in South Korea, while gains of around 1.5% or more were seen in Singapore, Taiwan and Australia. Bucking the trend, stocks were down 0.5% in Hong Kong and up only modestly in China following yesterday’s arrest of more than 50 democratic activists. Meanwhile, the ongoing sell-off in the US Treasury market predictably underpinned a further rise in bond yields across most of the Asia-Pacific region, with Australia’s 10Y yield rising 2bps to a 4-month high of 1.08% and Kiwi 10Y yields rising 5bps to 1.00%.

Japan’s labour cash earnings decline 2.2%Y/Y in November as bonus earnings slump
The only economic report in Japan today was the preliminary Monthly Labour Survey for November. Given disruptions caused by the pandemic, analysts had expected a modest weakening of labour incomes despite the earlier-reported increase in employment reported in the MIC’s household survey. As it turns out, average labour cash earnings (per employee) fell 2.2%Y/Y in November – far weaker than market expectations and a sharp deterioration from the 0.7%Y/Y decline recorded in October. After accounting for inflation, real wages declined 1.1%Y/Y, compared with the modest 0.1%Y/Y decline recorded previously.

In the detail, the key driver of the deterioration in November was bonus earnings, which slumped 22.9%Y/Y compared to the 9.0%Y/Y decline reported in October – a development that is not especially surprising given the drop in corporate profits indicated by the BoJ and MoF business surveys. Average overtime earnings – previously a source of weakness – fell a substantial 10.3%Y/Y, but this was less than the 12.0%Y/Y decline reported previously. As has been the case since the pandemic began, the weakness in overtime earnings continues to be driven by a reduction in overtime hours worked. Indeed, despite a further 0.6%M/M increase in November – driven by a 2.5%M/M increase in the manufacturing sector – overtime hours were still down 9.3%Y/Y. Regular earnings increased a modest 0.1%Y/Y in November, down from 0.5%Y/Y last month, but regular hours worked declined 2.5%Y/Y. Finally, the number of people in regular employment increased 0.1%M/M in November – the sixth consecutive increase – but annual growth still slowed 0.1ppts to 0.6%Y/Y. Growth in the number of full-time employees slowed to 0.8%Y/Y (down 0.3ppts from last month), but the 0.3%Y/Y increases in the number of part-time employees compared favourably with the 0.3%Y/Y decline reported in October.

German factory orders beat expectations with strong growth in November; euro area inflation, retail sales and sentiment indicators still to come
Further evidence of continued strength in global manufacturing came from this morning’s German factory orders data. Contrary to expectations of a drop, German orders rose for a seventh successive month and by a robust 2.3%M/M to be up a striking 6.3%Y/Y and 4.0% above February’s pre-pandemic level. To some extent the headline figure was flattered by one-off large-scale items, but even excluding them orders rose a firm 1.6%M/M. The increase in demand was widespread, with domestic orders up 1.6%M/M and foreign orders up 2.9%M/M. Of the latter, orders from within the euro area leapt 6.1%M/M. By type of good, the increase in demand was also broad-based, with orders for intermediate goods up 4.9%M/M and capital goods up 1.1%M/M, while orders for consumer goods lagged somewhat, up a more modest 0.5%M/M.

Meanwhile, German manufacturing turnover rose 1.1%M/M in November, suggesting that tomorrow’s IP data will similarly reveal a seventh successive month of growth in production. Nevertheless, turnover was still 3.6% below February’s level and, while recent survey indicators pointed to continued positive momentum towards year-end, manufacturing output will also likely remain below the pre-pandemic level for a while yet.

On a busy day for new economic data from the euro area, this morning will also bring the European Commission’s sentiment survey results and construction PMIs for December, the flash estimates of euro area and Italian inflation for the same month, and euro area retail sales figures for November. The euro area retail figures are likely to be subdued, despite the strong growth recorded in Germany where sales continued to rise despite the intensifying second wave of pandemic. With French sales hit by the closure of non-essential stores, the median forecast on the Bloomberg survey is for a drop in euro area sales of 3.4%M/M, which would be the largest monthly fall since April albeit nowhere near as severe as the 11.8%M/M decline posted that month. Thanks to the strength in Germany, however, we anticipate a far smaller decline. Meanwhile, following yesterday’s softer-than-expected German and French figures, we now expect the headline euro area inflation rate to be unchanged at -0.3%Y/Y in December, with the core CPI rate also unchanged at the series low of 0.2%Y/Y for a fourth successive month.

ISM services survey and jobless claims the data highlights in the US today
Aside from monitoring the fallout from Wednesday’s events in Washington DC, there are a number of economic reports worth monitoring in the US today. Given the advance merchandise trade figures released last week, the full trade balance for November is likely to reveal a substantially wider trade deficit. Of greater interest, the ISM services index for December will cast further light on how the economy closed out last year. In particular, following yesterday’s soft ADP reading, the employment component will allow analysts to refine their expectations for tomorrow’s official employment report. The weekly jobless claims report will also be of interest today to see whether initial claims remain under 800k.

Australian dwelling approvals rise further in November, but trade surplus narrows as imports rebound more than exports
The positive economic news flow continued in Australia today the number of dwelling approvals reported to have increased a further 2.6%M/M in November, leaving annual growth little changed at a strong 15%Y/Y. Approvals for apartments – often a source of volatility – fell 3.9%M/M and 13.0%Y/Y. However, private house approvals increased a much stronger than expected 6.1%M/M to be up a whopping 33.8%Y/Y and at the highest level since 1999. In value terms, approvals for dwellings increased 21.7%Y/Y. However, with approvals for non-residential buildings still down 7.1%Y/Y, total approvals for all buildings were up a less emphatic 10.2%Y/Y.

Finally, Australia recorded a trade surplus of A$5.0bn in November – less than the downwardly-revised A$6.6bn surplus recorded in October and A$0.9bn less than a year earlier. Virtually all of that narrowing was driven by the goods balance, with a 3.7%M/M increase in exports swamped by a 10.6%M/M rebound in imports. Despite the growth in November, merchandise exports remained down 1.9%Y/Y. Moreover, with Australia’s borders closed to most tourists, exports of services remained down 41.1%Y/Y, so that total exports fell 10.4%Y/Y. Meanwhile, merchandise imports increased 5.6%Y/Y – the first increase in 11 months – with imports of consumption goods up a strong 13.6%Y/Y and imports of capital goods increasing 31.5%Y/Y. However, with Australians not travelling overseas, imports of services were down almost 55%Y/Y and so total imports fell 9.5%Y/Y.

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