Over in parliament, the Treasury committee is holding a session with senior Bank of England officials.
They’re hearing from governor Andrew Bailey, chief economist Andy Haldane, and external members of the Monetary Policy Committee Silvana Tenreyro and Michael Saunders. You can watch it at the top of the blog.
Haldane speaks first, saying it’s been a rollercoaster year, with contractions in Q1 and Q2, and then a recovery in Q3.
There are already signs of some slowing in activity in the fourth quarter of the year, due to voluntary social distancing as Covid-19 cases rose, and the tightening of restrictions.
The November inflation report (released on the 5th) predicted a small contraction of activity in the fourth quarter, Haldane adds, but there’s huge uncertainty around short-term projections.
The most significant piece of news since we closed the report is the announcements of prospective vaccines, Haldane continues.
There’s some way to travel until we know for sure they are 100% effective, but “so far so good on that”, he tells MPs.
Clearly it’s positive news for individuals, businesses, charities, the NHS, schools, and the economy, and for the Bank’s economic forecasts. But the Bank will work out what it means for the economy for its next Quarterly report in February
Q: How much of a contraction do you expect to see in the fourth quarter?
Haldane says there could be a 3 to 4 percentage point shortfall in GDP, compared to the previous forecasts.
But a chunk of that was “in the bag” already, due to the voluntary social distancing and tiered restrictions that were being introduced, before the national lockdown.
Q: Can you isolate the impact of the lockdown, within that 3 to 4%?
Haldane says it’s hard to prise those three effects apart.
But on a rough order of magnitude, perhaps a third, perhaps as much as a half, was the incremental effects of the national lockdown, Haldane says.
But he adds that there are some big uncertainty bounds around that - differentiating these different effects are very difficult.
Governor Andrew Bailey weighs in too, saying it’s very difficult to estimate the economic cost/benefit of the lockdown as you don’t know the counter-factual (what would have happened without it).
Chris Williamson, chief business economist at IHS Markit, says November’s flash PMI report suggests the US economy is strengthening.
He also points out that business confidence hit its highest level since February 2015.
“The November PMI surveys provide the first postelection snapshot of the US economy, and makes for very encouraging reading, though stronger economic growth is quite literally coming at a price.
First the good news: business activity across both manufacturing and services rose in November at the strongest rate since March 2015. The upturn reflected a further strengthening of demand, which in turn encouraged firms to take on staff at a rate not previously seen since the survey began in 2009.
However, the surge in demand and hiring has pushed prices and wages higher. Average selling prices for goods and services rose at the fastest rate yet recorded by the survey, with shortages of supplies also more widespread than at any time previously reported.
Firms are scrambling for inputs and workers to meet the recent growth of demand, and to meet rising future workloads. Expectations about the year ahead have surged to the most optimistic for over six years, reflecting the combination of a post-election lift to confidence and encouraging news that vaccines may allow a return to more normal business conditions in the not too distant future.”
Business activity across both US manufacturing and services rose in Nov at the strongest rate since March 2015. The upturn reflected a further strengthening of demand, which in turn encouraged firms to take on staff at a rate not previously seen since the survey began in 2009 pic.twitter.com/XGR8lVmvFn
Just in: the US economy is growing at its fastest pace in over five years, according to the latest snapshot of American business activity.
The latest Flash US Composite PMI from IHS Markit shows that the recovery has gained further momentum this month, with service sector firms and factories both growing strongly.
November has also seen a survey record rise in employment and an unprecedented increase in prices, partly due to a surge in supply chain delays.
Markit says:
U.S. private sector business activity rose sharply in November, as growth momentum picked up further. The overall expansion was the fastest for over five and-a-half years, as both manufacturers and service providers indicated a steeper upturn in output.
The report found that:
Flash U.S. Composite Output Index at 57.9 (56.3 in October). 68-month high.
Flash U.S. Services Business Activity Index at 57.7 (56.9 in October). 68-month high.
Flash U.S. Manufacturing PMI at 56.7 (53.4 in October). 74-month high.
Flash U.S. Manufacturing Output Index at 58.7 (53.3 in October). 68-month high
Any reading over 50 points shows growth, so this is quite a contrast with the data from Europe today.
Here, lockdowns have pushed both the UK economy and the eurozone into contraction this month with PMIs below 50 points.
Photograph: IHS Markit
Markit says service sector firms drove the jump in employment:
Encouragingly, there was a marked uptick in hiring during November to result in the steepest monthly rise in employment recorded since the survey began in 2009. Service providers boosted their workforce numbers amid burgeoning demand, but hiring slowed slightly in manufacturing.
With the human and economic cost of the pandemic mounting, the pressure for a successful vaccine rollout is intense, as Richard Hunter, Head of Markets at interactive investor, explains:
“Markets are now caught in no man’s land, with investors increasingly desperate for the gap between the discovery and physical distribution of the vaccine to be minimised.
The rise in new Covid-19 cases – and indeed lockdowns – brings the need for a rapid roll-out of an acceptable vaccine into sharp focus. In the meantime, the human and economic damage continues unabated as governments remain well aware of the need for easing measures.
As such, the reported rift between the Federal Reserve and the Treasury in the US on the status of any fresh fiscal stimulus package adds unwelcome uncertainty in delaying the timing of any economic revival.
Deutsche Bank has hailed the AstraZeneca/Oxford trial results, predicting that it will allow some industrial nations, including the US and UK, to achieve herd immunity to Covid-19 by next summer.
Analysts Robin Winkler and George Saravelos told clients that their updated analysis suggests the majority of the developed world is on track to immunize its vulnerable population to COVID by the spring, and the entire population by mid-year.
Depending on the pace of vaccine distribution there may even be upside to this estimate with some countries achieving herd immunity before summer.
The combined vaccine news of the last few weeks is an unprecedented victory for science that will lead to a much faster pace of normalization to our daily lives compared to what we would have assumed just a few weeks ago. By spring, things should be looking much closer to normal.
We are most confident the US and UK will likely be able to immunize the most vulnerable residents--healthcare workers and the over-65s--by the spring. By the middle of the year, the US and UK should reach full herd immunity. This timeline is also realistic for Canada and for Japan, both of which will have good access to Moderna as well as to Pfizer and AstraZeneca.
EXCELLENT on herd immunity
"By the middle of the year, US & UK should reach FULL HERD IMMUNITY. This timeline is also realistic for Canada and Japan.'
Deutsche Bank: "We should all be smiling this morning. With Astrazeneca releasing trial results, our analysis suggests we are now on track for the majority of the developed world to immunize its vulnerable population to COVID by the spring and the entire population by mid-year"
Bloomberg is also reporting that vaccine optimism is pulling the US dollar down.
The dollar dropped to a two-and-a-half year low as the prospect of vaccine roll-outs added to headwinds for the world’s reserve currency.
The Bloomberg Dollar Spot Index fell as much as 0.2% to an April 2018 low after U.S. officials said vaccinations may start in less than three weeks. The pound and the Norwegian krone led gains against the greenback Monday, while the yield on 10-year U.S. Treasuries rose three basis points to 0.86%.
“The vaccine news is favoring the view of a sooner-rather-than-later global economic recovery with the USD losing its safe-haven appeal along the way,” said Rodrigo Catril, a currency strategist at National Australia Bank Ltd.
“This is a risk-positive, USD-negative backdrop, especially with the Fed likely to remain ultra-dovish for some time.
The US dollar has dipped by around 0.3% today, showing that investors are feeling more confident following the trial results of AstraZeneca’s Oxford vaccine.
The dollar is a classic safe-haven when markets are edgy, and tends to fall when traders start buying riskier assets instead.
As this chart shows, the US dollar index is threatening to drop through its September lows, and hit the lowest point since May 2018.
The US dollar index Photograph: Refinitiv
This risk-on move is why shares in airlines, miners and oil companies are gaining today, with crude prices still at their highest since early September.
Fawad Razaqzada, analyst at ThinkMarkets, says investors are looking through the surge in Covid-19 cases:
The AstraZeneca-Oxford vaccine is produced at cost price and not for profit, and will thus cost a lot less than Pfizer and Moderna vaccines, which are made for profit. Given these benefits, the vaccine is likely to be in huge demand from poorer regions of the world.
The key takeaway point is that we are getting ever closer to hopefully becoming immunised to COVID, which means life can return to more normal levels soon. As such, investors are continuing to shrug off concerns about the ongoing global surge in coronavirus cases and piling back into sectors that had been hurt badly by the pandemic such as travel and leisure. Crude oil prices have also risen as investors hope that with the development of vaccines, there will be a quicker return to normal levels of travel and economic activity.
Stephen Innes, chief global markets strategist at Axi, also points out that emerging market (EM) economies should benefit from the AstraZeneca/Oxford jab:
The world should be jumping for joy as the AstraZeneca delivery is a big deal as most of the developed world will be able to immunize its most at-risk population to COVID by the spring and likely the entire community by mid-year.
Equities up, commodities up, bond curves bear- steepen, dollar down. Risk sentiment improves as the AstraZeneca-Oxford vaccine shows 70% effective for participants with covid-19, with the effectiveness rising to 90% for using half a dose followed by a full one. The AstraZeneca-Oxford vaccine should benefit many EM countries as it costs only a fraction of the others and will be manufactured in EM countries from India to Brazil.
An investment trust backed (and managed) by the asset manager Schroders and Big Society Capital, a UK social impact investor, plans to float on the London Stock Exchange just before Christmas, to tap into rising demand for positive social impact investments.
Schroder BSC Social Impact Trust will be the first London-listed investment firm with a “measurable positive social impact”. It is looking to raise £100m in the the float by selling 100m shares at 100p each and hopes to sell a further 100m shares in the coming year, with a goal of turning it into a £500m fund over five years.
Retail investors will be able to invest in the investment trust through Hargreaves Lansdown, AJ Bell and Interactive Investor. Big Society Capital and Schroders, with clients of Cazenove, are both expected to subscribe for shares, 25% and 17.5% respectively. The shares are set to start trading on 22 December.
Investments will focus on property funds that develop affordable housing – for example for people who were formerly homeless or fleeing domestic violence, and for low income renters – such as the Resonance Real Lettings Property Fund which works with St Mungo’s; debt for social enterprises including charity bonds; and social outcomes contracts - contracts between the public sector and other organisations that are repaid for their services based upon social outcomes delivered.
Jeremy Rogers, chief investment officer at Big Society Capital, said:
“The current coronavirus pandemic is exacerbating many social challenges from homelessness to domestic abuse. Social impact investing can directly help the charities and social enterprises tackling these problems.”
He told the Guardian that people’s interest in their local area had increased during the pandemic, and that the trust would enable them to invest in local projects that they care about.
Andy Howard, global head of sustainability at Schroders, added:
“The connection between social impact and investment is deepening and expanding across financial markets.”
Full story: UK risks double-dip recession amid second Covid lockdown
Here’s our economics editor Larry Elliott on the sharp fall in UK service sector activity this month:
The first snapshot of the UK economy during England’s four-week lockdown has shown evidence of a looming double-dip recession as tougher restrictions took a toll of large chunks of service-sector output.
The monthly survey from IHS Markit and Cips reported the steepest fall in activity since May, with the closely watched purchasing managers’ index (PMI) dropping from 52.1 to 47.4. A reading below 50 indicates that the economy is contracting.
In an echo of the impact of the nationwide curbs on activity in the spring, the flash IHS Markit/Cips estimate reported steep downturns for restaurants, bars, hotels and other businesses heavily reliant on serving consumers face to face.
The fall was smaller than economists had feared, and nowhere near as severe as in the spring, when the final PMI dropped to a record low of 13.8 in April. Even so, the 15.5% growth in the economy in the third quarter is expected to be followed by renewed contraction in the final three months of the year.
It’s possible that vaccine optimism is pretty well priced in, with investors now wondering how much economic pain we must endure first.
As Marios Hadjikyriacos, investment analyst at XM, puts it:
What’s striking is the diminishing positive effect each new batch of vaccine news has on financial assets. This is the third Monday in a row when encouraging vaccine news has hit the markets, and each time the positive impact on equities and other risk-linked assets has been getting smaller.
What’s worse, the playbook so far has been that the initial boost typically fades by the next day, as the brightening prospects for next year are not quite enough to eclipse the grim lockdown reality that investors have to grapple with right now. A vaccine is great news, but the global economy has to get through a long winter first.
This battle between vaccine enthusiasm and the current lockdown reality will likely remain the dominant theme for a while longer. The raging question is whether all the ‘good news’ has been priced in by now, leaving markets vulnerable to any negative headlines as we go forward.
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