Eurozone contraction worse than thought in December – PMIs
Finally, on to the eurozone.
Final Eurozone Composite Output Index: 49.1 (Flash: 49.8, November Final: 45.3)
Final Eurozone Services Business Activity Index: 46.4 (Flash: 47.3, November Final: 41.7)
The IHS Markit surveys suggest that the private sector across the eurozone contracted the second month in a row in December, albeit at a much slower rate than in November. The final readings were worse than the flash estimates, as the latest coronavirus lockdowns took their toll on Europe’s economies.
The weak service industries remained the main drag on economic activity, down for a fourth month, while manufacturing was the main bright spot – expanding for a sixth month and at a faster rate than in November.
On to Germany! The eurozone’s biggest economy posted a fall in activity in its services sector for the third month running in December. Its business activity index rose to 47.0 in December from November’s six-month low of 46.0 but still well below the 50 no-change mark.
However, thanks to Germany’s strong manufacturing industry the composite output index ticked up to 52.0 from November’s five-month low of 51.7 – indicating expansion in the private sector.
Phil Smith, economics associate director at IHS Markit says:
December’s PMI data showed that the German service sector ended 2020 in contraction amid efforts to curb a second wave of coronavirus infections. Unlike during the first lockdown, however, the disruption to activity in the final quarter of 2020 was confined mainly to those sectors where temporary closures were in place, while other parts of the economy, notably manufacturing, showed much greater resilience.
While businesses have become more optimistic about activity in a year’s time thanks to the development of Covid vaccines, the picture for the near-term still remains uncertain, with restrictions on activity set to stay in place as long as case numbers remain high.
Two senior citizens walk through the Immunization Center at the Exhibition Halls for their vaccination in Hamburg, Germany, on 5 January. Photograph: Christian Charisius/AP
In France, the economic picture has improved markedly. It recorded 49.1 in its services business activity index in December, the final reading from IHS Markit shows. This is up sharply from 38.8 in November but still indicates declining activity.
The composite index for the private sector rose to 49.5 from 40.6.
Eliot Kerr, economist at IHS Markit, strikes an optimistic note:
The French private sector showed resilience in December, despite businesses facing strict Covid-19 restrictions for the vast majority of the survey period. The decline in activity eased markedly and new orders were little-changed having fallen in each of the previous three months. Moreover, with measures now somewhat relaxed, firms can once again begin to target growth as demand conditions start to recover. This mindset was exemplified by a stabilisation in private sector staffing levels, ending a nine-month sequence of workforce contraction.
Although the coronavirus crisis is not over, firms are optimistic that 2021 will be a stronger year, with new orders expected to rise as vaccines are rolled out to the population. With that, we can expect increasing levels of employment and a recovery towards pre-virus levels of activity.
In Italy, things look far more grim than in Spain, with the latest service sector survey recording a reading of 39.7 in December to signal a fifth monthly reduction in output. This is little changed from November’s 39.4.
Italy’s composite output index, which comprises services and manufacturing indices, posted 43.0 in December, up slightly from November’s 42.7, but still far below the 50 mark that divides contraction from expansion. IHS Markit, which compiled the survey, says:
Lewis Cooper, economist at IHS Markit says:
December PMI data provided little goods news for the Italian services sector, which remained deep in a downturn amid further lockdown measures. Business activity dropped substantially again, with client demand both domestically and abroad stifled further by measures.
Business confidence ticked up at the end of the fourth quarter, however, with sentiment the highest for three months amid positive news of a vaccine and hopes of a strong economic recovery in 2021.
Nonetheless, services remains a substantial drag on Italian economic performance as it stands, with the rapid drop in activity outweighing a further upturn in manufacturing output. Until the restrictions are loosened the downturn in the service sector will weigh heavily on any recovery.
And you can listen to Paul Donovan, chief economist at UBS Global Wealth Management, give his thoughts on the Georgia runoffs and today’s data here. He says:
In the two US senate races in Georgia, financial markets are starting to price in an increased probability of Democrat victories. Congress should confirm the presidential election result—markets have priced in the outcome as certain since November 2020, and should not react.
Stuart Clark, portfolio manager at Quilter Investors,has looked at the runoff races in Georgia and what the likely results mean for markets.
With early votes leaning more heavily Democrat than might have been expected it would seem likely, but not yet confirmed, that the Senate may indeed swing blue via the two Georgian seats, two independents and VP Kamala Harris having the casting vote capping a tumultuous election season. Of course, as we have seen with recent US elections there is a long way to go before we get official results, but for now it appears like President-elect Biden will be able to enact much of his agenda in his first four years in office.
This fine balance helps explain not just the relative calm in markets, but the willingness to see the normally less than market friendly overall Democrat control as even potentially positive as any more extreme policies could be easily voted down by rogue Senators. Furthermore, once Biden takes office, he will not wish to choke off any economic recovery while the perilous state of Covid and the economic restrictions associated with the control of this pandemic remain very much present.
However, this result makes it much more likely we will see investment targeted towards the greener sections of the economy as the Democrats focus on climate change. This, along with promised infrastructure spending are the potential areas that look attractive as a result of these elections.
US 10 year Treasuries have tipped over 1% yield for the first time in nine months – correctly identifying the potential for greater stimulus which could buoy markets even from their current highs and as a result we have seen inflation expectations start to tick up also.
The IHS Markit services survey for Spain is out. It shows an improvement, with the main index rising to 48 in December, from 39.5 in November – the smallest fall in activity in five months. Any reading below 50 indicates contraction.
Markit says:
The downturn of Spain’s services economy continued into the final month of 2020, albeit to a much weaker degree than seen recently. Activity and new work both continued to fall, but at slower rates, whilst confidence about the future improved markedly to a two-and-a-half year high on the back of positive vaccine developments related to the global coronavirus disease 2019 (COVID-19) pandemic.
The composite index, which includes services and manufacturing, also improved, to a reading of 48.7, from 41.7 in the previous month. This means activity in the private sector declined for a fifth month, but at a markedly slower rate.
The US dollar has also slipped on the prospect of the Democrats taking control of the US Senate, which could pave the way for higher spending by president-elect Joe Biden and may lead to higher inflation. Against a basket of major currencies, the dollar hit its lowest level since April 2018.
Analysts reckon that a Democrat-controlled Senate would be positive for global economic growth, boosting demand for riskier assets outside the US, but negative for bonds and the dollar. This has pushed up US and UK government bond yields this morning. UK 10-year gilt yields rose to a two-week high while 20- and 30-year gilt yields also climbed.
Paul Sandhu, of BNP Paribas in Hong Kong, told Reuters:
A Democratic-led government is expected to add more stimulus to help mitigate the virus crisis and... that means that there’s going to be a weaker dollar.
European stock markets rise; Nasdaq futures extend losses
And we’re off. European stock markets have opened higher.
UK’s FTSE 100 index up 0.8%
Germany’s Dax up 0.3%
France’s CAC up 0.7%
Spain’s Ibex up 1.2%
In the US, Nasdaq futures are now down 1.7%, pointing to a lower open for the tech-heavy index later today, as investors price in the likelihood of a double Democrat victory in the US Senate runoff races. This would give Democrats control of both chambers and increase the chances of a bigger fiscal stimulus package, higher taxes and more corporate regulation.
Introduction: Oil rises to 11-month high; markets brace for 'blue wave' in US
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Markets are eagerly awaiting results from the Senate run-off elections in Georgia, with a double Democrat victory looking increasingly likely, which would hand them control of the upper house. Democrats already control the lower house, the House of Representatives.
A “blue sweep”of Congress could usher in a larger fiscal stimulus package and pave the way for president-elect Joe Biden to push through more corporation regulation and higher taxes. This has spooked the tech-heavy Nasdaq futures, which are down more than 1%.
Rev Raphael Warnock has defeated the incumbent Republican senator Kelly Loeffler (a Trump ultra-loyalist) to become the next Democratic senator from Georgia, according to AP. Warnock will become the state’s first Black US senator ever. A second run-off race between the Democrat Jon Ossoff, a former documentary film-maker, and the Republican incumbent David Perdue looks to be close.
The oil market has been volatile and prices have hit an 11-month high after Saudi Arabia, the world’s biggest oil producer, agreed to reduce output more than expected in a meeting with the Opec oil cartel and other major producers (a group known as Opec+).Saudi Arabia pledged to cut production by an additional 1m barrels per day in February and March.
Brent crude, the global benchmark, rose nearly 1% to $54.09 a barrel, the highest since late February 2020. US crude climbed to $50.24 a barrel.
Goldman Sachs stuck to its year-end forecast of $65 a barrel for Brent but said in a note:
Despite this bullish supply agreement, we believe Saudi’s decision likely reflects signs of weakening demand as lockdowns return.
In the UK, car sales plunged to their lowest level since 1992 last year – the biggest slump since the second world war – despite a surge in sales of electric cars, according to industry figures. Sales fell by 29% during the year to about 1.63m, according to the Society of Motor Manufacturers and Traders (SMMT).
The timing of the first coronavirus lockdown across the UK last year couldn’t have been worse. It came in March, the month when sales are usually boosted by a change in number plates. Car showrooms were closed in England from late March until June, forcing car companies to adjust plans for production and sales. The data comes as England and Scotland are embarking on another lockdown.
The bosses of the UK’s top companies are paid 115 times more than the average worker, according to research by the High Pay Centre thinktank. This means that they will have made more money by teatime on Wednesday than the average UK worker will earn in the entire year. The chief executives of FTSE 100 companies are paid a median average of £3.6m a year, which works out at 115 times the £31,461 collected by full-time UK workers.
On the data front, the Caixin survey of Chinese services for December was 56.3, less than the 58.1 expected by economists. The previous reading was 57.8. We’ll be getting final reading for services and composite surveys for the eurozone and the UK this morning.
The agenda
8:15am GMT: Spain IHS Markit Services PMI for December (Forecast: 45)
8:45am GMT: Italy Markit Services and Composite PMI for December (Forecast services: 45.3)
8:50am GMT: France Services and Composite PMI (Final) for December (Forecast: 49.6 / 49.2)
8:55am GMT: Germany Markit Services and Composite PMI (Final) for December (Forecast: 47.5 / 52.5)
9:00am GMT: Eurozone Markit Services and Composite PMI (Final) for December (Forecast: 47.3 / 49.8)
9:30am GMT: UK Markit/CIPS Services and Composite PMI (Final) for December (Forecast: 49.9 / 50.7)
1:15pm GMT: US ADP employment report for December (Forecast: 88,000)
2:00pm GMT: Bank of England governor Andrew Bailey speaks at Treasury select committee
2:45pm GMT: US Markit Services and Composite PMI (Final) for December (Forecast: 55.3 / 55.7)
3:00pm GMT: US Factory orders for November (Forecast: 0.7% m/m)
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