President-Elect Joe Biden is due to be inaugurated on Wednesday. While the event is normally a pure formality, tensions are high in the US, with concerns about another riot. We expect the Biden administration to be more stimuli-friendly near-term, as Biden told us when he presented his economic plan yesterday.
The GBP was one of the winners this week, as Bank of England (BoE) Governor Andrew Bailey said there are downsides to negative policy rates leading to higher short-term rates in the UK. We believe the BoE will keep the Bank Rate at +0.1% and not cut it into negative territory.
The Fed has attracted much attention this (and last) week with comments about when to start tapering the QE bond buying pace. The comments have caused a repricing of the Fed, where investors now see a higher probability of a rate hike next year. We believe the discussions are premature but expect the talks to start more seriously in Q4 21, followed by actual tapering from Q1 22 (see Fed Monitor – Still too early for the Fed to start the normalisation process, 13 January). The Fed will be quiet from tomorrow when the blackout period starts ahead of the next meeting, which concludes on 27 January. We do not expect it to send any new signals but believe Fed Chair Jerome Powell is very likely to be asked about tapering during the Q&A.
The CDU party convention in Germany has begun today, with the ruling CDU party set to elect a new party leader to replace Angela Merkel. That person may potentially become Chancellor after the September parliamentary election, when Merkel is set to step down officially. The opinion polls are currently pointing to Friedrich Merz, considered a fiscal hawk. If he is elected, it could mean the German fiscal approach reverting to its pre-COVID-19 pandemic approach.
In our view, the ECB meeting next week is set to be a fairly uneventful one, which we largely expect to be a stock-taking meeting with no new policy signals. As the Euro area economy is still in lockdown and could be all through Q1, it is likely the services sector will continue to drag economic sentiment lower but with the rollout of the vaccines and improvement in the weather conditions, we believe economic activity is set to pick up. We expect the press conference to convey this ray of optimism . The recent recalibration of the policy instruments from the ECB in December has been well absorbed by markets, which means the ECB has no urgency to signal a new policy stance. We expect the ECB to refrain from commenting on any potential taper discussion, which has started in the US. For more details, see ECB Preview: Taking stock, 14 January. We do not expect any policy changes from the Bank of Japan despite a renewed state of emergency in half of the country.
In terms of economic data releases, we are due to get preliminary January PMI data for the euro area, the UK, Japan and the US. We expect these to show that there is still a big difference between the manufacturing sector doing well and the service sector doing poorly due to restrictions. We are also due to get Chinese Q4 20 GDP data, which we expect to show growth of 6.2% y/y, up from 4.9% y/y in Q3 20.