Your weekly economic update from the team at FXD Capital


This week on the data front saw the UK labour market data on Tuesday, US Federal Reserve meeting on Wednesday and US GDP on Thursday.

Once again, the UK labour market data for November masked the true weakness of the UK labour market. The unemployment rate rose from 4.9% to 5.0% in November, which is a four-year high but broadly in line with the BoE’s estimated equilibrium level. Similar to the Eurozone, the decline in employment is likely to be, in reality, a lot more acute than indicated by the (limited) increase in unemployment. This is due to the furlough schemes, the increase in the number of people not actively searching for work, and data collection issues. As the impact of these factors fade and given that the claimant count continued to grow steadily in December, the unemployment rate is likely to continue to increase in the next couple of quarters. In all, the data continues to point to the already growing weakness of the UK labour market just before the new lockdown measures were introduced in January. This would reinforce the need for the furlough schemes to be (at least partially) extended beyond April and could contribute to a more dovish Bank of England at its policy meeting next week.

Apologies in advance to any of our sun-drenched beach-loving readers (who isn’t), but Deutsche Bank analysts reckon ongoing travel restrictions in the UK could create another domestic tourism boom in 2021. The third quarter of 2020 saw an extremely rare event as Britain’s long-entrenched current account deficit in tourism – meaning UK travellers usually spend more abroad than foreigners spend on trips to Britain – actually turned positive. Staycations may be the only practical option for holidaymakers this summer, further boosting the domestic economy and the current account balance with it. Let’s hold off on the expensive sun factor for now.

Stateside, US Senate Majority Leader, Chuck Schumer, said that the US fiscal stimulus will likely not pass until mid-March. In a signal that the size of the fiscal stimulus will likely be lower than the $1.9trn floated by President Joe Biden, the President has indicated that he is willing to negotiate the final price tag in order to get the package through the Senate. Also, it should be noted that Democratic congressional staff are preparing options for two legislative routes for President Biden’s Covid-19 relief plan – one that includes Republican support, and one that goes without. In the current political climate, the second route option might not end well.

Also in the US Senate, in the first on-the-record test of support for the conviction on impeachment charges that Trump incited his supporters to mount an insurrection at the US Capitol, 45 out of 50 Senate Republicans voted to consider stopping the trial before it even starts. After the vote, Kentucky Senator Rand Paul (R), who pushed for the dismissal, claimed that the impeachment article delivered by the House on Monday was “dead on arrival”. He is probably right. It would take 17 Republican senators breaking ranks and voting alongside the 50 Democrats to convict the president and prevent him from ever running for federal office again.

One thing that we have learned from all of this is that the whole impeachment process is a bit of a farce. All Senators, on both sides of the aisle, are duty-bound to take an oath on impartiality, administered by the Chief Justice of the United States, before the hearing can commence. This oath was duly taken last Monday by all Senators. Despite this oath, the vast consensus is that the vote will go roughly along party lines. How is that in any way impartial? What’s worse is that nobody seems to bat an eyelid. “Greatest Constitutional Democracy” in the world. I more likely question if the US  Constitution is currently fit for purpose?

On Wednesday evening, Federal Reserve Chairman Jerome Powell declared that the battle against Covid-19 is not over. He pledged to keep the monetary “spigots” (taps, I am told) wide open to aid the pandemic-hit economy, brushing aside concerns that the super-easy stance will spawn a stock market bubble and too-high inflation. Under the average inflation targeting framework introduced at the September Fed meeting, the Fed will be patient and will tolerate modest increases in inflation.  The Fed is more concerned about economic recovery from Covid-19 than rising inflation at this point. US yields softened somewhat after the meeting. Wall Street ended down on the day to record its worst day since October.

On Thursday US GDP grew at an annualised 4.0% rate in the 4th quarter of 2020, in line with market expectations.

In Europe, the ECB were on the wires trying to talk down the value of the Euro by explicitly mentioning the nuclear option of further rate cuts. According to Bloomberg quoting an “official”, ECB members are “uncomfortable that investors appear to be largely ruling out more interest-rate cuts, and have agreed to stress that such stimulus remains a viable option”. Bloomberg explains, however, that the ECB is not considering cutting the deposit rate in the short term.

The EU and Astra Zeneca continue to have their vaccination spat in public. Boris must be loving the fact that the UK appears to have moved a lot quicker on the vaccination negotiation front. Michael Gove couldn’t resist and has even offered to talk to the EU “to see if he can help”. This must be very hard to bear from an EU perspective. In general, the UK should be applauded for the roll-out of the vaccinations so far.

Finally, a lot of headlines this week focused on the savage moves in the share price of GameStop and others. This week’s price action makes the dotcom antics of the late 90’s look timid. GameStop was at one stage this week “up 1300% on a 7 day trading period”. The time it took me to write that one short sentence probably rendered that statistic already obsolete. I, being an old fashioned investor, “googled” GameStop Inc. to find out what the company actually did as a business. I am still none the wiser, but I now know several vendors’ platforms where I can buy shares in it “commission-free” (although the huge bid/offer spread that the punter has to cross every time they transact a simple trade is far from free).

The mechanics of what has happened to GameStop’s share price, put very simply, work something like this: via blogging websites like Wall Street Bets on Reddit, the retail punters (real-life gamers and market vigilantes) first identify an illiquid stock with high short interest (GameStop’s sat at 139% of shares outstanding on Wednesday morning – so basically more shares were borrowed in the market as a whole than actually existed) and buy deep out of the money call options for a reasonably low premium from market-making institutions, who frankly should know better. (I’d suggest charging a higher premium, but hey what do I know?) The retail punters then decide to buy as much underlying stock as they can, forcing the price to rocket higher. All of this creates a “short squeeze” and a “gamma squeeze”. I will not bore you with the technicalities of a “gamma squeeze” but let’s just say that it is far from a pleasant experience from the option market makers’ perspective. A new army of retail traders is focused on momentum opportunities, rather than old school valuations. Geniuses I hear you say? Well, kind of, maybe, I really don’t know.

A lot depends on how “legal” the collusion is perceived by the regulator. It hasn’t really been a major concern before because it has never really driven the price of a share so dramatically. The “gamification” of the stock market via these apps is something that will scare the regulator, and it should. Whatever your take on it is, it is quite funny to see the powerful hedge funds getting their behinds handed to them by a bunch of Nintendo playing geeks (I obviously still haven’t grasped the change in fundamentals if I am still referring to Nintendo, but I am not sure I want to understand). Whatever the legal outcome is, I think it’s fair to say that the Exchange Act of 1934’s stipulation for regulators to keep “fair and orderly securities trading” looks fairly strained right now. I’ll move on before my stats, and I myself, become even more obsolete.

Next week keep an eye out for Euro Area GDP and Euro Area Inflation numbers on Tuesday and Wednesday respectively, the Bank of England Rate Decision on Thursday, and the US employment data on Friday. Best of luck.


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