Eliminate the negative

Friday’s confusion played through to Monday, leading to the unusual conjunction of share prices and bond prices falling together. Sterling was the accidental winner, strengthening by an average of 0.4% with no losses. The safe-haven CHF and the not-so-safe-haven SEK were together at the back.

On any logical basis, the pound ought to have had a bad day after the Prime Minister hinted at a further tightening of Covid restrictions, an MPC member talked of negative interest rates, and the Chancellor warned of greater economic woes. The Prime Minister’s contribution was an observation that “We’re going to keep the [lockdown] rules under constant review. Where we have to tighten them, we will.” Mr Sunak told Parliament that “the economy is going to get worse before it gets better”. Silvana Tenreyro, an LSE professor and external member of the Bank of England’s Monetary Policy Committee, said at the end of a speech on the subject that, if further easing becomes necessary, “having negative rates in our toolbox will, in my view, be important”.

Having drifted lower during the morning, the pound perked up after lunch despite the negative rates story. It bagged gains of between one third and two thirds of a cent against the North American and antipodean dollars, the euro and the Swiss franc. For the year to date, sterling is on average unchanged.

Biden’s trillions

Investors spent the weekend and Monday trying to digest the implications of comments by US President-elect Joe Biden at the end of last week. They came to the conclusion that his policies will result in significantly more US government borrowing.

Mr Biden revisited the idea of issuing $2,000 handouts to all adults, rather than the $600 offered in the most recent legislation. Speaking of the whole package, which will be given more detail on Thursday, Mr Biden said “the price will be high… it will be in the trillions of dollars”. Investors marked down Treasury bond prices, sending yields higher. In the last week, the yield on 10-year Treasuries has risen from 0.93% to 1.15%. That might not look much but it represents a 23.7% bigger return.

The only ecostat of any consequence on Monday was the Sentix measure of Eurozone investor confidence, which improved from -2.7 to 1.3, its highest level since February. The Bank of Canada’s Business Outlook Survey “pointed to a continued recovery” though “firms expect the recovery to be uneven”.

“Covid and the composition of spending”…

…is the title of a virtual speech by BOE Deputy Governor Ben Broadbent this morning. It is difficult to guess whether it will have any impact on the pound. The overnight report from the BRC, which showed a 4.8% annual rise for UK retail sales, certainly did not.

The agenda for the remainder of the day shows little promise. Highlights extend no further than the speeches from Mr Broadbent and two Federal Reserve figures: Lael Brainard and Eric Rosengren.

There are ecostats for Italian retail sales, South African manufacturing output, US job openings and US small business confidence. Tonight’s figures cover NZ commodity prices and Japanese machine tool orders.