Biden inauguration next week amid Fed repricing

President-Elect Joe Biden isdue to beinaugurated 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 winnersthis 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 believethe BoE will keep the Bank Rate at +0.1% and not cutit into negative territory.

The Fed has attracted muchattention 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. Webelievethe discussions are premature but expect the talks tostart more seriously in Q421,followed by actual tapering from Q122.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 itto send any new signals but believe Fed Chair Jerome Powell is very likely to be askedabout tapering during the Q&A.

The CDU party convention in Germany has begun today,withthe ruling CDU party set toelect a new party leader to replace Angela Merkel. That person may potentially become Chancellor after the September parliamentaryelection, when Merkel is set tostep downofficially. 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 tobe 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 expectthe press conferenceto convey this ray of optimism. The recentrecalibration 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 hasstarted in the US. For more details.14 January.We donot 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, weare due toget preliminary January PMI data for the euro area, the UK, Japan and the US. We expect theseto 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 Q420 GDP data, which we expect to show growth of 6.2% y/y, upfrom 4.9% y/y in Q320

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