Vice President Pence will not invoke the 25th Amendment, leaving impeachment as the only path left for Democrats to remove President Trump. House Speaker Pelosi will reportedly give Pence a deadline today. Since he won’t invoke it, the House will move ahead with impeachment proceedings tomorrow. As we’ve note before, impeachment is a largely symbolic move that will not impact policy in the final days of President Trump’s administration. Of note, the Senate is currently in recess until January 19 and so it would have to convene a special session to hold the impeachment trial.

The US curve continues to steepen.  At 108 bp, the 3-month to 10-year curve is the steepest since late March and the year’s high from March 18 comes in near 120 bp.  This is helping US bank stocks outperform and one of the forces putting downward pressure on gold, though there are plenty of other supportive factors for precious metals. The 10-year yield of 1.16% is the highest since March 19, while 10-year TIPS inflation breakeven inflation rate of 2.08% is just below the multi-year high of 2.11% from last week.  The rise in the long end is driven in part by rising inflation expectations here in the US as markets contemplate another slug of fiscal stimulus ahead.

It’s worth noting that real US yields have become less negative. That is, the increase in nominal yields has been faster than the increase in inflation expectations. This may be one of the factors helping the dollar stabilize. December inflation data will be closely watched, with CPI out tomorrow and PPI out Friday.

US Real Yields, 2017-2020

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Brainard, Rosengren, Kaplan, Kashkari, and George all speak today. November JOLTS job openings (6400 expected) will be reported.

Brazil reports December IPCA inflation.  It is expected to accelerate to 4.37% y/y from 4.31% in November.  If so, inflation would be the highest since May 2019.  Of note, the inflation target and target range were both shifted 25 bp lower this year to 3.75% and 2.25-5.25%, respectively.  Next COPOM meeting is January 20 and rates are expected to remain steady at 2.0%.  However, the CDI market is pricing in a 25 bp hike to 2.25% at the March 17 meeting, followed by a series of 50 bp hike thereafter that take the policy rate to 5.25% at year-end.  While this seems way too aggressive, we do believe steady tightening of a lesser degree will be seen this year.  Bloomberg consensus sees a year-end rate of 3.25%, which seems much more reasonable and likely.

Global Longer-Dated Yields

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Yields in Europe and UK are following the trend higher in the US markets, but not as fast. In both cases, 10-year yields remain within recent rages , trading around 0.33% in the UK and -0.48% in Germany. The widening nominal interest rate differential in the US’s favor provides some support for the dollar, but we still think this is only one of many variables and the headwinds will prevail in the short term.

Italy is facing another bout of political instability as a junior partner of the ruling coalition threatens to leave. Former Prime Minister Renzi may pull two ministers from his Italia Viva (Italy Alive) party out of the government tonight. After breaking away from the Democratic Party, Renzi’s party only holds 30 seats in the ruling coalition led by Prime Minister Conte, but it’s unclear if any other center-left parties will follow his lead. The two party leaders have clashed over the government’s plans for using the EU recovery fund. Italy Alive officials said the party will first study the government’s latest proposal for using the recovery fund that was just received Monday evening before making any decisions about leaving the coalition.

Conte would first try to cobble together another working coalition and so talk of fresh elections is premature. Of note, the current parliamentary terms ends in May 2023. For now, markets have not reacted to these developments. Elsewhere, Italian retail sales plunged -6.9% m/m in November as lockdowns hit.

EU Spreads, 2020 - 2021

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WIRP suggests potential for negative rates as early as May. We see this as highly unlikely.

ASIA

Reports suggest Japan’s government will declare a state of emergency for Osaka, Kyoto, and Hyogo prefectures as soon as tomorrow. With Tokyo and its surrounding areas already in a state of emergency, this new move would put a huge chunk of the nation under lockdown. The economy was already weak going into this current wave of infections and the recovery will be further delayed. While the BOJ is on hold for now, we fully expect another round of fiscal stimulus later this year. Elsewhere, Japan reported November current account data. An adjusted JPY2.34 trln surplus was slightly larger than the expected JPY2.0 trln.

Malaysia assets are underperforming on further lockdowns. The government announced a step-up of mobility restrictions for several states and the King declared a state of emergency until August 2021. The lockdown will last for two weeks, but will spare sectors of the economy deemed essential, such as agriculture and manufacturing. The Health Ministry also said they found a variant strain of the virus, similar to that found in the UK. The state of emergency means that parliament is suspended, a good thing for PM Muhyiddin Yassin since he was facing the risk of snap elections. Our initial reaction is that these events are net neutral for Malaysian assets, with the worsening economic outlook from the lockdowns offset by a period of political stability, at least for the near term.