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Stimulus optimism, U.K. approves vaccine, and Biden not ready for a China reset. 

Yield spike 

Investors dumped Treasuries yesterday amid an outbreak of optimism about the chances of a stimulus package. A bipartisan group of lawmakers pitched a $908 billion proposal yesterday and House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell are also making fresh attempts to break the deadlock. The move higher in Treasury yields, accompanied by a steepening yield curve, will have some knock-on effects in stock, currency and credit markets.  


The coronavirus vaccine developed by Pfizer Inc. and BioNTech SE will be available in the U.K. from next week after the shot received emergency authorization. The country has ordered enough doses of the vaccine to immunize 20 million of its 67 million population, with the very elderly and those in care homes the first in line for vaccination. The U.S. Food and Drug Administration meets on Dec. 10 to discuss approval of the Pfizer treatment. For now, the pandemic continues to take its toll with deaths in Germany hitting a seven-month high and hospitalizations rising across the U.S. 

No change

A rapid reset of U.S.-China relations looks unlikely following the change of occupant in the White House after President-elect Joe Biden told the New York Times that he would leave the phase-one trade deal in place while he conducts of full review of U.S. policy towards it Asian rival. The outgoing administration got a new headache when it was revealed that prosecutors are investigating whether several individuals offered political contributions in exchange for presidential pardons. President Donald Trump said that the alleged wrongdoing revealed in the unsealed court documents were "fake news." 

Markets mixed

After hitting record highs in the U.S. yesterday, today is a more subdued day for global equites as investors look for new catalysts after already pricing in all the optimism they can muster. Overnight, the MSCI Asia Pacific Index added 0.2% while Japan's Topix index closed 0.2% higher. In Europe, the Stoxx 600 Index had slipped 0.2% by 5:55 a.m. Eastern Time with traders favoring defensive stocks. S&P 500 futures pointed to a drop at the open, oil held steady ahead of tomorrow's OPEC+ meeting and gold continued to gain ground. 

Coming up...

A busy week for labor data kicks off with the ADP employment change number at 8:15 a.m. Crude oil inventory figures are released at 10:30 a.m. The latest Fed Beige Book is published at 2:00 p.m. Fed Chair Jerome Powell appears before the House Finance Panel from 10:00 a.m. and New York Fed President John Williams speaks later. Negotiations over the U.K.'s post-Brexit relationship with the EU appear to be coming to a head in London, with British pound traders increasingly sensitive to updates from the talks as the deadline approaches. 

What we've been reading

This is what's caught our eye over the last 24 hours.

And finally, here's what Joe's interested in this morning

Yields on U.S. government debt jumped yesterday, but overall they remain extremely low, even with the stock market soaring and other burgeoning signs of economic optimism. The lack of volatility in the market can be explained by the fact that investors understand that the Fed has set out aggressive conditions it needs see before hiking rates -- evidence of sustained higher inflation and full employment -- and that the economy is nowhere close to hitting those things.

That being said, it's possible that sometime next year -- perhaps next summer -- the situation could start to look different, creating the first interesting test for Powell and the rest of the FOMC. University of Oregon econ professor Tim Duy wrote in Bloomberg Opinion yesterday that thanks to a likely vaccine, and the substantial savings currently held by the public, that we could see a "supercharged" economy next year, as people feel safe, things open up, and have money to spend.

This also creates a potentially interesting situation on the prices side. We talked further with Duy on TV, discussing in part the possibility that inflation could start to rise, as industries like hotels, restaurants, other leisure services meet a population that's potentially ready to spend big time after more than a year of constraints. That's when the Fed is put to the test. As David Beckworth of the Mercatus Center put it, we could be seeing a "cage match between AIT (Average Inflation Targeting) credibility and the 2021 boom." In other words, does the Fed just look through services inflation (if it comes) next year, and argue that it's transitory due to a one-off "return to normal" shock? Or do some of the members start to get cold feet and talk about rate hikes, potentially creating a scare in the bond market.

Back in early 2011, Bernanke famously described the uptick in inflation as "transitory" and he was right to, however at that time, the unemployment rate was still extremely elevated -- above 9%. The unemployment rate is at 6.9% currently, and could plausibly be significantly lower in a 2021 boom scenario. So while things seem calm now on the Fed and rates side, with talk of the first rate hike way off in future times, it's not hard to imagine things looking a lot more confusing in just a few months time.

Joe Weisenthal is an editor at Bloomberg.

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