Financial Markets Monthly - January 2021

The vaccination race has kicked off with the US and UK leading the G7 in jabs while Canada and a number of European countries are off to a slower start. Inoculations can’t come soon enough as outbreaks continue to intensify in many regions, straining healthcare systems and necessitating some of the harshest lockdowns since last spring. The UK, dealing with a new, fast-spreading strain of the virus, is facing a significant setback in its already lagging economic recovery. The euro area likely lost ground as well toward the end of 2020 and some restrictions are being extended to ensure recent flattening in case growth is sustained. Ongoing containment measures will slow Canada’s recovery, while a more measured tightening in restrictions and some fresh fiscal stimulus should keep the US economy growing.

2021 has brought some notable political transitions. The UK and EU finally agreed to a trade deal that will allow quota- and tariff-free (but not entirely frictionless) goods trade, preventing a Brexit cliff-edge at the start of the year. And despite some deeply troubling scenes in Washington, Congress’s certification of the Electoral College vote put Joe Biden one step closer to his January 20 inauguration. Democrat wins in two Senate runoffs early this year strengthened Biden’s hand, though a narrow 50-50 split (VP Harris will act as tie-breaker) could still present challenges for the most ambitious aspects of the new administration’s agenda. Nonetheless, the prospect of more fiscal stimulus and larger budget deficits prompted a moderate selloff in the U.S. Treasury market, with 10-year yields rising above 1% for the first time since last March. Market-based inflation expectations rose above 2% for the first time since 2018, with rising oil prices contributing to the increase. Saudi Arabia’s unilateral production cut pushed WTI up to a ten-month high of more than US$50 per barrel.


  • US payroll employment declined in December for the first time since April. But it looks like the US economy continued to grow in Q4/20 and will do so again in Q1/21, even as rising COVID-19 cases and record hospitalizations necessitate ongoing containment measures.
  • Canadian employment also dipped at the end of last year and restrictions are being extended or tightened in early-2021. While GDP growth appears to have held up in Q4/20, we expect the Canadian economy will flat-line in the current quarter.
  • A post-Brexit trade deal was the only bit of good news for the UK, which is dealing with a fast-spreading mutation of COVID-19. Harsh lockdown measures will continue for at least another month, which should make for a second consecutive pullback in GDP in Q1/21.
  • Europe generally had more success flattening the curve but that likely came at the cost of a decline in Q4/20 GDP. We expect a return to growth early this year, but further extension of containment measures would put that at risk.
  • Most central banks are in a holding pattern at the moment and will evaluate the need for any tweaks to their asset purchase programs this year. But with the UK economy facing a longer road to recovery, we think the BoE will increase stimulus this year with a move to negative rates.


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    Josh Nye is a senior economist at RBC. His focus is on macroeconomic outlook and monetary policy in Canada and the United States. His comments on economic data and policy developments provide valuable insights to clients and colleagues, and are often featured in the media.

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