Markets:
Markets are apparently ready to shift into a lower gear after classifying today’s lukewarm EMU PMI’s. The ECB and Fed want to put policy on auto pilot in 2020, the US labour market shows no signs of breaking yet, Boris Johnson will get brexit done and Sino-US trade relations improved after agreeing a phase one trade accord. Today’s EMU PMI’s provided the final piece of precious information. They showed more of the same: stabilization near lows of the past months, pointing to a meagre 0.1% Q/Q growth pace in Q4. The outcomes were close to consensus, explaining the limited market reaction. Investors might keep having faith that the removal of event risk will eventually show up in the data. EUR/USD briefly dipped from 1.1150 to 1.1130, but rapidly reversed course again. German Bunds outperform US Treasuries, but again the PMI-impact is extremely subdued. US yields gain between 2.7 bps (2-yr) and 3.8 bps (5-yr) at the time of writing. German yield decline by up to 1 bp across the curve. 10-yr yield spread changes vs Germany are barely changed with Italy (+4 bps) underperforming. Italian government partners Centre Left and 5SM disagreed on how to rescue failing lender Popolare Di Bari. The government will eventually inject €900mn into state entity Banca del Mezzogiorno-Mediocredito Centrale (MCC) which will together with other investors take part in the restructuring of Bance Populare di Bari. The EU will check whether this complies with rules on competition and state financing. Earlier last week, three 5SM Senators left from Lega with several other threatening to form breakaway groups.
Sterling remained strong during Asian trading hours as PM Boris Johnson want to get brexit through parliament by Christmas. Simultaneously, messages about big infrastructure plans are taking over from brexit as main talking point. The UK economy could use the push in the back. PMI’s deteriorated further and remain in contraction territory for both manufacturing and services. Sterling slightly lost ground, pulling EUR/GBP from the low 0.83-area towards 0.8350.
News Headlines:
The New York Fed’s Empire State index, a measure of current general business conditions, indicated slightly improved manufacturing business activity in the state for the seventh straight month. The index inched up 0.6 points to 3.5 in December while economists had expected a reading of 4. New orders fell 2.9 points to 2.6 while shipments picked up 3.1 points to 11.9. Despite clearing geopolitical headwinds, manufacturers are still faced with a sluggish demand hitting business spending and trade.
European PMIs painted a gloomy picture of the region’s economy in December. In the UK, firms endured their worst slump since the aftermath of the 2016 referendum. Both the services (49, consensus at 49.5) and manufacturing (47.4, consensus at 49.2) sectors experienced an unexpected accelerated drop, raising the odds of the UK economy contracting in Q4. In the euro area, growth remained flat (50.6) as tepid foreign demand and a slowing labour market aggravated a manufacturing slump (45.9 vs. 46.9) and offset a modest increase in services activity (52.4 vs. 51.9).
Japanese and South Korean trade officials met earlier today for the first time since Japan imposed export control systems on South Korean high-technology materials in July. Japan’s move jeopardizes an important pillar of the South Korean economy and the global supply chain of chips. Both sides cited constructive talks and agreed to talk again to “contribute to resolving problems”.
