Market movers today
We kick off the week with euro area GDP figures for Q4. We expect that growth has edged out a small plus of 0.4% q/q, but the recovery pace cooled markedly at the end of 2021 in light of Omicron and supply chain headwinds, notably in Germany. We also get German CPI figures today. Here we should see a big dip in inflation as the VAT-effect falls out. Energy will continue to keep inflation elevated, though.
Overnight, The Reserve Bank of Australia is widely expected to end QE purchases, and the focus will be on forward guidance. While recent data supports the case for earlier hikes, we think RBA is unlikely to take as hawkish stance as markets are currently pricing.
Later in the week, we will focus on the ECB meeting on Thursday, where we do not expect to hear new policy signals (read more in our ECB Preview, 28 January). Bank of England will also meet on Thursday, and we look for a 25bp hike. Besides central bank meetings, we will keep an eye out for euro area inflation, several interesting Fed speeches and a jobs report from the US.
We will of course also look out for developments in the Russia-Ukraine stand-off.
The 60 second overview
Italy’s presidential election: Impasse was resolved over the weekend by incumbent President Mattarella agreeing to serve another term. This gives PM Draghi the opportunity to lead his unity government until the end of the parliamentary term in 2023 and reduces the political uncertainty for businesses and markets. Implementing Italy’s ambitious EUR 200bn recovery plan and structural reforms will remain the priority for the remainder of Draghi’s term. That said, fragilities within the government have already become more visible during the presidential election and disagreements over spending priorities and reforms (especially on the thorny issues such as tax, pension and labour market still outstanding) will probably only intensify as the next general election approaches.
Macro: US private consumption moderated in December (-1.0% m/m) driven by lower goods consumption. The normalizing goods demand could help alleviate some of the global inflation pressures, although the current level still stands around 5.2% above counterfactual pre-covid trend (down from +15% last March). Over the weekend, China’s official Manufacturing PMI’s new export orders index remained weak at 48.4 (from 48.1), still signalling contraction in export demand. This week, the US jobs report will be the key US data release to follow, we expect to see around 200k new jobs as faster recovery is unlikely before labour force participation begins to pick up. Omicron likely delayed the recovery in January, as U.S. Census Bureau’s Household Pulse survey data indicates that almost 8.8m Americans were unable to work in early January due to Covid-related sick leave or taking care of others who were infected (up from around 3.0m in December).
French election: The French economy continued its outperformance at the end of 2021, with GDP standing 0.9% above pre-pandemic levels, in contrast to a short-fall of 4% in Spain and 1.5% in Germany. A strong recovery in consumer spending and business investment helped France weather the economic fall-out from the Covid-19 pandemic better than other euro area peers. The strong economy remains one of the main selling points for Emmanuel Macron’s re-election bid and our base case is for him to secure another term as President. However, as the surprise potential at French elections remains high, we see scope for a higher election risk premium to be priced in fixed income markets, whereas the election impact on EUR/USD should be muted (read more in Research Euro Area – French presidential election: Macron encore? 31 January).
Equities: Equities in a big turn-around on Friday led by the tech sector flying after some solid earnings results. US outperformed Europe by 2.5% due to the turn-around but even more interestingly, tech was up by almost 3.5% while energy and materials were down. As a result, we had the first day in a while where pure optimism took over and hence cyclical growth outperformed. In US Dow +1.7%, S&P 500 +2.4%, Nasdaq +3.1% and Russell 2000 +1.9% Positive sentiment is continuing in Asia this morning as the Lunar New Year starts and therefore some Chinese markets are closed for holiday. European and US are higher as well.
FI: We have a week with several central meetings including the ECB meeting on Thursday as the main event. We expect that ECB will stress that they will not hike in 2022. Hence, if ECB is able to convince the market that they are not going to hike it should be positive for the front end. More support may also come from the EU and German inflation data, which is expected to decline due the base effect from the German VAT.
FX: Friday was a quieter day after the sharp move lower in EUR/USD on Thursday. EUR/USD is now trading closer to 1.11 than 1.12 vs. close to 1.15 in the middle of January. EUR/GBP is trading close to 0.83 ahead of the Bank of England policy announcement on Thursday.
Credit: Credit markets saw further weakness on Friday, with iTraxx Xover widening almost 6bp (to 285bp) and Main 1.7bp, closing in 59bp (its highest level since November 2020). HY bonds sold even more off, with HY bonds widening 9bp and IG 2bp.
