In focus today
Today we get a string of tier-2 data from the euro area. The most important ones are the euro area retail sales and German factory orders. The euro area November retail sales will provide important information about how consumption fared in Q4. German factory orders will shed light on the German industry ahead of the industrial production figures tomorrow. Moreover, we receive a bunch of confidence indicators including the Sentix investor confidence indicator for December.
In Switzerland, we get inflation numbers for December. The past months, inflation has surprised to the downside both compared to the SNB’s forecast and consensus expectation with headline and core now within the SNBS’s target range. Today’s print will prove important as to whether the SNB will opt for a rate cut soon, possibly already in March.
Finally, we will look out for Tokyo inflation data for December after price pressures moderated quite a bit in Japan in November. The print is released overnight.
Economic and market news
What happened overnight: Oil prices fell more than 1% overnight due to Saudi Arabia cutting prices coupled with rising OPEC output, outweighing upward price pressure amid geopolitical jitters in the Middle East. In the US, Congress agreed on a new spending deal for the current fiscal year, mitigating risks of a partial government shutdown on January 20.
What happened on Friday: The first trading week of 2024 concluded with the broad dollar index (DXY) gaining 1.1% on a weekly basis, proving to be the largest weekly gain since mid-July. This move follows sour global risk sentiment coupled with data releases indicating that the US economy is still proving fairly resilient. Bond yields moved higher approaching three-week highs, with the 10Y UST yield rising 6bp to 4.05%. In equity space, European markets closed lower and US stock indices climbed marginally higher, rounding off a choppy first week of 2024.
On Friday, US macro data provided mixed signals of the labour market. The US December Jobs Report surprised to the upside as non-farm payrolls grew by 216k (cons: 170k) although the November figure was revised down by 26k. Moreover, the labour force participation rate reversed, edging down to 62.5% and average hourly earnings remained at 0.4% m/m, which historically is uncomfortably quick for the Fed. In general, the report indicates that US labour markets are still tight. Conversely, the ISM services index ticked down to 50.6, notably lower than expectations (52.6) – and in contrast to the more upbeat PMIs released earlier in the day. Business activity improved, but prices, new orders and employment weakened. Markets are currently pricing around 140bp of Fed cuts for 2024. However, FOMC member Lorie Logan provided some pushback on the market pricing on cuts on Saturday stating that premature easing of financial conditions could reignite inflation pressure, signalling that rate hikes cannot be ruled out.
In line with our call, euro area headline inflation came in at 2.9% y/y in December (prior: 2.4%, cons: 2.9%), with the uptick primarily driven by energy base effects. Core inflation increased by 3.4% y/y (prior: 3.6%, cons: 3.4%). Using ECB’s seasonal adjustments, the 3m/3m seasonally adjusted annualized inflation was 1.4%, warranting that the underlying momentum in core prices is still declining. Despite inflationary momentum easing, service inflation remains too high for the ECB’s, printing at 2.3%. Hence, we believe that the ECB needs more data to be convinced of a sustainable convergence back to the 2% target.
Equities: Job market data all over the place sent equities for a volatile ride on Friday. Equities were mixed but closed lower for the week, thereby snapping a nine-week winning streak. Last week was all about reversal: Small caps suddenly underperformed large caps, value outperformed growth and defensives made a grand comeback. Global defensives outperformed cyclicals by 4 p.p. last week. Same story held on Friday. S&P 500 closed up 0.2% while Stoxx 600 managed to recover to -0.3%. We see the de-risking last week as a symptom of positioning and overbought conditions short-term and do not read too much into it. However, there is a macro aspect of it as well, and hence we recommend decreasing cyclicals exposure. Asian markets are continuing lower this morning, particularly in Hong Kong after renewed regulation fear in the gaming sector. US and European futures are lower as well.
FI: Global yields reacted sharply lower to the US labour market report on Friday, but quickly reverted back to the outset of the release. The euro area flash inflation report did not change market dynamics. 10y German Bunds were up 2-3bp on the day, and intra euro-area spreads were broadly constant on the day. Markets have taken out almost 25bp of the rate cuts from ECB and Fed since late last year, with now 144bp and about 140bp priced until year end. In particular for ECB, we find market pricing too aggressive.
FX: In a quite unusual whipsaw-session on Friday EUR/USD tested both the 1.09 support- and later the 1.10 resistance level before ending the session virtually unchanged around 1.0950. With EUR/SEK edging higher and EUR/NOK remaining more stable we are now close to parity in NOK/SEK while EUR/GBP has moved down to the 0.86-level.
