In focus today
Following the airstrike launched by the US and UK against Houthi rebel target in Yemen overnight (see more below), geopolitics will be on top of the agenda.
Today, in the UK, we get the monthly GDP estimate for November. It will be interesting to see whether it mirrors the positive momentum indicated by PMIs, which have hovered in expansionary territory the past months.
The US December PPI is also due for release today. Yesterday, both headline and core CPI picked up 0.3% m/m, which markets took as a hawkish signal, but with an overall muted impact.
In Sweden we get housing price statistics (CET 06.00) for December and the Riksbank’s Deputy Governor Aino Bunge will attend an event at the Ekonomichefsdagarna conference organised by Kommunalekonomernas förening (KEF) to discuss the economic situation and current monetary policy.
We look to Asia over the weekend, as on Saturday Taiwan will elect a new President as well as parliament. In Taiwan, polls are not allowed 10 days before the election but the most recent surves show a pretty tight margin between DPP’s William Lai and KMT’s Hou Yu-ih. Lai leads with 36% support vs 31% for Hou. DPP is currently in power and a victory for Lai would mean more of the same with an independence leaning stance whereas a victory by Hou could ease tensions a bit as KMT has generally had a less confrontational stance towards Beijing, although still not being in favour of unification. Also if Lai wins he will have a weaker mandate than current president Tsai Ing-wen who got close to 60% of the votes in 2020 and DPP will likely lose the majority in the Taiwanese parliament.
Finally, early morning European time on Monday, China is expected to lower the policy rate, the Medium Lending Facility 1-year rate, by 10bp from 2.5% to 2.4%.
Economic and market news
What happened overnight: Geopolitics. Oil prices surged overnight, as the US and UK launched airstrikes on the Yemen Houthis, marking a significant escalation in the already tense situation around the Red Sea. The move was a response to the recent Houthi attacks on international shipping in the area, which has so far counted 27 attacks in the past two months, according to US officials. This has vastly reduced the number of containers passing through the Suez Canal, which have instead opted to sail the long way around Africa. As of this morning, Brent was up 1.9% at 78.9 USD/bbl., extending gains from yesterday whe Iran seized an oil tanker off the coast of Oman.
China. Headline CPI dropped again in December by 0.3% y/y, which was a little less than the -0.4% y/y expected by consensus. It was the third month in a row with deflation in headline CPI but again it was mainly driven by a decline in food prices (-3.7%). Core inflation (ex food and energy) was flat at 0.6% y/y so we are still not seeing broad-based deflation. Lower food prices is actually good for consumers as it lowers living costs and thus improves purchasing power. Chinese trade data were also better than expected showing a rise in exports from 0.5% y/y to 2.3% y/y (consensus 1.5% y/y). Since export prices are falling it corresponds to a rise in real terms of around 8%. It highlights that a) the headwind to the Chinese economy from weak exports is fading and b) the global manufacturing recession is easing. Imports rose from -0.6% y/y to 0.2% y/y (consensus -0.5% y/y).
Bank of Japan. Overnight, reports surfaced that the Bank of Japan is said to revise forecasts for inflation and growth down for the fiscal year 2024 (starting in April) at its meeting on 22-23 January. However, we stress that the projections further out are the ones of significance, of which there are no reports of changes. Officials continue to expect inflation to re-accelerate after a brief slowdown. We therefor do not see this as a gamechanger, although it highlights that the BoJ is likely to stay on hold at the January meeting. We expect the BoJ to exit the negative interest rate policy in April 2024.
What happened yesterday:
US CPI: The most anticipated news of the day was the release of the US CPI for December. Both surprised slightly to the upside, with headline printing at 0.3% m/m (cons. 0.2%), and core at 0.31% m/m (cons. 0.3%). Both the dollar and 10Y treasury yields gained on release, as markets tempered expectations of a March rate cut, but the movements more or less reversed over the day, with EUR/USD marginally down and yields flat. We got hawkish signals from Cleveland’s Mester, who said that a March cut would be too soon. On balance, markets are still pricing in 6 rate cuts during the course of the year, which we think is too optimistic, and instead expect 4 rate cuts, with the first in March. See also Global Inflation Watch – Diverging Signals in December, 12 January for an overview of global latest inflation trends.
Energy markets: European gas prices declined about 0.5% in yesterday’s session. After a mild start to the winter the freezing spell of the past week has been a test for the European gas supply, and it looks to have passed. As of Monday, the EU’s gas storage was still 83% full, giving confidence that a lack of gas is unlikely to be a large problem going forward.
Riksbank: Finally, The Riksbank’s Per Jansson said in a speech that inflation pressures have come down and that he is convinced that interest rates had peaked. He also signalled that the SEK is still on the Riksbank’s radar, with the comment: “But exchange rates can fluctuate rapidly […] and they can in turn affect inflation prospects”.
Equities: Equities held tight on Thursday, although investors had several reasons to sell: Inflation was a little too hot, job data a little too strong and Fed speeches on the hawkish side. However, S&P 500 was down only -0.1% and VIX even dropped slightly. The limited equity impact is interesting and quite positive. Short-term positioning and sentiment is not as stretched long as one could have thought. That being said, investors were not happy. Defensives outperformed and yield sensitive sectors such as utilities and real estate were the losers of the day. Rotation story in the Nordics as well with high multiple stocks like Genmab or EQT selling off and investors piling into defensives like Carlsberg and Coloplast, up +4%. The Japanese rally is continuing this morning after another round of falling inflation figures. European futures are higher this morning and US a notch lower.
FI: The key highlight yesterday, the US CPI figure, yielded a whipsaw market reaction. While initially sending yields higher on a better than expected print, the 2y UST was up by 5bp, however it was quickly reversed. By the end of the day, European yields were virtually unchanged in the 10y point. Following the change of the10y Benchmark bond (Feb 2034), the Italy-Germany spread now stands at 157bp. Curves steepened from the front end, adding 2bp to the rate cut priced for this year to 141bp. Intraday though, markets added slightly more on the back of headlines suggesting that ECB’s Vujcic said that once rates cuts starts, 50bp cuts cannot be excluded. Looking at the details though, he said that in his view they move in 25bp steps in an ideal world, which the media headline did not reflect. Yesterday afternoon, Fed’s Mester said that a March rate cut is probably too early. Upon announcement of the 4.229% yield of yesterday’s 30y 21bn UST supply, 30y yields reacted with a 5bp rally. Tonight, Austria and Sweden are up for a review by DBRS.
FX: Yesterday proved another quiet session in FX markets. The CPI-induced rally in USD was short-lived and EUR/USD remains within the 1.09-1.10 range. SEK traded slightly on the back-foot with EUR/SEK moving above the 11.25-level which contributed to lifting NOK/SEK back closer to parity amid NOK staying little changed. The recent JPY sell-off eased yesterday with USD/JPY now trading just above 145 but still more than 4 figures higher compared to new year.
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