In focus today
Tonight at 20:00 CET the rate decision of this week’s meeting in the FOMC is announced. We expect no monetary policy changes. With no new economic projections, focus will be on Powell’s remarks in the press conference starting at 20:30 CET. We do not expect the meeting to be a major market mover, but see risks tilted towards a modestly hawkish reaction if Powell pushes back against the notion of rapid rate cuts and/or end to QT. Read more in our Fed preview – Patience and gradualism, 26 January. On the data front, January ADP private sector employment and Q4 Employment Cost Index will be released ahead of the rate decision.
In the euro area focus today is on German and French inflation data for January that will give an indication of where we can expect the euro area print to land tomorrow.
In China, Caixin PMI for January is due out. It has increased in the past two months, and we see some downside risk in January. The Caixin PMIs have been higher than the NBS version that we got overnight, where we saw an increase, see below. We expect the two figures to converge. In December the Caixing Manufactuing PMI was 50.8.
Economic and market news
What happened overnight
In China we got the official PMIs from NBS. Manufacturing PMI increased a little from 49.0 to 49.2. Hence, manufacturing remains in contractionary territory for the fourth month in a row. Service PMI increased from 50.4 to 50.7.
In Australia we got fourth quarter CPI. Consumer prices rose 0.6% q/q SA (Q3 1.2%, Consensus 0.8%), while RBA’s key measure of underlying inflation, the trimmed-mean CPI, grew 0.8% (Q3 1.2%, consensus 0.9%). That said, the easing in underlying inflation came in mostly from the goods side, while services price pressures remained more persistent. We have argued that the market pricing for the Reserve Bank of Australia’s rate path has been too hawkish relative to the Fed. After the release, markets are now pricing more than 50% probability of a first cut already in May.
What happened yesterday
In the US there were 9.026mn job openings in December. This is higher than in November where 8.925 job openings and exceeded expectations at 8.750mn. Labour demand remains elevated, which is a hawkish signal for the Fed. Layoffs increased modestly, but at the same time hiring picked up after somewhat weaker November. Conference Board’s January Consumer survey paints a similar positive picture, as Jobs plentiful index rose (45.5; Dec. 40.4). Consumer confidence generally improved as well, especially the current situation assessment rebounded. Inflation expectations continue easing, which is naturally a positive thing for the Fed.
The euro area economy stagnated in the last quarter of 2023 as Q4 GDP growth came in at 0.0% q/q. While activity stagnated in Q4, it was far from collapsing amid a strong labour market. Overall, the growth figures buy ECB more time before the first interest cut. Spanish inflation in January was higher than expected when looking at both headline and core, posing as a topside risk to the euro area print. Headline HICP at 3.5% (cons: 3.0%, prior: 3.3%) and core CPI at 3.6% (cons: 3.3%, prior: 3.8%). We knew that energy inflation would be high as government support measures were rolled back, but the uptick in core also suggests sizeable menu price adjustments.
The European Commission economic confidence indicators were stable in January as both service and industry confidence ticked marginally up. Selling price expectations in the service sector increased for the fifth consecutive month mimicking the PMI service output prices, a sign that service inflation still poses an upside risk for the inflation outlook.
In Sweden we got the NIER economic tendency survey for January. It showed a broad-based rise in all business sectors and in consumer confidence. Hiring plans also gained, a positive sign for the labour market. When it comes to price plans, these rose in manufacturing but remain in a pre-pandemic range. More importantly, price plans dropped slightly in both retail trade and private services, but they remain too high.
Saudi Arabia’s surprise decision to scrap a planned investment to increase oil production capacity 1mb/d might carry great symbolic weight but should not affect oil prices in the short run. The Saudis have about 3md/d spare capacity as it is, which it could quickly tap into should oil prices rise above, e.g. USD100/bbl.
Equities: Global equities were lower yesterday with banks and value in substantial outperformance. Not surprisingly, the macro print of both a stronger than expected JOLT and consumer confidence boosted the higher-for-longer scenario. Yields were also higher in the move, but it is worth nothing the inflation expectation dropping in the consumer confidence survey. Hence, the higher-for-longer is growth- and not inflation-driven which is the perfect outcome for the banks. In US Dow +0.4%, S&P 500 -0.1%, Nasdaq -0.8% and Russell 2000 -0.8%. Asian markets are mixed this morning, Japan is higher while China is leading the rest lower. European futures are mixed while US tech futures are lower after some late hour disappointing tech reporting yesterday.
FI: EGB yields drifted higher during yesterday’s session as national inflation figures for Spain and Belgium came in stronger than expected (0.6% MoM and 0.5% MoM, respectively). 10Y Bund yields rose 3bp throughout the day, while the 2Y point ended up 5bp. 10Y UST yields fell during the evening, now trading marginally above 4%. The Bund ASW-spread widened slightly, while long inflation swap rates (e.g. 5y5y) rose a couple of basis points. The German 30Y syndication yesterday saw very strong demand, indicating that the appetite for duration is currently strong. The bid-to-cover ratio came in at a substantial 12.3. Today, Germany will tap EUR4.5bn in the 10Y segment (2.2% 2034).
FX: EUR/USD remains below the 1.0850 mark in another strong session for the broad USD where US data surprised to the topside. Today focus turns to the Fed meeting. EUR/NOK ended the day higher with focus today on Norges Bank announcement of the fiscal NOK sales pace for February, where we see the risk of an increase to the sales amount, which could act as a headwind for NOK. AUD/USD fell overnight after Australian Q4 inflation data came out below expectations.
