In focus today
In the euro area, focus is on the inflation print for January today. We expect HICP to decline to 2.8% y/y from 2.9% in December and core inflation to decline to 3.2% y/y from 3.4%. The prints from the individual countries we have received this week indicate that we are close to hitting our expectations. Our core inflation estimate implies another month with a monthly inflation rate that is consistent with the 2% target when annualized. We also get the unemployment rate for December, which we expect remained at 6.4% as indicated by the PMI employment index.
In the UK, we expect the Bank of England to keep the Bank Rate unchanged at 5.25%, which is in line with consensus and current market pricing. Overall, we expect the MPC to deliver a dovish tilt to its guidance coupled with a downward revision to its inflation forecast, see more in Bank of England Preview – Topside risk to EUR/GBP as BoE removes tightening bias, 26 January.
In Sweden the Riksbank is not expected to make any changes to the policy rate, and given that it is a “smaller” meeting without a full monetary report or new macroeconomics forecasts it could be argued that the meeting is the least exciting in a while. We will look for verbal tweaks to the repo rate path suggesting it will cut the repo rate by summer. QT is expected to be raised from 5bn SEK per month to 7bn.
From the US, ISM Manufacturing Index will be released for January while preliminary labour productivity data is due for release for Q4. Earlier flash PMIs pointed towards an uptick in manufacturing activity, while the Fed will keep a close eye on productivity, where the recent surprisingly brisk growth has helped to ease the rise in unit labour costs.
Economic and market news
What happened overnight
In China the Caixin PMI was unchanged from a month ago at 50.8, hence according to this release China’s manufacturing sector expanded for the third consecutive month. This means that we continue to see the Caixin PMI being elevated compared to the national NBS PMI survey, which in yesterday’s release were 49.2.
What happened yesterday
In the US the Fed kept its monetary policy unchanged as widely expected, hence rates were kept at 5.25-5.50%. Powell signalled optimism on inflation but pushed back on expectations for a March cut. We stick to our call for a first cut in March followed by gradual quarterly reductions thereafter, as we think the approach still fits well with the Fed’s risk management stance. Market prices in around 35% probability for the March cut. For more details, see Research US – Fed review: In a risk management mode, 31 January. On the data front, labour costs increased less than expected by 0.9% in Q4 against 1.2% in Q3. This is still on the high side for the Fed. However, it is a dovish signal since it is trending downward more than expected. The ADP report signalled signs of cooling labour market. It came in at 107K, much lower than the expected 145K and the December print was revised downwards.
Yesterday in the US we saw renewed fears in the market for turmoil in the banking sector. The New York Community Bancorp (NYCB), the bank that bought the failed Signature Bank after last year’s bank turmoil closed down 38%, having dropped to 46% earlier. The drop came after the bank’s earnings dropped and it cut its dividends, which executives from the bank said was a result of its deal to take over Signature Bank. Combined with Powell pushing back on rate cuts and disappointing earnings from the US tech giants, equities in the US dropped during yesterday’s session. S&P500 dropped 1.6%, which is the biggest drop since September.
German HICP inflation was in line with consensus expectation at -0.2% m/m but slightly lower on the yearly growth rate at 3.1% y/y (cons: 3.2% y/y). French inflation was weaker than expected in January. French HICP rose 3.4% y/y (cons: 3.6% y/y, prior: 4.1% y/y) and monthly HICP came in at -0.2% m/m (cons: -0.1% m/m, prior: 0.1% m/m). As mentioned earlier, the country data overall points towards euro area being in line with expectations at tomorrows release.
Equities: Global equities were somewhat lower yesterday with sizeable US underperformance. Very high intraday volatility with big news coming from both earnings, macro and the monetary side. Tech, growth and a broader set of cyclicals were led lower although yields came down as well. One could think this sounds like a classic risk-off, but that was not the case as part of the drop in yields came from benign wage data in the US. Hence, this was much more about some profit taking after too high hopes and a strong run in equities leading up to this. In US yesterday, Dow +0.8%, S&P 500 -1.6%), Nasdaq -2.2% and Russell 2000 -2.5%. Asian markets are more positive this morning lifted by Chinese markets as officials are signalling more stimuli will be coming. US futures are higher while European futures are marginally lower.
FI: Yesterday’s myriad of key events was overshadowed by new uncertainty on US regional banks following the earnings release from NY Bancorp. Bund yields fell about 10bp across the curve throughout the day, while peripherals underperformed by a couple of basis points. Credit spreads widened with Bund/Schatz ASW-spreads following the US banking jitters, and implied volatility in swaptions market added to the rising tendency seen over the past weeks. UST yields fell through the FOMC meeting despite Powell’s statement, that March is not the most likely timing for the first cut.
FX: EUR/USD was in for a whirlwind yesterday, first from inflation data out in Europe, then renewed concerns about the health of US regional banks and then hawkish pushback from Powell. In the end, EUR/USD finished close to the 1.08 level and about flat on the day. The amount of foreign exchange that Norges Bank purchases on behalf of the government was left unchanged yesterday and EUR/NOK ended the day higher. Today, focus turns to euro area inflation data for January and the Riksbank and Bank of England monetary policy meetings.
