Sunset Market Commentary

Markets

Slightly better-than-expected December EMU PMI’s showed business activity decreasing for the second month running. The rate of contraction was slower than in November though (49.5 from 48.3). A modest return to growth of services (51.4 from 49.5) was unable to erase the continuing downturn in manufacturing (45.2; unchanged). As has now been the case for several months, the overall reduction in business activity was reflective of falls in Germany and France. Both remained in contraction during December while the rest of the EMU posted a solid increase in output at the end of the year (6-month high). Overall, economic output was scaled back amid sustained reductions in new orders. Meanwhile, the pace of job cuts was the fastest in four years as companies responded to a drop in workloads by lowering their staffing levels (mainly manufacturing, near stagnation in services). EMU manufacturers reduced their purchasing activity again, with the sharp decline in input buying the most pronounced of any month in 2024. Further marked declines in inventories of both purchases and finished goods were also registered. Optimism in the 12-month outlook for output strengthened, but only marginally and coming off low levels. Rates of inflation of both input costs and output prices quickened at the end of the year, with charges rising at a pace that remained above the series average. These developments back the ECB’s “safe” 25 bps rate cut last week. ECB President Lagarde today said that she expected to lower interest rates further. Interestingly, she believes that price momentum in the services sector has dropped steeply recently. An ECB tracker sees wage growth slowing to about 3% next year, a level the central bank generally considers to be consistent with the 2% target. Recall that most recent (Q3) wage data showed EMU high wage inflation at 5.4% Y/Y. Risks to the inflation outlook became two-sided, but are clouded by a huge amount of (geo)political and economic uncertainty. EUR/USD reacted stoic to today’s European numbers with EUR/USD moving up and down the 1.05 handle. Friday night’s unexpected French credit rating downgrade by Moody’s (Aa3 from Aa2, stable outlook) didn’t pull the single currency down neither, even though French credit risk premia added a few bps and with the CAC40 underperforming (-0.90%) EMU stock markets. Core bonds try a modest rebound after last week’s weakness with German yields currently 3.7 bps (2-yr) to 1.5 bps (30-yr) lower. We witness some USD strength and Treasury weakness as we finish this report following December US PMI’s. US output growth ends 2024 on 33-month high (56.6 from 54.9) amid a service sector surge (58.5 from 56.1), but manufacturers report falling output (48.3 from 49.7) and higher prices.

News & Views

The Norges Bank (NB) announced that it will be buying Norwegian krone and sell foreign currency to fund the transfers of the NB to the government. The Norwegian government owns the NB and holds deposits in its government Treasury account. The profit from the NB and the interest rates on the government deposit account are transferred to the government annually. The NB decided to sell FX in the market to make the transfer of its dividends to the government. This way of working will avoid that the transfers increase the long term level of bank deposits in the Norges Bank. Previously the government issued debt to prevent the transfers to the government from increasing banks’ liquidities at the NB. However, the government now wants to halt this procedure of creating more debt. The NB will only publish its earnings and dividends for 2024 in February next year. Recent developments suggest that the transfer will amount to NOK 27bn. The sale of FX can be considered as FX interventions, but today the announcement had no (positive) impact on the krone. EUR/NOK even trades marginally higher in the 11.72 area.

December UK PMI’s showed output increasing marginally (composite PMI 50.5 unchanged) as rising activity in the services sector (51.4 from 50.4) helped to offset an accelerated downturn in the manufacturing sector (45.7 from 48.3). S&P reported total new orders decreasing for the first time in 13 month on widespread reports of weaker business and consumer spending patterns. The combination of softer demand, rising employment costs and squeezed margins contributed to the further decline in headcounts, with the pace accelerating to the fastest pace in nearly four years. Rising salaries and elevated domestic inflationary pressures continue to push up input costs for business. S&P global concludes that “Businesses are reporting a triple whammy of gloomy news as 2024 comes to a close, with economic growth stalled, employment slumping and inflation back on the rise”.