In focus today
Christmas week is rather light in terms of data releases. Today, we get the latest signals from the German economy in the form of the Ifo index. Consensus is looking for a slight improvement in business climate in December but risks remain to the downside particularly as the flash PMIs confirmed on Friday that the economy continues to slow down.
We also have Bank of Japan meeting on Tuesday. There has been some speculation whether the BoJ would tighten policies next week, but we continue to believe we need more firm conclusions on 2024 wage negotiations before they will feel confident to abandon yield curve control and raise the rate to zero.
Later in the week, we will have Central Bank of Turkey meeting on Thursday.
One of the week’s data highlights will be US November PCE print on Friday.
The 60 second overview
Market focus: Risk sentiment was somewhat mixed on Friday as growth signals from Europe pointed towards continuing headwinds in December. Hawkish comments from NY Fed chief Williams, stating that a March cut seems ‘premature’, countered further declines in UST yields, though markets are still pricing quite aggressive rate cuts of 140bp next year. In Europe, long-end bond yields fell throughout the day following the weak PMIs. Risk sentiment has turned sour in Asia this morning with equity indices declining across the board.
Europe: Eurozone PMIs were weaker than expected in December. Manufacturing was unchanged at the deep red level of 44.2, while services continued drifting lower from 48.7 to 48.1. Output price indices rose, while input prices in the services sector fell further. This underlines, why the ECB is very interested in the development of corporate profit margins in relation to the inflation outlook. Overall, activity in Europe is still weak in the manufacturing sector and the malaise continues to spread to the service sector.
US: In the US, the PMIs pointed towards continuing economic resilience in December. The composite measure ticked up from 50.8 to 51 driven by an increase in the services PMI from 50.8 to 51.3. Manufacturing still looks weak in December (declining from 49.4 to 48.2), which was also the case in the New York Fed Empire Manufacturing Index out on Friday declining from 9.1 to -14.5. But overall, nothing really points towards a US economy about to fall off the cliff.
Equities: Global equities ended higher on Friday and thereby rose every day last week. Several indices reached new all-time highs last week while others were just inches away. The overarching reason for the continuation of the equity rally last was the dovish FOMC outcome and a 30bp drop in yields. Hence, no surprise to see small caps doing strong, Russell 2000 up more than 5% last week. For some maybe more surprising to see banks among the best performing in a week with massively lower yields. We do not find this surprising but rather see it a sa very telling outcome of how investors are readjusting expectations. Fear of central bank hawkishness and massive real estate defaults leading to bank losses and recession is being taken off the table. To replace this is sharply increased probability of a soft-landing where both equities, long durations assets and indebted sectors are outperforming. Once again, an example of how quickly things are turning around when the dominating investment narrative is shifting. In the US on Friday, Dow +0.2%, S&P 500 -0.01%, Nasdaq +0.4% and Russell 2000 -0.8%. Mixed markets this morning both in Asian, European and US futures.
FI: Global yields ended the Friday session significantly lower as December PMIs confirmed the headwinds to European growth. 10Y Bunds were 9bp lower throughout the session, while the 2Y tenor was less changed (-4bp). Peripheral spreads (e.g. 10Y BTP/Bunds) reversed the gains following ECB’s PEPP announcement, widening some 3-4bp throughout the session. German ASW spreads narrowed as implied volatility fell further. 10Y UST yields were close to unchanged at 3.9% by the bell.
FX: EUR/USD erased around 50% of its post Fed-gains going into the weekend. The SEK has had a good run over the last couple of weeks amid strong equities and lower global rates, which have helped pull EUR/SEK below 11.20. NOK was last week’s outperformer on the back of the soft Fed but specifically on the back of the hawkish surprise by Norges Bank, which pulled down EUR/NOK ca. 50 figures to currently just below 11.40 and pushed NOK/SEK above 0.98.
Credit: Following a couple of days of rapid tightening, credit spreads gave a little back on Friday where iTraxx Xover widened 3bp and Main 1.5bp.
