In focus today
Not much on the data calendar before Christmas. In Sweden, markets will take a close look at NIER’s December survey. In particular retail trade and private services price plans will be scrutinized for further signs of moderation. Any widening cracks in confidence or hiring plans are also in focus.
In Norway, unemployment rate for December will be released.
Overnight, we will get November inflation print from Japan. Consensus expects headline inflation to fall to 2.8% y/y from 3.3% in October.
The 60 second overview
Risk sentiment: Market’s risk sentiment weakened unexpectedly last night with equities turning lower, yields still falling and USD regaining some strength. This marked a shift from the rally sparked by last week’s FOMC meeting, where equities, bond markets and cyclical FX all appreciated on the expectation of looming rate cuts. Yesterday’s macro data was not particularly downbeat however, with UK inflation surprising to the downside and consumer sentiment recovering both in the euro area and the US. Even so, the Fed’s Harker cautioned that he has heard signals of ‘things starting to soften faster than data suggests’ and that ‘a lot of things could thwart a soft landing’. ECB’s Knot noted that a rate cut in H1 2024 remains unlikely based on today’s information and Lane reminded that markets should not extrapolate the November’s positive inflation surprise for what’s to come.
EU fiscal rules: Yesterday evening, the EU economy and finance ministers struck a deal on a new set of fiscal rules for the EU. The new rules include stricter overall limits on spending while it provides leeway for countries to invest in key EU priorities like defence and the green transition and allow structural reforms. The old thresholds of a maximum public deficit of 3% of GDP and the 60% debt to GDP remain. Countries with debt over 90% of GDP must trim it by 1 percentage point per year, while countries with debt between 60% and 90% need to make half that effort. Countries that both breach the 60% and 3% thresholds must aim at cutting deficits to 1.5% of GDP by improving the structural balance with 0.4% of GDP each year. Enforcement of the new rules will be tougher and countries that deviates from their spending plans will have to reduce spending by 0.5% of GDP per year. However, a last-minute concession won by France secured that for such countries interest payments will be excluded from the calculation in 2025-27. 16 out of 27 EU countries will not comply with either the deficit target or debt to GDP threshold next year according to the EU Commission estimates. Thus, we should expect an overall tighter fiscal stance in the EU next year. Among the larger countries this will especially affect spending plans in France, Italy and Belgium.
Equities: Global equities lower yesterday as the US cash session went from positive to sharply negative in the afternoon. No obvious trigger and all sectors were lower with no relation to cyclicality or rates etc. The only go to explanation being, the very strong rally leading up to this. Hence it looks like investors said too far too fast and therefor took some chips of the table. We have seen these dynamics before and typically don’t recommend chasing sudden shifts unless the fundamental drivers have shift. That was not the case yesterday where we got very solid macro data and yet another set of benign inflation prints.
In US yesterday -1.3%), S&P 500 -1.5%, Nasdaq -1.5% and Russell 2000 -1.9%.
Most Asian markets are lower this morning while China moving against the trend. European futures are lower while US once are higher.
FI: European yields ended lower across the board with a parallel of about 4-5bp supported by the weak UK inflation print in the morning. This took 10y Bund yields below the 2% mark. Intra euro area spreads remaining broadly stable into the holiday period. With only a couple trading days left and no tier 1 data releases scheduled, we may be in for similar sessions with low liquidity period similar to yesterday. Also today, there is no key data releases on the agenda. Yesterday’s comments from ECB’s Knot on rate cuts in the first half is rather unlikely was disregarded by markets.
FX: In majors, EUR/USD moved slightly lower yesterday, yet still in the mid-1.09s. EUR/GBP hold on to gains after the UK inflation surprise, trades at 0.8660. USD/JPY has continued lower after recent test of 145 and is now below 143. In Scandies, NOK/SEK gave up some of recent days gains as EUR/NOK recovered to above 11.30 whereas and EUR/SEK remains under pressure at around 11.12. NOK/SEK still holds above 0.98.
Credit: The December holiday slowdown has hit the credit market with limited new issue activity and only small changes to spreads. iTraxx Main was unchanged at 60bp while iTraxx Xover was 2bp wider at 323bp.
