In focus today
Today, focus will be on inflation data coming out of Germany and France, which should indicate the direction of the euro area inflation released tomorrow.
In the US, we will get a new round of labour market data, as the ADP employment report for December and initial jobless claims are scheduled for release.
Geopolitics will remain in focus as tensions between Hezbollah and Israel are rising, sparking fears that the war in Gaza could be spreading to the wider region.
Economic and market news
What happened overnight: The Caixin services PMI from China increased to 52.9, expanding at the fastest pace in five months. Together with the better-than-expected Caixin manufacturing PMI, the composite PMI measure rose from 51.6 to 52.6, indicating that growth is finally picking up after a very challenging 2023. However, risk sentiment in Asian markets has remained negative with broad-based declines in equity indices overnight.
What happened yesterday: The risk-off market sentiment continued yesterday as uncertainty on the outlook for monetary policy continues to induce volatility across asset classes. Yields climbed higher for most of the session, though soft US data and the FOMC minutes managed to reverse most of the move in the evening. Equities continued down across sectors and regions throughout the session.
The December FOMC minutes were overall quite balanced with both hawkish and dovish signals. Almost all members were convinced at the December meeting that inflation was coming under control, while also noting that “upside risks” to inflation have diminished. Moreover, it appeared that members were increasingly concerned about the damage that “overly restrictive” monetary policy could do to the economy. Despite the relatively dovish hints, many officials expressed some concern that the easing of financial conditions could complicate returning inflation to the target. This could warrant keeping policy unchanged longer than currently anticipated.
In respect of the ISM and JOLTs, the signals were relatively mixed. The ISM December manufacturing index was in line with consensus, increasing slightly to 47.4, yet still remaining in contractionary territory. In terms of JOLTs, the print came out roughly in line with expectations as job openings rose less than projected, while the October figure was revised higher. The labour market is gradually cooling with both hiring and the number of quits declining in November. However, it still remains fairly robust – for instance the ratio of job openings to unemployed remains above pre-pandemic averages (1.4 vs. 1.25).
Equities: Investors took home profit across the US, Europe and Nordics yesterday. Equities sold off sharply, but Fed minutes and macro data not to blame, in our view. In fact, these were still as close to goldilocks as it can get. However, it is difficult to surprise investors positively when goldilocks are already the base scenario into 2024. Hence, excess optimism and stretched short-term positioning in equities will exaggerate small disappointments to the downside. That is probably what happened yesterday. We think fundamentals are still in place for an equity overweight, but with a VIX at record lows it is inevitable that the road will be bumpier than the last two months.
Stoxx 600 and S&P 500 fell -0.9%, Nordics -1% and small cap Russell 2000 a full -2.7%. Underperformers included the December winners: Cyclicals. This brought a mixed bag of real estate, consumer discretionary, industrials and materials to the losers club. Note that not only rate sensitive sectors sold off: Yields sensitive sectors like utilities, health care and communication outperformed. Hence, this was more about a defensive rotation than Fed disappointing. Same defensive rotation in the Nordics with industrials selling off -3% to the benefit of health care (Novo Nordisk +2%), telecom and banks. US futures are unchanged this morning, so the sell-off might be levelling off today.
FI: Global yields were higher for most of yesterday’s session, though gaining some tailwinds from US data and the FOMC minutes in the last part. 10Y government bond yields in Germany and the US are down a couple of basis points, while the pricing of rate cuts from the ECB and Fed in 2024 is almost unchanged at 162bp and 148bp, respectively. The Bund ASW spread tightened further on Wednesday, now standing at 46.6 – the lowest level since early 2022.
FX: We saw continued USD-strength in yesterday’s trading, although the FOMC minutes brought on a minor retracement at the end of the session. Meanwhile, DKK and SEK suffered through poor risk sentiment, whereas otherwise risk-sensitive NOK found (relative) support in rising oil prices. Yesterday’s worst performer (vs USD) within G10 was JPY, with USD/JPY rising above 143 once again and at the other end of the spectrum we find GBP, posting a gain of 0.4% vs the USD on the day.
