In focus today
Today, from the US, the NFIB’s Small Business Optimism index will be released for December. Markets will focus especially on businesses’ perception of upcoming price changes and the outlook for labour markets.
In the euro area, focus is on the unemployment figures and German industrial production for November. In October, the euro area unemployment rate remained at historic lows of 6.5%. Based on signals from PMIs and country releases we expect that it remained at 6.5% in November. Going forward, we foresee a slow and muted rise in the unemployment rate due to the previous weak economic activity. It will be interesting to follow the German industrial production figures as the hard data for the German industry has not showed a bottom out of activity yet.
The National Bank of Poland concludes its two-day monetary policy meeting. We expect an unchanged policy rate at 5.75%, in line with consensus.
In Sweden, the December budget balance is expected (SNDO) at a deficit of SEK92bn. Year to date, the budget surplus stands at approximately SEK120bn, set to decline to SEK28bn if the December forecast proves correct. For the coming two years however, SNDO expects deficits for the full years and thus a higher funding need.
Finally, overnight we get November wage data from Japan. Wage growth is key to the outlook for Bank of Japan tightening, but we will probably have to wait for the spring wage negotiations to see wages move much higher.
Economic and market news
What happened overnight: U.S. tech stocks were off to a good start of the week as the Nasdaq composite gained 2.2%.
Tokyo CPI inflation for December was broadly in line with expectations with CPI excl. fresh food slowing to 2.1% y/y (from 2.3%) and CPI excl. fresh food and energy slowing to 3.5% y/y (from 3.6%). Note, Tokyo CPI acts as a leading indicator for national CPI data, which is due to be released next week. The key missing piece of the puzzle for the Bank of Japan (BoJ) is higher wage growth. We expect to get more hard evidence of that during the spring after which we expect the BoJ to be ready to hike the policy rate out of negative territory and release the grip on the yield curve.
What happened yesterday: Oil prices continued to decline during the day in reaction to the price cut by Saudi’s Aramco, with the Brent ending yesterday’s session at around 76 USD/bbl, a fall of more than 3 per cent. Combined with general underperformance of the energy complex, this weakened the commodity sensitive NOK.
Higher electricity, gas and housing rental prices contributed to a slight upside surprise in Swiss December CPI, with headline inflation printing at 1.7% y/y. This moved EUR/CHF slightly lower during the day.
In their remarks last night, the Fed’s Bostic and Bowman remained optimistic that inflation continues to cool in 2024, but Bowman underscored that the approach to cutting rates would have to be a ‘cautious’ one. In line with his earlier views, Bostic called for the first cut in Q3 and a total of two cuts in 2024, which contrasts markets pricing in as much as 132bp of cuts for this year as a whole (Danske forecast: quarterly 25bp cuts from March). As a positive sign, consumers’ inflation expectations continued to decline in the NY Fed’s December survey released last night, 1-year expectations fell to 3.0% (the lowest since Dec 2020, from 3.4%) and 3-year to 2.6% (the lowest since June 2020, from 3.0%).
Equities rebounded on Monday and quite forcefully in the US. S&P 500 jumped 1.4% and Nasdaq a full 2.2%, while Europe edged up 0.4%. Small caps were suddenly back in favour with Russell 2000 gaining 2%. This was mainly a positioning driven bounce story, after the sell-off last week. Scrapping to find other triggers, one could blame yields being a notch lower on positive inflation news and falling oil prices. Growth outperformance was the big investor theme, with rotation into FANMAG+ (tech, consumer discretionary and communication). Yield sensitive sectors such as real estate and health care also performed well. Clear cut cyclicals, such as banks, materials or industrials, however lagged. Asian markets are mostly higher this morning but US futures have dipped back into negative.
FI: There was a modest decline in global bond yields yesterday ahead of the US inflation data that are released on Thursday. The focus in the European fixed income market is on the activity in the primary market. Here we continue with Italy and Belgium that coming to the market.
FX: In a fairly uneventful beginning to the week, the NOK has been the worst performer in G10 space with EUR/NOK rising to the mid 11.30s amid a general underperformance in the energy complex incl. a decline in oil prices. EUR/USD remained unchanged around 1.0950 while EUR/GBP has edged just below the 0.86 threshold.
