All Eyes on US Inflation

In focus today

The most important release today will be the US December CPI. We look for a modest uptick in headline inflation to +0.2% m/m SA (Nov +0.1% m/m) driven mostly by less negative energy contribution while core inflation is set to remain relatively stable at +0.3% m/m SA (Nov +0.3% m/m). The main focus will be on underlying components of inflation, especially on the services sector.

In Sweden, Riksbank vice governor Per Jansson who – as we read it – has shifted from being the most hawkish member to becoming the most dovish member, is scheduled for a speech on the economy and current monetary policy at 15:00 CET.

Economic and market news

What happened overnight: Things were generally quiet overnight, as markets look ahead to the release of the US CPI. On geopolitics, the UN Security Council has passed a resolution that calls for an immediate stop to the Houthi attacks on Red Sea vessels. The Nikkei 225, Japan’s benchmark equity index, had another strong day. As of this morning, it was up by 2%, hitting a 34-year high. Bitcoin found support on the back of the US Securities and Exchange Commission approving ETFs holding the digital asset.

What happened yesterday: Markets continued to temper expectations on a March rate cut by the ECB, after ECB Vice-President Guindos said in a speech that he expected the pace of disinflation to “slow down in 2024, and to pause temporarily at the beginning of the year”, and ECB member Isabel Schnabel said it was “too early to discuss rate cuts” in a Q&A on X. In December, a March-cut was fully priced in, while markets now attach a 40% probability of a cut. We stick to our expectations of a first rate cut in June.

The yen continued to weaken against major currencies during yesterday’s session, with USD/JPY breaking above the 145 level after data showed weak wage growth in November.

We got a range of Scandinavian data yesterday. In Sweden, November data showed the GDP indicator advancing (+0.2 % mom) for the second month in a row, suggesting the Q4 print will eventually show an expanding economy. That said, retail sales, consumption and production all fell back, but note October data instead was revised higher. Norwegian core inflation was slightly lower than expected at 5.5% y/y (consensus: 5.6%). The initial market reactions were fairly muted with EUR/NOK continuing to trade around the 11.30 mark. In Denmark, headline inflation was 0.7% y/y in December, with food prices in particular posing a drag.

Equities: Risk appetite picked up a bit on Wednesday. Equities were generally higher, led by the US (S&P 0.6% vs Stoxx 600 -0.2%). The reason for the US outperformance was once again a growth-driven preference. Again, big tech were the stand-outs. This was not an overly risky session. Other cyclicals, such as industrials, materials and banks, did only okay. Likewise, small caps continued to underperform. The wait-and-see mode will be over today as US inflation figures are due and earnings results kick off tomorrow. US futures are slightly higher into the numbers. The Japanese rally continues, with Nikkei 225 gaining another 2% this morning (+5% so far this year!).

FI: Global yields ended marginally higher in a quite uneventful macro session. The high level of issuance remains a main driver for FI markets these days. Short-end EGB yields rose as the pricing of ECB rate cuts in 2024 continues to fade, while the long end of the curve was close to unchanged. The 5Y5Y EUR inflation swap rate faded some 3bp as prices for natural gas and oil continued declining.

FX: Yesterday’s FX session was primarily characterised by the weakening of the JPY amid higher rates and disappointing Japanese data. The EUR was among the best performers yet EUR/USD remained below the 1.10 figure. In the Scandies both EUR/NOK and EUR/SEK ended the sessions slightly higher.