In focus today
In the US, we will get the US January job report. We expect the employment growth to have slowed down to 180k from 216k in December, which is a robust pace in historical terms. We expect average hourly earnings growth to have slowed to 0.3% m/m SA from 0.4% in December.
In Norway, we will get unemployment data for January. The Norwegian labour market remains tight. Employment growth is holding up relatively well, but falling activity means that productivity growth has now become negative. Without an immediate boost in activity there is a risk that unemployment will begin to rise. However, we believe that January was too early and that seasonally adjusted unemployment rate was unchanged at 1.9%.
Economic and market news
What happened yesterday
In the UK the Bank of England (BoE) maintained the Bank Rate at 5.25% as widely expected. The BoE shifted towards a more neutral approach to monetary policy removing its tightening bias, a less hawkish vote split than previously and overall being more confident in developments in the persistence of inflation, as expected. The tilt fell slightly short of market expectations but overall, a muted reaction in markets. We continue to expect the first 25bp rate cut in June, and see yesterday’s meeting as supportive of this, and markets have subsequently shifted towards this as well. We still see relative rates as a slight positive for the cross and note the important signal delivered yesterday in opening the door for cuts. For more details see Bank of England Review – Removing the tightening bias, 1 February.
In Sweden the Riksbank kept the policy rate unchanged as expected at yesterday’s policy meeting. In terms of guidance, the Riksbank noted that “if the prospects for inflation remain favourable, the possibility of the policy rate being cut during the first half of the year cannot be ruled out”. This was to the dovish side, which provided headwind for the SEK. We continue to expect the first 25bp cut in June followed by consecutive quarterly cuts, totalling 75bp for the year. Additionally, the QT pace was increased from 5bn SEK per month to 6.5bn per month. January PMIs were a bit of a disappointment as headline dropped to 47.1 rather than rising as we expected. It seems production, orders and employment pulled the index lower while delivery times and inventories pushed higher.
In the euro area HICP headline and core came in higher than expected by consensus but in line with signals from country data. Headline HICP rose 2.8% y/y and core inflation came in at 3.3% y/y. Overall, a print close to expectations with core slightly higher but a print ECB should be satisfied with. Euro area unemployment rate remained at record low levels in December at 6.4%. Business surveys show that labour demand is still elevated especially in the service sector although it has come down a bit. These factors together with large wage increases highlight that service inflation is still a worry for the ECB. With weak but not collapsing growth the ECB should be able to remain cautious towards the first rate cut due to the upside risks to inflation from service prices.
In the US Q4 productivity growth surprised to the upside again and remains clearly above pre-Covid average levels at 3.2% q/q at annualized rate. As a result, despite the still quite rapid nominal wage growth, unit labour cost growth has remained very modest (only +0.5% q/q AR). While productivity is difficult to forecast, this should make it easier for the Fed to feel confident about cooling underlying inflation. Meanwhile initial jobless claims surprise to the upside, still at low levels though (224k). We also got surprisingly strong ISM data. The uptick was in line with PMIs, but it was stronger than many of the regional manufacturing surveys suggested. Recovery in order-inventory balances reflects similar developments elsewhere in the global economy as well, although export orders remain at low levels. Employment index falls while prices index ticks higher.
Equities: Global equities ended higher yesterday driven by a lift in US markets while Europe and Japan ended lower. These days are extremely interesting as there are many moving parts and not surprisingly it makes investors a little uncertain on what to think. However, it is worth highlighting that we are getting strong macro data, softer inflation prints, monetary policy makers are opening to policy loosening and lately earnings reporting has been very solid. With that in place, it takes more than some bad banking news, geopolitical noise and Chinese property sector crisis to bring down equities. This was also the conclusion yesterday. Major indices in US did very well despite the regional bank index being down more than 2% and reemerging of the fear of loan losses in regional banks. In US yesterday Dow +1.0%, S&P 500 +1.3%, Nasdaq +1.3%, Russell 2000 +1.4%. Asian markets are mixed this morning, China is lower while South Korea is up 3%(!). Strong PMI from South Korea coupled with a very solid US ISM fuelling the hopes of a strong tech led manufacturing recovery where South Korea will be a major beneficiary. European and US futures are higher, partly lifted by some strong after hour earnings in the US.
FI: The global bond market rallied yesterday as the market “ignored” the comments from Fed Chairman Powell from the FOMC meeting on Wednesday regarding the timing for the first rate cut. The US curve “bull-flattened” with 10Y US Treasury yields declining some 5bp, while 2Y yield fell 1bp. In Europe, yields initially rose yesterday morning before the rally began later Thursday, and Bund ended the day 5bp lower.
FX: The first Riksbank decision of 2024 was broadly in line with our expectations, however with a slight dovish twist, which provided support for EUR/SEK. EUR/GBP initially dipped briefly following the Bank of England announcement. While the Committee delivered a dovish tilt and signalled an important shift towards a more neutral approach to monetary policy, it fell slightly short of market expectations. EUR/USD moved higher over the course of the day, breaching back above the 1.08 mark as global bond markets rallied. Today, focus turns to the non-farm payrolls from the US, where focus is on whether the US will continue to show underlying strength.
