In focus today
Focus in the euro area is on retail sales for December. Private households are still cautious with spending despite the strong labour market and large savings from the previous years. We expect private consumption to improve during 2024 as real income rises, but the December 2023 print will likely show muted retail sales as previous months.
In Germany, we receive factory orders for December that will give a hint of where industrial production released tomorrow is heading. The print will likely be weak as we know German GDP contracted 0.3% q/q in Q4 2023.
Fed’s Mester speaks at 18.00 and Fed’s Kashkari speaks at 19.00.
Economic and market news
What happened overnight
The Reserve Bank of Australia chose to keep interest rates unchanged in line with markets’ expectation. The central bank revised down its growth outlook citing lower consumer spending due to inflation and higher interest rates feeding into consumers’ mortgage rates. They also underlined the risk of weak Chinese consumption affecting Australian exports. The central bank however said demand was still outstripping supply, hence they were not in a rush to cut rates, and “a further increase in interest rates cannot be ruled out”.
In Japan, the average wage growth for December came in at 1.0% y/y. November’s print had been revised up from 0.2% to 0.7% y/y, hence December showed stronger growth, albeit lower than the 1.3% expected by consensus. Wage growth is key to the outlook for the Bank of Japan’s (BoJ) monetary policy and possible tightening. But we expect we will probably have to wait until spring wage negotiations for wages to start moving much higher. The debate on ending negative rates intensified in December according to a summary of opinions from the BoJ’s December meeting.
In the commodity space, the ICE Front Month Brent contract trades at USD78.16/bbl slightly up from its closing price in yesterday’s session.
What happened yesterday
In the US, ISM Services Index for January surprised to the upside. The PMI came in at 53.4 (prior 50.6), which compares to a Reuters poll showing consensus expectations of 52.0. The Prices Paid, New Orders, and Employment Index also all came in higher than December’s print. The upside surprise in the ISM Services Index aligns with how most recent US data releases have surprised to the upside.
The OECD updated its outlook to global growth revising up its 2024 outlook to 2.9% from the 2.7% it expected in its November outlook. The organisation left its 2025 outlook for global growth unchanged at 3.0%.
In the euro area, the Sentix investor confidence rose to its highest level in 10 months. Given how the Sentix is the first sentiment indicator for February, the rise could signal improvements in other sentiment indicators to be released this month. The Producer Price Index fell 0.8% m/m in December in line with expectations. The biggest contributor to this drop came from energy prices which fell 2.4% m/m.
In Germany, the government announced it had agreed on earmarking subsidies worth EUR16bn for gas plants to switch to hydrogen.
In Sweden, the Service PMI for January came in at 51.8 thus rising from December’s print at 50.0. This marks a firm entry into expansionary territory for the service sector that is the biggest sector in Sweden.
Bank of England Chief Economist Huw Pill was cited for saying it was a question of ‘when, not if’ when it came to rate cuts by the BoE. Pill, a voting member on the Monetary Policy Committee, did however stress he needed to see further evidence that underlying inflation components had weakened before he would vote for any rate cuts.
Equities: Global equities were down yesterday as the central bank reprising took its toll on the equity optimism. However, as the reprising owes to a stronger growth outlook it has a limited negative effect. Likewise, cyclicals kept up with defensives and tech stocks outperformed together with health care. If anything, the biggest surprise is to see quality growth stocks doing so strong despite the massive lift to yields we have seen lately. Not surprisingly, small caps struggled, and higher yields once again fuelled the fear in heavy-indebted sectors such as REITs and utilities. Materials were also one of the laggards, but this is just as much a China story and not yet feeling the support after massive Chinese policy stimulus. In US yesterday Dow -0.7%, S&P 500 -0.3%, Nasdaq -0.2% and Russell 2000 -1.3%. We see a very mixed picture in Asia this morning. Most markets are following the slight risk-off tone from Wall Street yesterday while Chinese markets are massively higher in a volatile session after yet another round of policy support for financial markets. Futures in Europe are higher while mixed in US.
FI: The repricing of global central banks continues as interest rates rise and we have taken out a rate cut from both the Federal Reserve and the ECB since Monday last week. Hence, 10Y US Treasury yields have risen almost 30bp and 10Y Bunds have risen almost 25bp since early last week. Furthermore, the new issuance wave continues as well with issuance in the long end of the curve. January 2024 set a record in the European market with a combined issuance of SSA, FIG and corporate bonds of EUR 350bn relative to EUR 290bn in 2023 (which was the previous record). This is also putting pressure on the global bond market, where we have seen a bearish steepener.
FX: US yields advanced further, pushing the greenback higher yesterday. Overnight, both Chinese stimulus and the unchanged RBA decision help short up AUD. Scandies, that suffered yesterday found some support overnight. After a strong start to the year, GBP has retreated somewhat at the start of February.
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