Sunset Market Commentary

Markets

November EMU PMI’s were one of the final reality checks going into the December 12 policy meeting (and beyond). Last month, there was a glimmer of hope with the overall index at 50. HCOB analyses even saw tentative signs of some light at the end of the (German) tunnel. However, the November data made crystal clear that the tunnel for the EMU economy is much longer and darker than expected. The composite PMI tumbled back in contraction territory (48.1 from 50.0), the lowest level in 10 months. The manufacturing PMI also dropped further to 45.2 from 46.0, but the major negative surprise came from services as it joined the contraction in the manufacturing (49.2 from 51.6) for the first time in 10 months. Intra-EMU divergence persisted with Germany and France seeing even bigger declines in output than in October. France even marked the fastest decline in activity in since January. The rest of the EMU still sees business activity increasing, but at the slowest pace in the current 11-month sequence of growth. The odds for a recovery also aren’t good as new orders decreased for the sixth month running. Employment declined for the fourth consecutive month, but the decline remains limited. HCOB describes the EMU environment as stagflationary as the decline in activity coincides with higher input and output prices, mainly due to higher wage costs in the services sector. In its assessment on Germany, HCOB mentions political uncertainty due to the election of Donald Trump and the announcement of snap elections in Germany. We don’t label it as a glimmer of hope yet, but German expectations for next year improved slightly on hopes that the next government would develop measures to boost the economy, maybe by reforming the debt brake. The market reaction was telling and ‘logical’. German yields are currently ceding between 9 bps (2-y) and 3 bps (30-y), after even bigger losses this morning. Money markets again seen an almost 50/50 chance between a 25 bps and 50 bps ECB rate cut in December. ECB’s Villeroy said he sees inflation reaching 2% earlier in 2025 than expected and is careful of the risk of undershooting the target. ECB’s Centeno also warned on this risk, but still defended a gradual adjustment. US yields were understandably little affected by the decline in EMU. US yields declined 1-2 bps across the curve in the run-up to the publication of the US PMI’s. EUR/USD tumbled in a flash crash post the PMI’s and briefly touched the lowest level since November 2022 (1.0335 area). A close below 1.0448 (currently 1.0425) materially weakens the technical picture with 1.0201 (62% retracement 2022-2023 move) the next target on the charts. At the time of finishing this report, the US PMI’s show ongoing strength in the economy. The composite index improved further to 55.3 from 54.1 on a strong performance of services (55.3 from 54.1). US yields are moving toward unchanged levels. Additional USD gains stay modest (DXY 107.5, EUR/USD 1.041).

News & Views

November UK PMI’s showed a sustained drop in private sector employment amid weaker business optimism and rising cost inflation. The composite PMI slipped from 51.8 to 49.9 (vs 51.7 consensus), the first sub-50 reading since October 2023. New order growth eased to its lowest for one year Details showed a deterioration in both manufacturing (48.6 from 49.9; 9-month low) and services (50 from 52; 13-month low). S&P global market intelligence, responsible for the surveys, commented that companies are giving a clear thumbs down to the policies announced in Labour’s first Budget. Especially the planned increase in employers’ National Insurance contributions hurts. The November PMI is indicative of the economy slipping into a modest decline, with GDP dropping at a 0.1% quarterly rate. The loss of confidence hints at worse to come. Still elevated rates of wage-related price and cost growth limit scope for further BoE rate cuts. It helps explain today’s “modest” fall in UK yields (5 bps across the curve). EUR/GBP initially followed EUR/USD south on weak EMU PMI’s (EUR/GBP 0.8268 intraday low) before rebounding after the UK data to opening levels near 0.8320.

Hungarian gross wages declined by 0.3% on a monthly basis in September, but were still 12.5% higher compared with a year ago. Net earnings increased by 12.3% and real earnings were 9.2% higher than a year earlier. Wage pressure remains stronger in the public sector (+0.5% M/M & 14.1% Y/Y) compared with the private sector (-0.4% M/M & 11.9% Y/Y). The forint remains in the defensive (EUR/HUF 411) as CE FX face a perfect storm of higher USD rates, rising geopolitical tensions and weakness in key trading partner Germany.