In focus today
President Macron is faced with the difficult task of appointing a new prime minister following PM Barnier being outed at yesterdays no-confidence vote. We think it is likely that a new government will not be formed before the new year, with the current government to continue in a caretaker capacity. We anticipate the passing of a ‘special law’ that will extend the 2024 budget into 2025. This measure would ensure the continuation of minimum state expenditures and revenue collection from 1 January 2025, until a new government is able to propose a formal budget.
In the euro area, we receive retail sales data for October. Retail sales increased 1% q/q in Q3, signalling decent consumption growth in the third quarter. This positive development has been flying a bit under the radar, so it will be interesting to see if the rebound continued in October as the recent development is one of the bright spots of the euro area economy.
Swedish preliminary November CPI and CPIF inflation is released, and we expect headline measures to overshoot the Riksbank’s forecast by a large margin in part due to soaring electricity prices.
Overnight we get October wage data from Japan. Real wage growth remains key to the economic recovery and further Bank of Japan hikes.
Economic and market news
What happened overnight
In the crypto space, Bitcoin surpassed previous records reaching USD 103,284. Investors are betting on a friendlier US regulatory approach to cryptocurrencies under President Trump to bring crypto closer to mainstream adoption.
What happened yesterday
In France, the no-confidence vote against PM Barnier succeeded, pushing the country into deeper political turmoil. The decisive vote tallied 331 out of the required 288 and was initiated by the left-wing coalition which was met with support from Marine Le Pen’s far-right National Rally. President Macron now faces the difficult task of appointing a new prime minister who can survive a no confidence vote in the National Assembly. The current stalemate in French politics is likely to persist, with no large reforms to be pushed through.
In South Korea, officials announced readiness to activate a USD 7.1bn stock market stabilisation fund and a USD 28.4bn bond market stabilisation fund if needed. This comes as both the won and South Korean stocks declined in the wake of President Yoon’s declaration of martial law Tuesday evening. The declaration has since been repealed and calls have been mounting for President Yoon to face impeachment.
In the US, The Fed chair Powell refrained from providing any strong signals about FOMC’s upcoming rate decision in his final remarks before the December blackout begins on Saturday; markets are pricing 18bp worth of cuts for the meeting. He emphasized that the economy remains in a good place, and as downside risks have diminished since September, the Fed ‘can afford to be a little more cautious’ in finding neutral. Earlier in the day, St. Louis Fed’s Musalem and Richmond Fed’s Barkin also kept all options open, citing more data still to come
ADP’s private sector employment report landed close to consensus at +146k (cons. +150k) although with negative revisions. The manufacturing sector recorded job losses at odds with the strong ISM and PMI readings seen earlier. In addition, the ISM Services index released yesterday afternoon declined to 52.1 (cons: 55.5, prior: 56.0) driven by weakness in business activity, new orders and employment components, and also contrasting the stronger signal from its PMI counterpart released before.
In the euro area, service PMIs were revised up slightly in the final release to 49.5 from 49.2. The manufacturing PMI remained unchanged, and the composite index was revised up to 48.3. Despite the small upward revision, the November PMIs have still increased our concerns over the near-term growth outlook for the euro area economy. We expect GDP growth in the final quarter of the year to be 0.1% q/q, but this reflects large differences between countries where Germany and France are expected to contract while Spain, Portugal and Greece are expected to continue to grow at full speed. For details see our Nordic Outlook, 4 December.
In Denmark, The Danish Ministry of Finance yesterday published an update on the borrowing requirement for 2024 and 2025 relative to the forecast in August. The numbers show a significant improvement in the public finances for 2024 as the net financing requirement is revised downwards from DKK -66bn to DKK -81bn. Hence there is a bigger surplus on the budget in 2024. Furthermore, the net financing requirement for 2025 is revised downwards by DKK 11bn to DKK -15bn – hence, we are going from an estimated deficit in 2025 to a modest surplus.
In the UK, PMIs for November were revised slightly up, bringing them in line with euro area PMIs. Composite was revised to 50.5 from 49.9 and services to 50.8 from 50.0. In the morning, BoE governor Bailey (dove) made some dovish remarks noting that he expects four rate cuts the coming year and downplaying the impact of the budget, pushing UK rates slightly lower. However, he also noted that the BoE central forecast implied a gradual easing of monetary policy. We think a gradual easing is warranted by the BoE for now but expect a step up in easing pace in the spring.
Equities: Global equities were higher yesterday, driven by cyclicals and large caps. Over the past five trading days, there has been a very steady increase in investor sentiment and risk-taking. Although this aligns well with our strategy, we must admit that the complacency around Germany, France, and South Korea is slightly surprising to us. The guiding star remains the US, where the S&P 500 yesterday posted its 11th gain in the past 12 sessions, with all three leading indices – S&P500, Dow, and Nasdaq – achieving fresh record closes yesterday. Additionally, please note the narrow sector leadership we have seen both yesterday and over the last week, with cyclicals up by 2.4% and defensives down by 0.5% in the last five trading days. In terms of single sectors, tech is higher by 4.7%, while utilities were down by 2% the last five trading days. This builds on the historical outperformance of cyclicals over the last two years. Since 1 January 2023, MSCI World cyclicals have risen by 73.9%, while MSCI World defensives have increased by 14.1%. Again, this fits very well with the strategy we have had for the last two years but we have now reached a level at which the relative valuation between cyclicals and defensives will be a challenge going into 2025. In the US yesterday, the Dow was up by 0.7%, the S&P 500 by 0.6%, the Nasdaq by 1.3%, and Russell 2000 by 0.4%. Asian markets are mixed this morning, while European and US futures are lower.
FI: Yesterday’s disappointing ISM Services figures for November led to a significant rally in bond markets. The 10Y UST yield closed some 5bp lower, taking the level back below 4.20%. The EUR swap curve rose from the front as markets trimmed expectations for a 50bp cut next week despite the rather dovish remarks from Lagarde in her speech in the EU parliament. Markets now discount 27bp ahead of next week’s meeting. The OAT-Bund spread held steady in the 83-85bp range, as markets awaited last night’s no-confidence vote against the French government. The motion was passed, implying that President Macron now faces the challenging task of appointing a new prime minister. We expect a special law to extend the 2024 budget into 2025, as we see little chance that a new French government will be formed before New Year.
FX: EUR/USD found slight support from weak ISM services and with the no-confidence vote out of the way in France focus now turns to the US jobs report out on Friday. EUR/GBP dipped slightly lower during yesterday’s session as UK PMIs for November were revised slightly up and a dovish Bailey failed to provide support for the cross. It was a quiet day for NOK yesterday with EUR/NOK virtually ending the day where it started; just north of 11.60, SEK on the other hand was the big winner of the day with EUR/SEK breaking below the 11.50 mark.
