In focus today
In the euro area, we expect the ECB to deliver a 25bp rate cut. Although that is the consensus, markets price in around a 15% probability of a 50bp cut this morning according to Reuters. Rather than focusing on the size of the rate cut, we should focus on where the policy rate will end in this cutting cycle, albeit we do not expect any verbal guidance on this. Markets may however interpret a 50bp cut as a signal of a lower terminal rate – and that may even be a signal that the ECB wants to send. For further details see ECB Preview – A disputed 25bp rate cut, 6 December.
In Switzerland, markets are pricing in around 35bp for the meeting and consensus favours the 25bp cut over the larger 50bp. We expect another cut in March with risks skewed towards further cuts.
In Sweden, we get the full Swedish inflation report for November. Last week’s flash release showed a sharp uptick in CPIF to 1.9% – a whopping full percentage point above the Riksbank’s forecast. Thus far, the flash estimates have proven reliable and as such we do not expect any revisions today.
In Norway, we expect the regional survey to signal continued restrained optimism among domestic corporates, indicating a 0.2-0.3% growth rate in the next quarter (Q1/25). In that case we expect Norges Bank to consider domestic growth ‘as expected’ and be neutral to the rate path in the monetary policy report next week, despite actual growth in Q3 being higher than anticipated. The crucial point will be the indicators for capacity utilization and labour shortage. Another significant lift in these measures of slack makes it more likely that Norges Bank will consider growth as ‘accelerating and above trend’. Also, keep an eye on the expected wage growth for next year. A downward revision to around 4% should reduce the rate path directly, but also affect risk assessment as the risk of cost-driven inflation should abate.
In Japan, overnight we get the Bank of Japan’s (BoJ) extensive quarterly Tankan business survey, which will shed some more light on how the economic recovery has fared in Q4. PMI data has been on the weak side. The survey will be scrutinised by the BoJ, and it will be key to the decision on the policy meeting next week.
Economic and market news
What happened yesterday
In the US, headline prices grew 0.3% m/m seasonally adjusted (cons. 0.3%, 2.7% y/y) while core inflation was also 0.3% (cons. 0.3%, 3.3% y/y), in line with consensus. The data is very volatile from one month to another, so it is important not to put too much weight on any single reading, but the overall signal is still positive for the Fed. Short-end UST yields ticked lower as markets have now basically fully priced in the Fed’s rate cut next week.
In Canada, Bank of Canada delivered a 50bp cut, as expected by markets and most analysts. Importantly, the forward guidance included a hawkish twist, with the central bank no longer explicitly stating an expectation of further rate cuts. USD/CAD took a knee-jerk move lower amid the hawkish twist, while the reaction in Canadian yields was more mixed. A 50bp cut to 3.25% also meant that the policy rate was at the upper range of the BoC’s estimate for the neutral rate. With the communication that day, it seemed increasingly likely that the BoC would slow down its incremental cut pace to at least 2×25, reaching its midpoint estimate for the neutral rate of 2.75% in March.
In China, the monetary authorities are considering a currency devaluation of the CNY according to Reuters who spoke to persons who have knowledge about the discussion. The reason for the consideration is US President elect Trump’s threat of imposing even higher tariffs on goods produced in China, which could hit Chinese exports.
Equities: Global equities were higher yesterday with notable sectoral differences. Large-cap cyclical growth, particularly in consumer discretionary and communications services, registered markedly higher, while the majority of sectors, led by defensives, were lower. This divergence was also evident in the US indices’ performance yesterday, with the Dow losing 0.2% and Nasdaq gaining 1.8%. We have discussed this phenomenon previously, but it bears repeating: This is a classic late-cycle scenario in which investors continue to chase the winners and abandon the losers, leading to a widening spread in relative valuations. In the US yesterday, the Dow registered a decrease of 0.2%, the S&P 500 increased by 0.8%, the Nasdaq rose by 1.8%, and the Russell 2000 saw a gain of 0.5%. Most Asian markets are higher this morning, and the same is true for European futures. US futures on major indices are all lower this morning.
FI: A waiting-for-today’s-ECB trading session ended with very little volatility yesterday. German yields traded in a narrow 2bp range through the day across all maturities. The Bank of Canada’s decision to cut 50bp was widely anticipated and thus did not inject volatility either. Bank of Canada left out the guidance of further cuts if their baseline outlook materialised. Markets are pricing 26bp for today’s ECB meeting and a cumulative 155bp by end of next year.
FX: The market reaction to the in-line US November CPI print was modestly dovish. Front-end US yields initially edged lower following the release but later reversed higher. The USD strengthened broadly across the G10 space. The CAD outperformed in G10, supported by a hawkish 50bp BoC rate cut. EUR/USD declined to around 1.05. In the Scandi space, both NOK and SEK gained against the EUR, with EUR/NOK dropping to around 11.70 and EUR/SEK to just above 11.50. Meanwhile, EUR/GBP continued its downward trend, breaking below 0.8250 for the first time since early 2022. EUR/DKK is trading slightly on the strong side of the central parity ahead of today’s ECB meeting. Elsewhere, oil prices have rebounded modestly this week. The market reaction to the in-line US November CPI print was modestly dovish. Front-end US yields initially edged lower following the release but later reversed higher. The USD strengthened broadly across the G10 space. The CAD outperformed in G10, supported by a hawkish 50bp BoC rate cut. EUR/USD declined to around 1.05. In the Scandi space, both NOK and SEK gained against the EUR, with EUR/NOK dropping to around 11.70 and EUR/SEK to just above 11.50. Meanwhile, EUR/GBP continued its downward trend, breaking below 0.8250 for the first time since early 2022. EUR/DKK is trading slightly on the strong side of the central parity ahead of today’s ECB meeting. Elsewhere, oil prices have rebounded modestly this week.
