In focus today
From the US, initial jobless claims and retail sales will provide markets with evidence of the health of US consumers and unemployment. For initial jobless claims consensus expects an increase of 210k (prior: 201k) and for December retail sales consensus expects 0.6% m/m (prior: 0.7%).
The ECB will release the records of its latest meeting from 11-12 December at 13.30 CET.
Economic and market news
What happened overnight
Israel-Gaza ceasefire: Gaza ceasefire has been announced after 15 months of conflict. Negotiations have led to a structured agreement to bring an end to the war in Gaza. The ceasefire is set to commence on 19 January. The agreement outlines an initial six-week ceasefire period, including the withdrawal of Israeli forces from the Gaza strip, the release of hostages, and the return of displaced Palestinians.
Trump’s promises of ceasefire in Ukraine on his first day in office is under pressure. Trump’s advisors now acknowledge that resolving the Ukraine conflict will take months or even longer, providing a sharp reality check on Trump’s major foreign policy promise. The promise of facilitating a deal within 24 hours was always unrealistic, and it appears that the complexity of the conflict is now being recognized.
What happened yesterday
In the US, December CPI were close to expectations, with details continuing to show easing underlying inflation. Headline inflation was +0.39% m/m s.a. (cons: +0.3%), while core inflation slowed to +0.23% m/m s.a. (cons: +0.2%), both close to consensus. The rise in headline inflation was driven by energy prices, while core inflation details were encouraging. Shelter inflation slowed after November’s hotel price surge, and both rental and owner-occupied housing inflation are cooling. Non-housing services inflation slightly increased. Core goods and health care prices also eased core inflation. Despite market concerns about rising inflation, the data shows nothing to support these fears. Consequently, bond yields dropped, and EUR/USD rose after the release.
In the UK, inflation for December surprised significantly to the downside with headline at 2.5% y/y (cons: 2.6%, prior: 2.6%), core at 3.2% y/y (cons: 3.4%, prior: 3.5%) and services at 4.4% y/y (cons: 4.8%, prior: 5.0%). While the downside surprise was broad-based, air fares drove a large part of the downside surprise. Services, which is by far the most important component for the Bank of England, came in lower than the BoE’s expectation of 4.7%. Likewise, our measure of core services, which excludes volatile components such as air fares, continues to decline and shows easing momentum, which is good news for the BoE. With the lower-than-expected US inflation data out later in the afternoon this offered some much-needed relief to UK markets after the recent sell-off.
In Germany, GDP for 2024 contracted by 0.2% y/y (prior: -0.3%), highlighting one of the country’s most prolonged economic crises in decades, just six weeks ahead of a crucial snap election. The very early estimate of GDP growth in Q4 2024 was -0.1% q/q, though this estimate carries higher uncertainty due to incomplete data. Nonetheless, the decline aligns with our growth expectations and is not as severe as feared, given the negative economic sentiment.
In Sweden, final December core inflation, CPIF excl. energy, was 0.1 p.p below the preliminary number, at +0.3% m/m and 2.0% y/y, a slight downside surprise. This may widen the spreads to Riksbank’s forecast going into January. Also, Origo Group is the new vendor managing the collection of inflation expectations from January 2025 and onwards, previously this was done by Prospera (Kantar). The shift might cause disruptions but there are no strong reasons to assume so. Hence, we expect only marginal adjustments relative to the December survey which showed expectations close to or below the inflation target.
Equities: Global equities rose yesterday, with optimism boosted by a lower-than-expected core CPI number from the US. Consequently, we observed indices closing at or around daily highs, and for several indices, it was the best day since the post-US election surge. Not surprisingly, cyclicals, especially US cyclicals, led the advances. However, the magnitude of the outperformance of cyclicals was somewhat surprising even to us. This, if anything, underscores our view that cyclicals will continue to outperform as long as the macroeconomic environment remains positive, despite trading at the highest premium to defensives in over 15 years. In the US yesterday, the Dow increased by 1.7%, the S&P 500 by 1.8%, the Nasdaq by 2.5%, and the Russell 2000 by 2.0%. Asian markets are catching up this morning, reflecting the strong performance in the Western world yesterday. Meanwhile, US and European futures are more mixed this morning.
FI: US rates rallied on the back of the US CPI release yesterday coming in less hot than expected by consensus. The 5-10y area led the way with a 15bp rally, with the wings down “only” by 10bp. 10y German Bunds ended 6bp lower, with ECB pricing now at -96bp. Also, Gilts rallied following the UK CPI release in the morning.
FX: Yesterday’s session was dominated by first the relief in UK markets and later the US CPI induced rally in risk appetite which aided risk-sensitive currencies such as AUD and NOK while the drop in global yields sent the JPY soaring. While the USD initially weakened, we have since seen a slight comeback which has also contributed to a rebound in USD/JPY from below 155.50 to now 160.00. While EUR/GBP dropped in yesterday’s session the cross is still trading north of 0.84.
