In focus today
At the ECB meeting today at 14:15 CET, another 25bp cut bringing the policy rate to 2.75% is unanimously expected among analysts and markets. Markets anticipate 100bp in rate cuts this year. While we expect the ECB to cut further, we see the risk of a repeat hawkish market reaction in December if Lagarde does not commit to the end point of this cutting cycle.
Multiple euro area prints are on the agenda today including the first estimate of euro area GDP for Q4 2024, which we expect to show continued weak growth at 0.1% q/q. Previously released data indicated that Spain remained the primary growth driver with GDP rising 0.8% q/q. Ahead of the euro area, we receive Q4 GDP figures from France and Germany, where we anticipate a slightly negative growth rate. Additionally, the euro area unemployment rate for December will be released. With survey indicators suggesting a softening of the labour market in recent months, not yet visible in the hard data, it will be interesting to see the print. Focus will also be on Spanish inflation for January.
In the US, we expect Q4 Flash GDP growth to land at 2.4% q/q AR, indicating a modest slowdown from the 3.1% pace in Q3. Solid private consumption continues to be the most important driver of growth, although we do pencil in some moderation towards 2025.
In Sweden, we will receive additional data to assess where we stand with regards to the widely expected consumption-driven recovery. At 08.00 CET, retail sales data for December will be out, followed by NIER’s confidence indicators at 09:00 CET. The NIER survey will highlight consumer confidence, which has been rising since late 2022 but dipped in December. Corporate sector sentiment and pricing plans will also be examined.
Economic and market news
What happened yesterday
In the US, the Fed kept rates unchanged at 4.25-4.50% as expected. Powell delivered a balanced message avoiding speculation on future trade and fiscal policy effects. He noted the committee’s general lack of urgency to adjust policy, but he did not rule out a cut in March. We make no changes to our call for the next cut in March and for quarterly reductions thereafter until the policy rate target reaches 3.00-3.25%. See more in Fed review: As balanced as it gets, 29 January.
In Sweden, the Riksbank cut the policy rate as expected by 25bp to 2.25%, motivated in the press release as “the risk of inflation becoming too high is limited, at the same time as economic activity is weak”. In combination with the wording that the Riksbank “is prepared to act if the outlook for inflation and economic activity changes”, our interpretation is that the Riksbank keeps the door open to further cuts, and we maintain our view that the Riksbank will cut once more to 2.00% in May. Especially as our inflation forecast is lower than the Riksbank’s. See more in Flash Comment: Riksbank January 2025, 29 January. The Swedish GDP indicator for Q4 showed an increase of 0.2% q/q s.a. close to consensus and our expectations of 0.3% q/q. Important to note, that this print belongs in the unofficial, experimental set of SCB data, which has understated actual GDP growth, so it should be taken with a pinch of salt.
In the euro area, the European Commission presented the “Competitiveness Compass”, which outlines policy priorities for the next five years aimed at enhancing the European economy’s competitiveness. This will be achieved through reforms that promote investment by increasing innovation, risk capital, and reduced regulation. Concrete reforms, based on the Draghi report’s recommendations, will be introduced over the next two years. If implemented, these reforms could enhance European and Danish productivity. However, their long-term impact remains uncertain due to the need for approvals and growing scepticism in the European Parliament about increased EU centralisation and integration.
In Spain, the strong GDP growth continued into Q4 rising 0.8% q/q (cons: 0.6%, prior: 0.8%). The Spanish economy has been a clear bright spot of the euro area with GDP rising 3.2% y/y in 2024. This growth has been boosted by strong service activity, relatively lower energy prices, and a large rise in employment.
In Canada, BoC cut policy rate by 25bp bringing it to 3.0% as widely expected. Emphasis was especially on the threat of US tariffs as a major source of uncertainty, though the BoC stressed that its projections do not incorporate these new tariffs threatened by the US.
Equities: Global equities declined yesterday, once again dragged down by the US while Europe was higher. Year to date, European equities are up by 6%, while their US counterparts have increased by only 3%. Yesterday was not influenced by a single factor and the DeepSeek impact faded as anticipated. The combination of monetary policy and earnings dominated the market, with monetary policy aligning closely with expectations, while earnings were strong not only in Europe but also in the US. Most positive earnings news in the US emerged after the close of cash trading, which should positively impact cash trading today. In the US yesterday, the Dow fell by 0.3%, the S&P 500 by 0.5%, the Nasdaq by 0.5%, and the Russell 2000 by 0.3%. Many Asian markets are closed for the Lunar New Year. However, those open for trading are mostly higher. Futures in Europe are mixed this morning, while US futures are higher, led by the Nasdaq.
FI: Yesterday’s wait-and-see mode ahead of the FOMC in the evening led to European yields trading in a very tight range. In the afternoon, a surge in natural gas prices due to unplanned supply restrictions sent yields slightly higher though. 10y Bunds ended the day at 2.58%. All three central bank decisions were widely anticipated: Riksbank and the BoC cut by 25bp while the Fed was on hold. That said, BoC also announced its plan to end QT to complete the normalisation of its balance sheet. Starting in early March, BoC will gradually restart its asset purchases to stabilise its balance sheet. At the same time, effective 30 January, the BoC will set the deposit rate at a spread of 5bp below the policy rate. Together with the plan to halt QT, these measures aim to support the functioning of liquidity markets and mitigate upward pressure on the overnight repo rate.
FX: EUR/USD remained largely unchanged following the widely anticipated Fed hold, hovering above 1.04. We continue to see potential for a near-term topside to EUR/USD. CAD remained unfazed as the BoC delivered a widely expected 25bp rate cut, bringing its policy rate to 3.00%. We maintain our near-term bias for a move lower in USD/CAD. Yesterday, the Riksbank cut the policy rate as expected by 25bp to 2.25%. EUR/SEK initially dipped lower, but the cross ended the day close to unchanged. GBP FX has been in for a strong week with Chancellor Reeves speech yesterday not spurring renewed fiscal policy concerns.
