In focus today

In the afternoon, US November retail sales and industrial production are due for release. Leading soft indicators gave very conflicting signals in November, so the Fed will closely follow hard data releases for stronger conviction on the direction of the economy.

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In Germany, we receive two growth and sentiment indicators from Ifo and ZEW. It will be interesting to see if they show the same development as the PMIs yesterday, where the German composite index rose to 47.8 from 47.5, giving some relief on the current economic situation.

In the UK, we get the labour market data for October/November where focus is on developments in wage growth, particularly in the private sector.

Economic and market news

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What happened yesterday

Norges Bank yesterday announced an important change to the way it will control its balance. Starting in March 2025, Norges Bank will cap the size of its FX reserve by selling foreign exchange and buying Norwegian kroner. The purpose is to limit the rise in central bank reserves as Norges Bank’s seigniorage over time otherwise would have transmitted from a higher capital to higher bank reserves. A decision on the matter has been long-awaited, and while yesterday’s market reaction was limited there are still diverging views as to what the full market impact will be in 2025.

In Germany, Chancellor Olaf Scholz lost the no-confidence vote in the German parliament. PM Scholz from the SPD had called for a vote-of-confidence for the government after he dismissed his Minister of Finance from the FDP back in November. As expected, Scholz lost the vote of confidence and can now ask the German president to dissolve the parliament and call for a general election. The election is expected to be held on 23 February 2025. Currently there is no clear majority in the polls, and a new coalition government is the most likely outcome of the election.

Euro area PMIs rose more than expected in December recovering some of the large decline in November, with the composite PMI rising to 51.4 from 49.5 (cons: 49.5). The manufacturing PMI stood unchanged at 45.2 while services PMI rose more than expected to 51.4 from 49.5 (cons:49.5). Hence, the data in December shows that the services sector continues to make up for the declining activity in the industry. With the average composite PMI lower than in Q3 the data supports our view of a contraction in the economy in Q4 with GDP growth at -0.1% q/q driven by the industry. The sub-component on services prices rose to the highest level since August with both input and output sub-indexes ticking higher in December showing that there is still a modest pressure on services prices. The euro area employment PMI subcomponent declined in December, showing that the labour market is gradually cooling and supports our expectations for slightly higher unemployment in the coming year.

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UK PMIs for December mirrored those from the euro area with stronger than expected services and a decline in manufacturing, recovering some of the decline we saw in November. The service sector continues to hold up the economy with an increase in private sector output offsetting a downturn in manufacturing production. Price indices higher across the board indicating some continuous stickiness in price setting, a key concern for the Bank of England. On the other hand, the employment indicator came in weak at 45.2 in services and 49.3 in manufacturing, which points to accelerated cooling in the labour market.

In the US, the PMIs painted a mixed picture with manufacturing plunging further below 50 (48.3; from 49.7), yet services growth accelerating more than expected (58.5; from 56.1). The release was positive from an inflation perspective with both services input and output price indices continuing to decline despite solid growth in both business activity and new orders. Services are the most important driver of current inflation, and according to PMI, output price pressures should continue stabilizing towards pre-pandemic levels. On the other hand, manufacturing input costs continued trending higher. Goods inflation has been less of a problem for the past couple years though.

Equities: Global equities were higher yesterday, with a new all-time high in the Nasdaq index. However, this was yet again a very narrowly led market, particularly in the US, where cyclical large-cap growth stocks, specifically in the tech, consumer discretionary, and communication services sectors, made the gains. In the US yesterday, we had more industries lower than higher yesterday, and it marked the 11th consecutive trading session where more than half of the constituents in the S&P 500 were lower. While we are fundamentally positive on equities, we must admit that narrow leadership is not a fundamental driver but more a result of late cycle animal spirit, and in similar previous occasions, it has ended in badly. In the US yesterday, Dow -0.3%, S&P 500 +0.4%, Nasdaq +1.2%, and Russell 2000 +0.6%. This morning, Asian markets are broadly lower, together with futures in both Europe and the US.

FI: There were modest movements in global bond yields yesterday and a downgrade of France from Moody’s had modest impact on the French government bonds yesterday. Initially, the 10Y OAT-Bund spread widened some 5bp, but at the end of the day the spread moved just 1-2bp. The French central bank has cut their growth forecast for the French economy and looking at the other rating agencies Fitch has been stating that without a credible plan for the budget in coming years there is significant risk to the rating. Thus, we expect to see more pressure on French government bonds given the political uncertainty.

FX: EUR/USD remains rangebound, fluctuating around the 1.05 mark as attention shifts to tomorrow’s FOMC meeting. EUR/GBP erased recent gains during yesterday’s session following the UK flash PMIs for December showing continued stickiness in price setting. In China, the continued need for policy easing keeps the upward pressure on USD/CNY intact and we saw a move yesterday from 7.275 to 7.285. EUR/SEK is steady around 11.45 this morning after it dropped ten figures yesterday and thus left the last week’s range above 11.50. This move rhymes with the post-PPM December seasonality and our repetitive call for a tactical downside potential after the cross has been trading in more and less stretched overbought territory since the peaks in early November. We keep our 1M target at 11.30. Yesterday we got the long awaited announcement from Norges Bank on how they will handle the rise in structural liquidity in the coming years. The market reaction was non-existent, which we think makes sense for NOK FX spot given the relatively small amounts. Meanwhile, NOK/SEK took a one-figure hit, down from 0.9870 to 0.9770.