Euro Area PMIs Cap an Eventful Week for Markets

In focus today

In the euro area, flash PMIs for January are set for release. In December, both services and manufacturing PMIs declined but from levels that still suggest quite modest growth in the final quarter of the year. We expect that growth momentum continued into January, with PMIs little changed compared to December, aligning closely with consensus. Specifically, we forecast the PMI composite to come in at 51.6 (cons: 51.8, prior: 51.5), PMI manufacturing at 49.0 (cons: 49.1, prior: 48.8), and PMI services at 52.4 (cons: 52.6, prior: 52.4).

In Sweden, focus turns to the Labour Force Survey (LFS) unemployment figures for December and the fourth quarter. Indicators for the labour market have shown clear signs of improvement, but the official LFS data is lagging. Unemployment, as measured by Sweden’s public unemployment agency, has improved, as well as indicators for labour demand. However, our assessment is that the Public Employment Service’s statistics are once again leading the way for the LFS, just as they did after the pandemic. Our forecast for the LFS unemployment is 8.7% SA and 8.2% NSA.

Economic and market news

What happened overnight

In Japan, as widely expected, the Bank of Japan kept the overnight call rate at 0.75% following the recent hike in December. The new outlook report reveals a hawkish bias, as the central bank has revised its core inflation expectations somewhat higher across the forecast horizon running until 2027. The market reaction has been very muted. Further fiscal stimulus looks inevitable, as election campaigns have been kicked off with VAT cut promises from all major players. This has propelled Japanese government bonds higher at fast pace, and a still weaker yen is threatening to exacerbate inflation problems. Overnight data shows December core inflation declined slightly to 2.9%, while PMIs indicate a strong start to the year in both service and manufacturing, bringing composite PMI to 52.8 in January, the highest level in 17 months. We will listen in to the press conference later this morning for potential more hawkish tunes.

What happened yesterday

In the euro area, the ECB minutes from the December meeting revealed no major new insights, with most members viewing inflation risks as two-sided. Overall, while the ECB is in a solid position from a monetary policy perspective, the stance was not considered static. The softening of downside risks since September supports the view that maintaining current interest rates represented a solid path under the baseline outlook. An extended period of steady rates appears likely, assuming December inflation projections for both headline and core figures materialise.

Additionally, January consumer confidence improved more than expected to -12.4 (cons: -13.0, prior: -13.2). While the improvement is encouraging for the economic outlook, as consumption is expected to drive growth this year, the historically low level calls for caution in overinterpreting this trend.

In Norway, Norges Bank’s interim meeting unfolded as expected, with the policy rate remaining unchanged at 4.00% and no new signals on future policy direction. We still expect the third 25bp rate cut to come in June and pencil in four quarterly cuts from June 2026 to March 2027. The market reaction upon announcement was non-existent.

In Denmark, consumer confidence rose for the second consecutive month in January to -13.4 from -17.3, marking the highest level in a year. The improvement was driven by better perceptions of personal finances and a more optimistic view of the national economy. This progress is surprising given recent concerns over Trump’s interest in Greenland, which caused significant economic worry a year ago. However, confidence remains negative, with expectations of worsening personal and national finances over the coming year.

In the Ukraine war, President Zelenskiy announced after ‘positive’ talks with President Trump in Davos that security guarantees for Ukraine have been finalised. However, the critical territorial dispute with Russia remains unresolved – a key point for Kremlin. Diplomatic efforts continue with upcoming trilateral peace talks in Abu Dhabi today and Saturday.

In the Greenland debate, no significant new details surfaced about the NATO-brokered framework that led to Trump’s U-turn on Wednesday. At an extraordinary summit, EU leaders stressed ‘respect’ in transatlantic relations, with Denmark reiterating Greenland’s sovereignty as a red line. However, they voiced concerns over Europe’s reliance on the US and the broader implications of the deal.

Equities: Global equities moved higher yesterday across regions and sectors, led by cyclicals in what still looks like a geopolitical relief trade. Notably, small caps once again outperformed large caps. Year-to-date, small caps are now roughly 6% ahead of large caps after just the first three weeks of the year. Worth highlighting that this comes in a week when equities overall are still marginally lower, yet small caps stand out as the best-performing style. There is a strong underlying signal in the ongoing rotations, across sectors, regions, and particularly in style allocation preferences. In the US yesterday, Dow +0.6%, S&P 500 +0.6%, Nasdaq +0.9%, Russell 2000 +0.8%. This morning, Asian equities are higher. European futures are marginally lower, while US futures are marginally higher.

FI and FX: As we enter the final session of an eventful week the “Sell US”-theme has gotten increased traction with general EM, Scandies and Antipodeans being the clear winners while the greenback has continued to trade on the backfoot. EUR/USD has decoupled from short-end rate spreads and is on track for its best week since August. The JPY has also had a rough week amid focus on the upcoming elections, the likelihood of considerably more expansionary fiscal policy and subsequently higher yields. This morning Bank of Japan stayed put but lifted its inflation forecast underpinning expectations that the central bank is far from done in its hiking cycle. The general underperformance of Japanese fixed income has also impacted global markets this week with Japanese investor flight weighing on long duration portfolios. Finally, precious metals continue to rally while European natural gas prices have hit the highest level in almost a year amid cold weather and market concerns as to the potential geopolitical vulnerability of US LNG exports.