Market movers today
Focus continues to be on the geopolitical situation in the Middle East. In terms of data releases, the highlight today is euro area inflation. We expect it to show that the ECB’s ‘mild increase in underlying inflation pressures’ came to a halt in December with core inflation falling back to 1.2% (see also Euro Area Research – Measuring the euro area inflation pulse , 29 November 2019). Despite this, higher food and energy prices should still help lift headline inflation further and country figures point to a reading of 1.3%. We also get euro area retail sales for November.
US ISM non-manufacturing is due for release today. Even though there is usually not a strong correlation between non-manufacturing and manufacturing (which was very weak on Friday), the number will likely gain significant attention. ISM non-manufacturing is already at a relatively weak point. We are also monitoring the employment sub-index for clues what to expect on Friday when the official jobs report is due out. We believe the labour market continued to tighten in December.
In Sweden we have PMI services for December today. PMI manufacturing recovered slightly to 47.1 in December and we might also see a small rise for the service index, which at 47.9 is still at the weakest level since 2013.
Selected market news
Focus remains on the conflict between the US and Iran, but it seems that the financial markets have already shrugged off the worst fears and outcomes. European equity indices ended in red yesterday, but the losses were more muted than indicated at the opening. US equity markets actually managed to close in positive territory as investors once again flocked to the large tech companies. In Asia Nikkei is up 1.4% this morning.
Optimism was also supported by the US Service PMI that rose from 52.0 in November to 52.8 in December. The composite PMI rose from 52.2 to 52.7. Service PMI also rose in the euro area to 52.8 from a preliminary 52.4. The numbers confirmed that the service industry is slowly improving in both the US and the euro area despite a still weak manufacturing sector. The numbers for the US support the view that the very weak ISM manufacturing released on Friday might have been an outlier.
The better risk appetite weighed on safe-havens. 10Y US treasury yields edged higher and are once again above 1.80%. USD/JPY has also moved higher and at 108.5 the cross is basically back at the level before the US killing of the Iranian commander. The oil price has also retreated and is at USD68 a barrel (Brent future), which is just USD2 above the pre-attack level after trading at USD70.74 a barrel early yesterday morning. Despite the improved risk appetite in financial markets over the past 24 hours Middle East news is still a major concern. The Trump administration is drafting economic sanctions against Iraq, if it goes through with its pledge to expel US forces from the country, and at the same time the US is sending more forces to the Middle East. The funeral of Soleimani yesterday also left little doubt that Iran is seeking revenge.