Market movers today
Today, focus will be on December inflation data from Germany. Due to fiscal measures, German and euro area inflation will be in for a rollercoaster ride in the coming months, adding to the difficulties for markets and the ECB to accurately assess the true inflation pressures. German headline CPI faces some significant downside risks in December due to households having received a government-backed discount on their energy bills. The statistical treatment of this discount is a bit uncertain but it seems this could be treated as an implicit fall in consumer energy prices. As a result, German HICP energy inflation could fall sharply in December, and headline inflation could drop below the 10% mark. However, the price decline will then revert sharply in January/February, before the gas price brake takes full effect in March and the decrease in energy inflation repeats.
In Europe, a lot of focus remains on energy markets, where developments over the winter have been less negative than feared. European gas prices continued to fall yesterday and the benchmark 1-month future reached its lowest level since February 21. Alternative sources (LNG mostly) for Russian gas have allowed Europe to accumulate larger-than-expected reserves while milder than usual temperatures have led to lower-than expected withdrawals.
The 60 second overview
Positive risk appetite. While US and UK investors were out on holiday yesterday the first trading session of the year start with positive risk sentiment, with broader European indices higher. At the same time European yields declined and reversed much of the sell-off recorded ahead of new years.
European final PMI manufacturing released yesterday from euro area countries all landed in sub 50 range, with the most dire print from Spain at 46.4.
China: December activity and supply chains takes a hit. The official PMI for December dropped further to 47.0 from 48.0 in November, and overnight the private Caixin PMI manufacturing printed at 49.0. The former is a very low level in a historical perspective and highlights the negative effect of the covid chaos on the economy, while the Caixin printed in the sub-50 territory for the fifth month in a row.
Credit: While US and UK investors were out on holiday yesterday, the EUR primary market reopened following the Christmas break with two covered bonds priced, along with an SSA deal. For the covered bonds, there is renewed issuance in slightly longer maturities, following the very short tenors seen in Q4. Looking ahead, the pipeline is building with another two covered bonds and a dual-tranche senior non-preferred transaction mandated yesterday.
FI: European rates recorded a strong performance on the first trading day of the year, while US and UK still out for holidays. 10y Bunds ended 13bp lower at 2.43% with spreads broadly unchanged to the rest of the EGBs. Focus today turns to the German inflation print which faces some significant downside risks in December due to households having received a government-backed discount on their energy bills.
FX: Muted traded among thin liquidity yesterday as US, among others, was closed. USD/JPY closed below 130 for a seven-month low. AUD and NZD strengthen on reports that ‘peak covid’ might soon be hit in China. Mostly sideways in Scandies in thin trading.
Nordics: The December manufacturing PMI was flat at 45.9. The details show a slight improvement in new orders both exports and domestic. Employment rose slightly from still “positive” levels (>50). On the price front, things are easing: delivery times hit the lowest since 2009 and price expectations continue to drop. Hence, an overall positive reading from a Riksbank perspective.
