Thu, Jan 26, 2023 @ 21:25 GMT
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Upbeat PMIs Ease Recession Fears

Market movers today

The German IFO index for January is on the agenda today. The German economy has been holding up better than feared in Q4 22, thanks to a range of tailwinds from mild weather to a large order backlog and easing supply bottlenecks in industry. A further improvement in the IFO business climate would add to the positive signals from other leading indicators such as ZEW and PMI, supporting easing recession risks in the market.

In Sweden, December PPI is likely to show a high print again, after electricity prices rose sharply.

The 60 second overview

Euro area: Both manufacturing and service sector PMIs came out stronger than expected, which pushed the composite index above 50 ie. to a level no longer pointing towards economic contraction. That said, the figures were a ‘two-sided sword’ for the ECB as euro area still appears caught in stagflationary environment in early 2023. Strong labour market, improved consumer confidence and the reopening in China could give a further boost to PMIs over the coming months, but at the same time selling price pressures increased for both goods and services from December. In our view, the combination of a resilient economy yet still elevated inflation risks supports our call for 50bp ECB hikes at both February and March meetings.

US: Also US Flash PMIs ticked higher from December, although the levels still remain consistent with a modest recession. While it seems that the risk of a hard landing has eased, input price pressures rose both in manufacturing, and especially services sector (63.7, from 58.3). Employment indices eased just slightly, but overall labour market conditions still appear tight, and wage-driven inflation risks have not yet eased completely. We expect Fed to hike its policy rate to 5.00-5.25% with three consecutive 25bp hikes, but markets’ focus has already shifted towards the looming rate cuts. We take a look at the factors which will eventually determine the pace and timing of the cuts in our preview for the next week’s meeting, see Research US – Fed preview: What it takes for the Fed to cut rates, 24 January.

Australian CPI: Overnight, the Reserve Bank of Australia’s (RBA) preferred trimmed-mean measure of inflation picked up more than expected in Q4 to 6.9% y/y (from 6.1%), which is the highest level since 1988. Despite the cooling labour markets, the figures increased the risk of RBA continuing its hiking cycle in February (with markets now pricing around 80% probability of a 25bp hike) and supported AUD/USD close to our 1M target of 0.71.

FI: It was a rather choppy trading session yesterday through most of the day amid mixed European PMIs. In the late afternoon, US treasuries’ volatile reaction to the US PMIs initially sent yields higher, but spreads were marginally tighter on the day and did not seem affected by Spain mandating banks for a new 10y. Curves recorded a minor flattening from the long end. The long end tap from EU (2053) saw strong demand and is likely to have supported the demand for long end papers.

FX: In a fairly uneventful session the HUF stood out as the session winner while NOK and GBP traded slightly on the back-foot. EUR/USD started the session by moving lower but later erased losses leaving the cross virtually unchanged on the day just below the 1.09 threshold. EUR/SEK is hovering just north of 11.10, which marks the lowest level so far this year.

Credit: Credit markets were jittery on Tuesday on the back of a softish overall market for risk assets. Itrax main widened 0.6bp to close at 79.0bp while Itrax xover widened 3.9bp to close at 416.5bp. Primary markets remained open but were still somewhat muted due to reporting season being in full swing currently.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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