Yield curves flattened further this week as longer dated yields traded lower on the back of softer US labour market data and not least ECB’s Schnabel’s interview with Reuters where she passed on the opportunity to oppose the recent aggressive market pricing of the ECB. In line with this, the euro has continued to weaken. The big winner on FX markets has been the yen, which benefits on several fronts from a lower global yield environment, a marked decline in oil prices and speculation of imminent normalisation of Bank of Japan policies.
This week, we published our view on the large global economies and the Nordics. It looks like we can get inflation down with only a modest increase in unemployment in the US, the euro area and the Nordic countries. The scene is set for rate cuts during 2024 and 2025, as central banks can gradually release the pressure. However, uncertainty is very high, and there is big risk of both deeper crisis and re-emerging inflation over the coming years.
Data out of the euro area has on balance been uplifting and confirmed that the economy is not falling out of the bed. Retail sales climbed slightly higher in October and final November PMIs adjusted the flash numbers a good bit higher leaving the picture of a modest cooling of the service sector and a weakening manufacturing sector which has at least stopped accelerating further into recession. Manufacturing weakness continues to reflect in German factory orders, though. A few 2020 COVID lockdown months aside, they now stand at the lowest level in over ten years.
US data continues to support our expectation of a soft landing economy. The ratio of job openings to unemployed workers dropped to the lowest level in over two years and as involuntary layoffs tick higher from low levels, the labour market continues to cool off. At the same time, ISM data indicates modest growth in the service sector with the activity index increasing from 51.8 to 52.7.
Next week will be a busy one. We expect both ECB, SNB and the Fed to be on hold. ECB looks set to guide a more neutral policy outlook for the near term as we expect them to virtually rule out the possibility of a further rate hike. At the FOMC meeting, focus will be on the updated macro and rate projections, and especially if the ‘dots’ already signal a higher chance of rate cuts for next year. With labour markets cooling and broad-based easing in inflation we also expect the BoE to stay on hold.
On the data front, US CPI data will be key to markets and we forecast another month with modest price pressures and core CPI growth at 0.2% m/m. In the euro area, we look out for December PMIs and expect continued modest contraction in the service sector while the downward trend in manufacturing becomes gradually less steep. We also get the quarterly Tankan survey in Japan, which will hold key information about activity and inflation pressures ahead of the Bank of Japan meeting later this month. In China, another deflation print will likely draw headlines, however retail sales will be more important, as consumers are key to keep the economy afloat.