Today’s PMIs marked the end of a busy week. They would either confirm or challenge yesterday’s ECB en BoE case for signaling steady rates for the foreseeable future. It turned out to be the latter for Frankfurt, triggering Bund outperformance vs US Treasuries. German yields currently drop 2.4 (2-y)-9.9 bps (30-y). The 10-y came close to the 2% barrier, more or less this year’s lows. The 10-y swap sniffed at key support at 2.5% which, if broken, opens up another 50 bps of declines from a technical point of view. European PMI business confidence unexpectedly fell in December, from 47.6 to 47. Manufacturing flatlined at 44.2 while services activity (48.1 from 48.7) eased further to its lowest since the early 2021 lockdowns. The overall reduction in business activity again reflected deteriorating order books in both sectors with an only slightly less gloomier outlook not boding well for the future. Backlogs fell consequently while employment, viewed over the past several of months, teetered between marginal increases and decreases, essentially holding steady. S&P Global notes that this is positive for the individual consumer but exacerbates productivity challenges given that it coexists with declining output. Purchasing activity as well as inventories were cut to the lowest levels since around the GFC. Input cost inflation cooled but selling price inflation accelerated, the latter remaining elevated by historical standards. According to the PMI owners, the likelihood of the euro area being in a recession since Q3 remains notably high. It estimates growth of just 0.5% in 2023 and 0.8% next year. The release came the dollar to the rescue as EUR/USD (1.091) called of the test of the 1.10 resistance zone. Fed’s Williams later added some USD strength to it. He pushed back against the recent hefty repositioning prior and after the Fed meeting. He said while that it’s natural to move policy towards a more normal level over time, the FOMC isn’t “really talking about rate cuts right now”. He called the March bets premature. US yields rebounded intraday, turning losses into gains between 0.9-3.6 bps with the front underperforming. In their first comments after the meeting, most ECB officials kept the party line. Villeroy (France) said hikes are over, barring surprises, but warned the ECB needs to be patient. Holzmann (Austria) said policy rates probably have hit their peak but confirmed there was no discussion about rate cuts. He also noted that the council majority still saw upside inflation risks. Centeno (Portugal) struck the unsurprising dovish string with a remark that inflation has come down faster than it rose.
The UK economy finished to 2023 on a more constructive note. The S&P Global/CIPS composite PMI rose from 50.7 to 51.7, the second consecutive reading above the 50 level and coming after three months of sub-50 contraction readings. The December figure indicates the fastest rise in activity in the private sector since June. This was driven by a rebound of activity in the services sector (52.7 from 50.9). Activity in manufacturing declined for the tenth consecutive month. Firms reported a (marginal) increase in total new work for the first time since June. Respondents in this respect mentioned a stabilization in interest rates and hopes of a modest recovery. The improvement in order books was confined to the service economy. Despite better activity and orders, employment declined modestly for the fourth consecutive month. Inflationary tendencies still remain at work. Input cost inflation reaccelerated to the highest since August, mainly on higher wages. Higher cost increases also translate into higher output charges. In this respect, S&P sees little sign of a slowdown in inflationary pressures since the summer. Businesses also turned rather optimistic on their own growth prospects for 2024. S&P concludes that the UK economy probably stagnated over the fourth quarter as a whole. S&P also assess that “the service sector’s resilience and sticky inflation picture will add to speculation that it’s too early for the Bank of England to be talking about cutting interest rates”. UK gilts underperform Bunds but have pared their initial losses since. The front end loses 1-2 but longer maturities drop 4.6-4.7 bps. Sterling outperforms a broadly weaker euro with EUR/GBP falling back below the 0.86 big figure.