In focus today
Today, the US election year kicks off with the Iowa Republican Caucuses. Prediction markets see Trump as the clear favourite to win the Republican candidacy, and he is projected to win over half of all votes in Iowa according to the latest polls. The Iowa caucuses are often seen as a bellwether for the rest of the spring, and either of Trump’s closest challengers, Ron DeSantis or Nikki Haley, would likely have to come up as a close runner-up to maintain their hopes of clinching victory in the end.
In the euro area, we receive the November industrial production figures. The industry has been stuck in contractionary territory in 2023. Recently, soft indicators like the manufacturing PMIs and leading indicators from Asia have started to show a bottoming out in manufacturing activity. It will be interesting to see if the hard data confirms this. However, the risks are tilted towards another benign euro area print as data released last week showed German industrial production falling 0.7% m/m in November.
We also receive German GDP figures for 2023. The figures will show how the economy ended 2023 in Q4 where activity likely declined judging by data released on industrial production as well as soft indicators. The release includes the 2023 data and not the official seasonally adjusted real q/q growth rate for Q4 – this is scheduled in two weeks.
In Sweden, we expect the December inflation data to show a decline in primarily CPIF inflation, which likely has temporarily dropped below the 2% target. That said, core CPIF excl. energy is expected to continue to undershoot the Riksbank’s November forecast as we forecast CPIF and CPIF excl. energy to print 1.9% y/y and 5.0% y/y, respectively, which is -0.2 and -0.6 percentage points below Riksbank’s dittos. We note that December inflation in Denmark and Norway suggest lower prints on food, clothing, transportation services and recreation than what is assumed in our forecast, which may suggest a downside risk to the overall forecast.
For the remainder of the week focus we will look out for inflation data from the UK and Japan. We also have several central bank speakers on the wire.
The World Economic Forum in Davos also kicks off Monday. The WEF runs till Friday 19 January.
Economic and market news
What happened overnight
Chinese central bank surprises with unchanged rates: PBOC surprisingly kept rates on hold this morning in contrast with ours and consensus expectations of a 10bp cut. The central bank has signalled further easing recently but apparently not already today. It may also be a signal they will prefer to reduce the reserve requirement ratio (RRR) instead and we will be looking out for that in the coming weeks. They normally do not change the RRR rate at the same time as the rate decisions so it could happen any time in our view. The CNH strengthened slightly after the rate announcement this morning but USD/CNH is unchanged from the levels Friday afternoon around 7.18.
Oil prices rose slightly this morning with Brent having gained around 0.20% trading at USD78.45/barrel.
What happened over the weekend
Taiwan election points to status quo: As expected, the independence-leaning DPP secured the presidency for the third time in a row as their candidate Lai Ching-te won by a 6.7 percentage points margin to KMT’s Hou Yu-ih. However, Lai’s victory was smaller than his predecessor Tsai Ing-wen and DPP lost the majority in the parliament. Hence Lai is ruling with a weaker mandate than Tsai Ing-wen. Lai’s victory was also secured by keeping a more moderate tone on independence than before he became presidential candidate suggesting that he is unlikely to increase confrontations with China. It also reflects a mood among the Taiwanese where polls show a clear majority in favour of the status quo – and more so over the past year, see also Research China – Taiwan election points to status quo, but not further escalation, 15 January. The market reaction to the election this morning has been very muted.
On Friday UK monthly GDP November figures came out slightly better than expected at 0.3% m/m (consensus: 0.2%, prior: -0.3%). A slight rebound, as expected following the upbeat PMIs the past months which showed composite and services in expansionary territory. The 3m/3m was however lower than expected at -0.2% after downward revisions almost across the entire board for October.
Oil prices initially rose after the US and UK had conducted airstrikes against the Houthis in Yemen with Brent briefly trading north of USD80.5/barrel but settling at USD78.29/barrel. Between Friday and Saturday, the US conducted another air strike against the Houthis. US president Biden later said the US had delivered a private message to Iran regarding the Tehran-backed Houthis and their attacks on commercial ships in the Red Sea.
US PPI numbers for December came in at -0.1% m/m and 1.0% y/y, which was lower than expected (consensus: 0.2% m/m and 1.4% y/y). November PPI was revised down to -0.1% m/m from being unchanged, hence headline PPI m/m dropped for the third consecutive month in December. Core PPI for December stood at 0.2% m/m and 2.5% y/y.
The 10y UST was down by 3.6bp by end of Friday’s session, as investors digested the week’s inflation numbers.
In the equity space Microsoft seized the throne from Apple as the largest public company by market cap. Microsoft had briefly overtaken Apple in Thursday’s session, however this marks the first time Microsoft stands as number one by closing bell since November 2021. Microsoft which gained 1.00% in Friday’s session now has a market cap of USD2,887bn, whereas Apple which gained 0.18% in Friday’s session has a market cap of USD2,875bn.
Geopolitics: On Friday, we published a note discussing the tensions in the Red Sea. For now, we are not overly concerned that the events would affect global markets. Although freight rates have increased significantly over the past few weeks, energy markets remain calm. In a late business cycle environment, supply side issues are not as inflationary as in an environment where the economy is booming. We do acknowledge though that the situation warrants close monitoring. Risks rise in a scenario where the war in Gaza expands. Lebanon’s involvement would raise the risk of Iran also drawing in, and such a scenario could be a game changer for the energy markets, for inflation and for the major central banks. Read more on Research Global: Tensions rise in the Red Sea – should we worry? 12 January.
Equities: Global equities were higher Friday and last week despite a lacklustre start to the US earnings season. As always, US banks were the first ones to report and the combination of both disappointing earnings and for some weaker than expected guidance dragged down banks and made US indices underperform. The energy sector was the best performer after oil price rose as a result of the US and British attack on Houthis. Asian markets are mixed this morning. Japanese indices are continuing higher on the back of further yen softening. European and US futures are mostly higher this morning.
FI: Global yields in the front end went sharply lower on the back of the US PPI miss, which added to easing expectations from central banks. The 2y US yield ended 10bp lower, which took the Schatz (Germany) 7bp lower along the way. Markets are now pricing 154bp of rate cuts for the rest of the year, which is 14bp more than on Thursday last week. This weekend, ECB Chief Economist pushed back on the expectations for a rate cut in Spring, but saying that by June, ECB will have the important wage data for Q1, which will only become available by the end of April.
FX: Despite elevated geopolitical risks with the air strike in Yemen by the US and UK on Friday, market sentiment is positive – also helped by soft US December PPI figures on Friday. EUR/USD is still range trading in the mid 1.09-1.10 level, while USD/JPY declined below 145. EUR/GBP had a fairly quiet session on Friday, staying just below the 0.86 mark. EUR/NOK and EUR/SEK are hovering just below 11.25, bringing NOK/SEK near parity.