In focus today
We start off the week with low activity on the data release front.
In Denmark the monthly employment statistics for November is released Monday morning.
Early Tuesday we await the rate decision from the first policy meeting from Bank of Japan in 2024. We expect the Bank of Japan to stay on hold. Wage growth remains the key missing piece of the puzzle before they can raise the policy rate out of negative and let go of the yield curve. We expect they will be ready to do that once we have hard evidence that the Shunto (spring wage negotiations) results in wage acceleration.
This week’s main event is the ECB meeting on Thursday, where we expect rates to stay on hold for now, but signal that the next rate change most likely is a cut, which may happen in the summer. We also look out for Thursday’s rate decision from Norges Bank, January PMIs on Wednesday and Tokyo January CPI print from Japan on Friday. Focus will also be on the US earnings season, where companies from a broader selection of sectors (including IT) will report.
Economic and market news
What happened overnight
In China the People’s Bank of China kept its loan prime rates unchanged. This means that the one-year and five-year loan Prime Rates will remain at 3.45% and 4.2%, respectively. The move was in line with expectations, after the People’s Bank surprisingly kept the medium-term lending facility unchanged last week, despite the consensus of a cut.
In the Republican primary election, Ron DeSantis suspended his campaign and endorsed Donald Trump becoming the republican nominee for the 2024 US presidential election, leaving Nikki Haley as Trump’s sole competitor in the race. The decision was made in the aftermath of last week’s first round Iowa election where Ron DeSantis gained 21% of votes compared to Donald Trump’s 51%. Tomorrow, the primary election heads to New Hampshire for the second round.
What happened over the weekend
In the US, the University of Michigan’s consumer sentiment survey showed that the consumer sentiment improved markedly from 70.1 to 78.8 (consensus: 69.7) as current conditions and expectations improved. This is the highest level since July 2021. 5-10Y inflation expectations fell from 2.9% to 2.8% in January (consensus: 3.0%), though still close to the 3% average over the past year. Short-term inflation expectations (1Y) declined to 2.9% from 3.1% in December.
In the UK, December retail sales dropped more than expected, at the fastest pace since early 2021, raising concerns over the health of the economy in late 2023.
Equities: Global equities were higher on Friday with S&P 500 reaching a new all-time high. This will of course happen from time to time but it was the first time in more than two years for the big refence index to set a new high. Our benchmark index, the MSCI world local currency index also made a new high. Just as interesting, the index is almost 35% higher since October 2022 and based investor surveys a period of historical underweights among profession investors. This should serve as a lesson on risk of being underweight and too defensive. Very often we meet investors seeing the risk in being overweight risk but not so much vice versa. On Friday there was big appetite for cyclical, large cap growth stocks. Global big tech outperformed consumer staples by 2.5% although yields continued to push higher. However, as emphasised several times in our Espresso, as long as yields are higher for the right reasons it is not a problem. On Friday, US consumer confidence increased significantly while inflation expectations dropped further. In US on Friday, Dow +1.1%, S&P 500 +1.2%, Nasdaq +1.7%, Russell 2000 +1.1%.
FI: Friday was a relatively volatile session in bond markets as investors continued to digest the hawkish signals from central banks during the week. Initially, long government bond yields dipped early in the session, but the move was swiftly reversed in the afternoon following the release of a stronger-than-expected US Michigan Consumer Survey for January. Meanwhile, 2Y Bund yields climbed by 5bp, reflecting ongoing adjustments to ECB expectations. Ahead of this week’s meeting, the pricing of ECB rate cuts for the year stands at 130bp vs. 150bp last Monday. The Bund ASW-spread widened after consequent tightening for most of the week. The issuance pressure in the coming weeks will continue to be significant.
FX: USD/Scandies have started 2024 on a strong note, though last week was one where the USD consolidated vs most G10 peers. EUR/USD closed Friday a notch below 1.09, USD/JPY close to 148, USD/SEK in the mid-10.40s and USD/NOK just below 10.50. Meanwhile, NOK/SEK is again closing in on parity. This week offers a lot of important macro events to digest for FX, fixed income and equities including the ECB meeting on Thursday and US PCE data on Friday.
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