In focus today
Today, the primary election to become the Republican nominee for US presidential election 2024 heads to New Hampshire. Sunday, Ron DeSantis announced that he suspended his campaign and endorsed Donald Trump. The only other remaining candidate is Nikki Haley.
In the euro area, we will receive the quarterly ECB bank lending survey which will show how banks’ credit standards changed in Q4 2023. Banks have tightened credit standards significantly since ECB started tightening monetary policy, while loan demand has been on a downward trajectory.
Early Wednesday we will get PMIs from Japan. PMIs will reveal whether the growth picture with modest declines in manufacturing activity and a strong service sector has continued.
Economic and market news
What happened overnight
The Bank of Japan (BoJ) kept its quantitative and qualitative easing with yield curve control policy unchanged this morning as expected. The policy rate stays at -0.1% and the 10-year yield target around 0, with the upper bound of 1.0 percent as a reference rate. BoJ has also published a new Economic Outlook. Inflation in the fiscal year (FY) 2024 has been revised 0.4pp lower to 2.4%, but the core inflation outlook remains unchanged at 1.9% for both FY2024 and FY2025. This was widely expected and thus the market reaction was muted. We expect the BoJ will be ready to start normalising policies at the April meeting when they are more certain that wage growth will pick up. A policy hike and releasing the grip on the yield curve are both at play but the normalisation pace will very much depend on the wage outlook and the pressure from softening among other major central banks.
In China, the authorities are considering a package of stimulus of USD 278 billion to stabilize the slumping equity market according to a Bloomberg article released overnight. The rumours are not confirmed by official sources. Hang Seng is up 2.7% this morning.
In the Red Sea, US and UK launched new joint air strikes against the Houthi rebels. It is the eighth time since 11 January that the US has hit Houthi targets responding to the Houthis’ attacking container vessels passing through the Red Sea.
What happened yesterday
In Denmark, employment increased by 3200 in November compared to October. We still await signs that the expected economic slowdown is shown in employment data from Denmark.
Equities: Global equities ended higher yesterday after Europe and Japan caught up to the strong Friday performance in US. There was no one-sided rotation and no major macro release to push the market strongly in any direction. Hence, it looked more like investors were buying into the rally as they realized they had been missing out on the strong rally lately as growth and inflation outlooks have improved more than expected. Underscoring the “better-than-expected” economic outlook could also be seen from REITs doing fine together with small caps. Two industries/styles that still have more upside potential in the current falling inflation, falling yields and soft-landing narrative continues to unfold. In US yesterday, Dow +0.4%, S&P 500 +0.2%, Nasdaq +0.3% and Russell 2000 +2.0%. Asian markets are higher this morning with Chinese stocks leading the advances. Rumours were that China is working with a massive package to support domestic equity markets. That comes after the CSI 300 is hitting a five-year low. To put this into perspective, S&P500 and some other western indices reached new all-time highs again yesterday. Futures in Europe and US are flat this morning.
FI: Global bond yields declined across maturities with 10Y US Treasuries declining 2bp and 10Y German government bonds declining some 5bp. The ECB has been trying to push back on the market pricing of ECB policy, but there is still plenty discounted in rates, and thus supportive for bond yields. Furthermore, the 10Y Italian-German yield spread continues to tighten and is now trading at 150bp, which is a one-year low. However, spreads typically perform when the central banks are entering an easing cycle and with Italy back on stable outlook the risk of downgrade is low, and this is supportive for Italian government bonds relative to EU peers.
FX: As widely expected, the BoJ did not make any changes to monetary policy in the first meeting of 2024 in a unanimous decision. The market reaction was muted, with USD/JPY hovering around 148. EUR/USD stuck at 1.09. EUR/Scandies and EUR/CHF stable mostly sideways yesterday and overnight, while the GBP traded slightly on the weak side.