In focus today
Today, the main event of the week will be when ECB announce their rate decision at 14:15 CET. We see few, if any, new policy signals, given the limited new information that has been released since the December meeting. We expect President Lagarde to confirm that the next policy rate change is most likely a cut, which may happen in summer. It remains to be seen whether the June meeting will be singled out as the key meeting to watch, see ECB Preview – Stocktaking, 18 January.
Before the ECB announcement, we will follow another interesting policy meeting in Norges Bank, who will announce their rate decision at 10:00 CET. We see a close to zero probability of rate changes today and expect Norges Bank to signal that rates will most likely be kept unchanged also at the March meeting (neutral bias). We still expect the first rate cut in June 2024 and expect five 25bp rate cuts for the whole of 2024, see Reading the Markets Norway – Too early for NB to shift rhetoric, 22 January.
From Germany, we receive the January Ifo figures. We especially look out for the economic expectations indicator as the ZEW has shown a significant rise in expectations which has not yet been mirrored in the Ifo figures.
US flash Q4 GDP is due for release this afternoon. We expect solid quarterly growth at 1.8% Q/Q AR, which will mark a slowdown after the very strong 4.9% in Q3.
Early Friday, Tokyo January CPI data will give a first indication whether price pressures have continued to moderate in the beginning og the year.
Economic and market news
What happened over night
Overnight, the Fed decided to raise the lending rate on new loans in its emergency lending program (Bank Term Funding Program or BTFP) and terminate the program from March 11. The BTFP lending rate (1Y OIS + 10bp) has declined markedly over the past couple of months as markets have priced in significant rate cuts from the Fed in 2024. By bringing the BTFP rate (currently 4.92%) in line with the rate on reserve balances (5.40%), the Fed is de facto closing an arbitrage opportunity for banks. Whether the termination of BTFP will strengthen the appetite for slowing down QT remains to be seen.
What happened yesterday
In the euro area, Service PMIs fell unexpectedly to 48.4 (cons: 49.0, prior: 48.8) while manufacturing rose more than expected to 46.6 (cons: 44.7, prior: 44.4). The price pressure in the service sector increased in January and is now at the highest level in six months while the manufacturing sector continued to lower prices. Service companies also hired staff at the fastest pace in six months highlighting continued upside risks to inflation.
In the UK, PMIs for January came in stronger than expected and remain in expansionary territory for composite and services. As result markets scaled back on expectations for cuts and are now pricing around 100bp of cuts for the remainder of the year. On price pressures, input prices continue to rise, although more moderately. Input price pressures increased in the manufacturing sector following impact from the disruptions in the Red Sea, which also triggered a sharp rise in delivery times.
US PMIs were also stronger than expected in January. Both manufacturing and services are now in growth territory (above 50). Although the PMIs have recently been more positive than the ISM figures, yesterday’s outperformance emphasizes the resilience of US growth data.
People’s Bank of China (PBoC) yesterday pre-announced a cut in the reserve requirement ratio (RRR) for banks of 0.5 percentage points on 5 February. PBoC also signalled more easing was on the way by stating that the RRR rate is still relatively high and that the policy pivot by the Fed would expand China’s policy space. The rising US-China policy rate spread has been a concern for PBOC as it could destabilise the CNY.
Bank of Canada (BoC), left rates unchanged yesterday at their first policy meeting in 2024, which was in line with expectations. BoC expects inflation to stay around 3% in the first half of 2024 and signalled the potential rate cuts in the third quarter if inflation turns to the predicted 2.4%.
Hungary’s prime minister Victor Orban said Wednesday that he will urge the Hungarian parliament to approve Sweden’s NATO bid as soon as possible. After Turkey’s decision to approve the Swedish bid on Wednesday, Hungary is the only remaining member country still to approve the Swedish bid.
Equities: Global equities were higher for the fifth consecutive day. Yesterday’s surge was fuelled by a cyclical rotation, with Europe and Asia delivering the best performances. It is tempting to echo the theme of our 2024 outlook, “good news is good news,” given the positive manufacturing news from the flash PMIs. However, some of the initial enthusiasm waned during US afternoon trading as yields reversed course and increased towards the closing bell. In the US yesterday, Dow -0.3%, S&P 500 +0.1%, Nasdaq +0.4%, and Russell 2000 -0.7%. Asian markets are broadly higher this morning, propelled by China and the substantial monetary loosening measures announced yesterday. US and European futures are mixed this morning.
FI: US government bond yields rose on the back of a weak auction in the 5Y Treasuries as well as speculation that Federal Reserve will be higher for longer. Hence, 30Y US Treasuries rose to the highest level in 2024 on the back of the weak 5Y auction, where the bid-to-cover was 2.3, which is in the lower part of the range for the bid-to-cover at the 5Y Treasury auctions seen over the past five years. Next week we get the quarterly refunding statement from the US Treasury and it will be interest to see if issuance is increasing in the long end.
FX: USD/CAD rose almost a full figure, to 1.3520, after BOC left rates unchanged, as expected, and mulled when to let go of current restrictive policies. USD gained vs most G10 currencies as US PMI data surprised on the upside and US Treasuries underperformed vs peers. However, EUR/USD has dropped over night to around 1.0880. EUR/NOK is back below 10.40 ahead of Norges Bank’s rate decision at 10:00 where unchanged is widely expected.
