In focus today
In the euro area, Q4 GDP is released. The composite PMI indicator was almost unchanged from Q3 to Q4 at 47.2 indicating negative GDP growth, and German GDP fell 0.3% q/q. Hence, we expect the euro area release to show that GDP fell 0.1% q/q in Q4 thereby posting the second consecutive quarter with negative GDP growth. If we are right, we are in a “technical” recession. However, we stress that it is not a real recession as the labour market is still very tight and the unemployment rate was historically low at 6.4% in November. We also look out for Spanish inflation data for January that will give an indication of where we can expect the euro area print to land on Thursday.
From the US, Job Openings and Labor Turnover Survey (JOLTS) will be released for December and Conference Board’s consumer confidence survey for January. Markets will keep a close eye especially on the number of job openings, which is a key indicator of labour demand for the Fed.
The US earnings season continues and today and the rest of the week a lot of results will be coming in, today among others, the results from Microsoft and Alphabet.
Overnight we get Chinese official PMIs for January from NBS. Manufacturing PMI has been much weaker than the private version from Caixin lately. We expect the two indices to converge in January and hence look for a rise in NBS PMI manufacturing. Focus will also be on the NBS service PMI which at 50.4 in December is at a low level, partly because it includes construction activity.
In Sweden, the NIER economic tendency survey is published at 09:00 CET. The expected selling prices have started to take off once again in the service sector, which is a concern especially as the Riksbank has been worried about the persistence of service inflation. The survey will also provide us with further indications of the outlook for the labour market, as it includes employers’ hiring plans.
Economic and market news
What happened yesterday
ECB commentary. Vice president Luis de Guindos spoke at the Investment Outlook Conference hosted by Citi Private Bank in Madrid. He sounded more dovish than in previous comments, saying that inflation risks in the euro area are tilted to the downside. He also noted that the latest bank lending survey showed stabilization and that he thinks that the disinflation process can continue. ECB’s Kazimir said that a rate cut in June is more probable for now, while ECB’s Centeno, who typically is more to the dovish side, said that he would prefer to react earlier but more gradually, than later and more forcefully. ECB’s Knot said on Sunday said that it is important to wait for wage data, due in May, before deciding on of rate cuts.
The EU threatens to hit Hungary’s economy if Viktor Orban vetoes against an ongoing plan to provide financial aid of EUR 50 million to Ukraine. EU officials has said that this does not reflect the status of talks. Victor Orban refused to give in if it comes down to this.
The US Treasury lowered its quarterly estimate for federal borrowing in January through March from USD 816bn to USD 760bn. The US treasury also announced it expects to borrow USD 202bn in the second quarter. As a result, the 10Y US treasury yield dropped to a one-week low following the announcement.
In Sweden the GDP Indicator for December decreased by 0.3% m/m and increased by 0.1% q/q, which showed that Sweden is no longer in a technical recession and provided a first estimate of annual growth for 2023 of -0.3%. This is not nearly as severe as forecasters projected earlier in 2023. Retail sales data for April to November 2023 got heavily revised down making the overall retail sale development in recent months weaker than earlier anticipated.
Equities: Global equities continued their strong run yesterday making the eighth consecutive day of gains. A lower-than-expected estimate from the US treasury department on the Q1 borrowing needs ended up giving a late hour boost to markets. It was no surprise to see cyclical growth benefitting the news with long duration small caps gaining the most. We have been arguing for overweight of equities and small caps because of the markets focus on lower funding cost, and hence this falls well in line with our thinking. In US yesterday, Dow +0.6%, S&P 500 +0.8%, Nasdaq +1.1% and Russell 2000 +1.7%. Normally, the current environment should be very beneficial for Asia and EM stocks in general, but the Chinese domestic challenge keeps dragging EM lower which is again visible this morning with massive underperformance in China as the Evergrande story weighs on sentiment. Futures in Europe are higher this morning while US futures are mixed.
FI: Markets digested the dovish comments from Villeroy during the weekend that said that a rate cut could come at any meeting this year. Centeno was even more dovish and said they should cut sooner rather than later. The 5y point outperformed the rest of the curve. Markets are now fully pricing the first rate cut by ECB in April.
FX: EUR/USD dipped below the 1.0850 mark in a quiet start to a very eventful week, characterised more by EUR weakness than USD strength. EUR/SEK continues to consolidate in the 11.30-40 interval ahead of the Riksbank meeting on Thursday, which we do not expect to rock the boat. Oil prices held steady as the market mulled the potential ramifications of the escalation of geopolitical tensions in the Middle East and the risk US reinstate sanctions on Venezuela after President Maduro back-tracked on this promise of free elections.
