Germany and the euro area are due today

Market Movers

• In the US, the Markit PMI manufacturing for January will give us some insight into how manufacturing has performed in the first month of the new year. The PMI index is not followed nearly as closely as the ISM index by the markets. However, the divergence between US manufacturing and services sector has attracted a lot of attention and the Markit PMI manufacturing index has not painted the same negative picture as ISM manufacturing in recent months.

• In the euro area, the January preliminary PMI figures for France, Germany and the euro area are due today. We expect the improving trend in the euro area to continue and look for an increase both in manufacturing and service PMIs. Regionally, we expect Germany to be the pulling force and improve the most, while France is set to lag a bit behind still.

• In the UK, retail sales (excluding auto and fuel) are expected to decline 0.3% m/m in December following an unexpected large increase of 1.7% m/m in November. A decline of 0.3% m/m will result in an annual increase of 3.5% y/y in December.

Selected Market News

Despite high expectations of additional rate cuts already priced in the market, Draghi managed to deliver and presented a very dovish tone at the ECB press conference yesterday implying it will review and possibly reconsider its monetary policy stance at the next meeting in early March. In our view, the meeting showed that the very low oil price and the risk of second-round effects are a big concern to the ECB. We now expect the ECB to cut the deposit rate by 10bp at the upcoming meeting in March and expect the central bank to maintain an easing bias over the next six months. See ECB comment:Draghi never gives up – we expect 10bp cut in March (21 January) for more details.

We expect Danmarks Nationalbank (DN) to mirror a possible ECB rate cut in March and lower the rate of interest on certificates of deposit to minus 0.75%. In our view, the 7 January 10bp rate hike normalising the DKK-EUR money market interest rate spread to around the level last seen in 2013 should be sufficient to stabilise EUR/DKK close to the central rate of 7.46038. For more details, see Flash Comment Denmark: Denmark tomirror ECB cut in March - but it's a close call (21 January).

Draghi’s dovish stance was well received in the market and US equity indices ended the day higher following the solid bounce in Europe while Brent crude oil rose USD25 cent/bbl to USD29.75/bbl. In Asia, equities also trade higher this morning on the prospect of additional easing with Japan being the biggest winner so far. In the FX market, the two safe havens were sold off on the improved sentiment sending EUR/USD lower and USD/JPY higher.

In Japan, the Nikkei manufacturing PMI index dipped slightly lower from 52.6 in December to 52.4 in January according to the flash estimate released this morning. While the index remains above 50 indicating further improvement in the manufacturing sector, details were also weaker than expected suggesting that the PMI index is likely to decline further in the coming months.

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