Europe faces 'peak pessimism'
|In focus today
Today, we receive the January PMI index for both the euro area and the US. This index has recently significantly impacted financial markets especially in Europe as attention has shifted to growth amid continued lower inflation momentum. In the euro area, we anticipate a slight rise in the composite PMI to 50.0, with slow growth in the service sector and manufacturing gradually moving back up towards 50, indicating an ongoing but slower decline.
In Sweden, December PPI and Labour Force Survey are released.
Economic and market news
What happened overnight
In Japan, the Bank of Japan hiked its policy rate by 25bp to 0.50% in a long-anticipated move. The decision followed just a couple of hours after December CPI inflation (excluding fresh food) was released with a 0.3 percentage point increase to 3.0%, driven by a removal of government energy subsidies. The BoJ also adjusted its inflation forecast 0.5 percentage points higher to 2.4% in the fiscal year 2025 (starting in April). The move dragged USD/JPY about 0.5% lower to 155.
Next, investors will look at the press conference later this morning to get an idea of the BoJ's next move. We expect Ueda to signal a cautious stance, where further hikes will depend on the upcoming wage negotiations and global market sentiment. We think, the BoJ will find room for another two rate hikes this year once continued wage growth has been confirmed.
What happened yesterday
In the US, President Trump used his speech at the World Economic Forum to insist global companies should manufacture their products in the US or face significant tariffs. He also called on Saudi Arabia and OPEC to lower oil prices to help end the war in Ukraine. With oil prices lowered, Trump would push for interest rates around the world to drop immediately.
In the euro area, European Central Bank President Christine Lagarde stated that Europe's "existential crisis" outlook is not pessimistic, on the back of Europe's vulnerability to a new 'America First' dynamic in the US relationship.
In a slightly more positive light, consumer confidence rose to -14.2 (cons: -14.1) in January from -14.5 in December. The rise in January gives some relief to the growth outlook as the downward movement we saw in November and December stopped. Consumer confidence is important for the growth outlook as private consumption is expected to be the main driver of growth this year.
In Norway, Norges Bank kept rates unchanged this morning at 4.5% and firmly guided towards March as the most likely time for the first rate cut. The market reaction was close to non-existent amid very little news.
Equities: Global equities were higher yesterday, rising for the eighth consecutive day. Gains were fairly broad-based, with defensives performing as well as cyclicals, while tech underperformed. In Europe, the advances were driven by banks, continuing their strong run from last year as both macroeconomic factors and earnings continue to support the sector. In the US yesterday, the Dow was up by 0.9%, the S&P 500 by 0.5%, the Nasdaq by 0.2%, and the Russell 2000 by 0.5%. Most Asian markets are higher this morning, led by China, in what appears to be a bit of trade war relief as the worst-case scenario seems less likely with the latest comments from Trump. Japanese equities are flat following the rate hike from the Bank of Japan, a strong yen, and higher yields across the curve. European futures are in the green this morning, while US futures are marginally lower.
FI: Global rates sold off from the long end yesterday, led yet-again by the US treasury market, in a steepening move. 10y UST rose 3bp to 4.64%. It was a day without significant news as markets await the euro PMIs out this morning, and the important central bank meetings week next week, where we have both the ECB and the Fed meeting
FX: USD lost some ground against the most of G10 yesterday, while GBP, AUD and NZD were top performers, as US President Trump spoke in Davos, but in the big picture his speech did not move the market. NOK was about unchanged following the Norges Bank's decision to keep interest rates unchanged.
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