Disinflation continues in the Euro area

Market movers today

The most important data release of the day will the November ISM Manufacturing index from the US. Consensus expects a modest rebound, as several other leading indicators for global manufacturing have shown signs of bottoming out lately, even if the US Flash PMI still ticked lower in November.

Manufacturing PMIs are due for release also for Sweden and Norway.

The Fed chair Powell will participate in a fireside chat at 17CET. The FOMC's blackout period begins tomorrow, so this will be a key opportunity to provide markets some final remarks ahead of the December meeting. We still think that the Fed is already done with hikes and will begin its cutting cycle in March.

The 60 second overview

Euro Area: The Euro area HICP inflation declined more as expected as also hinted by early country releases. The monthly decline of euro area HICP by 0.5 % m/m versus consensus of -0.2% m/m translated into a yearly growth rate of just 2.4% y/y, even below the market pricing of 2.5%. Core inflation ticked down to 3.6% y/y (cons: 3.9%, prior: 4.2%). Overall, the slowdown in inflation was broad-based and the momentum is slow which is important for the ECB. The previous base effects that have driven inflation down will fade now and therefore the low monthly price momentum is what will bring inflation to the target. Hence, this print is clearly positive for the ECB with ECB done on rate hikes, but the easy financial conditions opens for a discussion to ending full PEPP reinvestments at the upcoming December meeting, as Lagarde also hinted at earlier this week.

US: In the US the October PCE inflation was slightly below expectations (+0.0% m/m). The Fed's preferred Core Services PCE inflation continues to slow down in both m/m (+0.21%) and y/y (+4.6%) terms. We didn't find this to be major news for the markets here, albeit it is yet another signals that the Fed continues to make progress towards cooling underlying inflation.

Oil: OPEC disappointed the oil market yesterday with its decision to keep status quo and about roll over current output levels to next year. Amid deteriorating global demand, the decision not to tighten supply further was underwhelming. However, we were not surprised. We have downplayed the importance of OPEC which turned out right. Going forward, we expect the oil market to be in the hands of global growth and the dollar and look for Brent to average USD80-85/bbl. 

China: Overnight, the Chinese Caixin manufacturing PMI unexpectedly rose to 50.7 from a below 50 reading last month.

Equities: Equities were higher again yesterday. This was interesting as a new relationship came back into place: Equities went up together with yields. Reason being right data being strong (manufacturing) and the "right" areas weakening (jobless claims, inflation). Value cyclicals fared well, such as industrials or banks. Thereby huge dispersion between value indices like Dow jones up 1.5% vs Nasdaq down -0.2%, as investors found financing in big tech. S&P 500 0.4% and Stoxx 600 0.6%. US are unchanged this morning.

FI: European rates were volatile yesterday where initially a rally was observed across the maturities on the back of the low French, Dutch and European inflation data. However, what seemed like a buy the rumour, sell the fact reaction on the European inflation release the markets gradually sold off through the rest of the day amid US data release which was broadly in line with expectations during the afternoon (PCE core, jobless claims). Markets took 3bp out of the rate cut pricing for 2024, and now price ECB to cut 110bp through the end of 2024. The first full 25bp cut is priced for April 2024. The decline in yields in both the US and the EA has been driven by the front end, where both jurisdictions have added a full 25bp rate cut this week to its policy expectations for next year. We do not find data compelling enough, particularly on the euro side to validate this move, and hence we look to fade this rally.

FX: EUR/USD declined below the 1.09 mark on a day where the USD broadly strengthened across the G10, despite risk assets ending a strong November with another day in the green. USD/JPY is trading just above 148 - even though the cross trended up in yesterday's session, it seems that the JPY has increasingly been reacting to the notion of a peak in global yields recently. EUR/GBP declined to the lower end of the 0.86-0.87 range. The Scandies had a bad day, with both the SEK and NOK selling off. EUR/SEK rose to around 11.40, while EUR/NOK rose above 11.75.

Credit: Credit indices drifted wider yesterday where iTraxx Xover widened 6.5bp to 373.5bp and Main widened 1.2bp to 683bp. The slight cautious tone was also visible in the primary market where the activity was subdued.