ECB lowered interest rates by 25bp as widely expected

In focus today

In the euro area, we receive data on industrial production from October, which will give the first hard data point for production in Q4. Industrial production has been on a negative trend for two years without any sign of stabilisation.

Statistics Sweden publishes the latest labour force surveys outcome at 8:00 CET. Whereas the increase in unemployment has started to slow down, it is still somewhat too early to hope for a drop in unemployment, we do however expect the numbers to improve during next year.

Economic and market news

What happened overnight

In Japan, the Tankan survey showed that the business confidence index for big manufacturers rose to 14 (cons: 12; prior 13). The index for the big non-manufacturers decreased slightly to 33 but remained elevated (cons: 32; prior 34). This bodes well for Bank of Japan's plans to begin hiking interest rates from still very low levels. However, the survey also showed that companies expect business conditions to worsen over the next three months. This should be seen in the light of intensified labour shortage becoming an increasing problem, which could lead to a constraint on growth. Furthermore, global demand is still weak, and threats of higher tariffs from US president-elect Trump could also have played a role in the weaker expectations.

What happened yesterday

In the euro area, the ECB delivered a 25bp rate cut bringing the deposit rate down to 3.0%. In our view the decision was not clear cut. The ECB could have opted for a 50bp rate cut considering the weak economic growth outlook. However, staff projections showing inflation at the target led the ECB to conclude that a 25bp rate cut was sufficient. The decision was a dovish 25bp rate cut, though, and we assess the communication around it to be as close as possible to a 50bp cut without delivering such a cut. Lagarde also said that there were deliberations of a 50bp rate cut. Markets did not take any cues from the press conference and continues to price in 125bp of rate cuts in 2025. See Flash: ECB Review - A dovish 25'er, 13 December.

In Switzerland, the Swiss National Bank (SNB) lowered the policy rate by 50bp to 0.50%. Markets had been pricing in around a 35bp cut prior to the decision. The cut marked the fourth consecutive cut and was the first cut of 50bp. EUR/CHF increased after the announcement. The inflation forecast was adjusted significantly lower in the near term to around 0.2-0.3% y/y in the coming quarters before it is expected to pick up again in 2026.

In Norway, the regional network survey was not too far from the expectation, but if anything, it was slightly to the hawkish side. We note that capacity utilisation and labour shortage were unchanged. Wage growth expectations for this year were unchanged but lifted to 4.5% next year. This was a hawkish surprise amid other indicators pointing to a downside risk to Norges Bank's 4.3% wage growth estimate for next year. Growth expectations for Q1 2025 were as expected at 0.3%. On the back of this report, we see it as highly unlikely that Norges Bank will open the door for a January cut after next week's meeting.

In Sweden, the headline flash estimate was confirmed (0.3% m/m; 1.6% y/y). CPIF y/y was revised down to 1.8% from 1.9% in the flash release (so merely a rounding effect). CPIF excluding energy flash estimate was confirmed as well (-0.2% m/m; 2.4% y/y).

Equities: Global equities declined yesterday as negative macroeconomic data overshadowed the messages from the ECB and SNB. The slightly stagflationary signals from the US PPI and jobless claims caused the US to underperform compared to the rest of the world, with most US indices ending at their daily lows. Yields rose for the "wrong" reasons, leading to defensives outperforming alongside large caps. The VIX edged slightly higher, and while investors are currently behaving relatively calmly, we would not be surprised to see volatility increase significantly if a series of negative macroeconomic data emerges in the current exuberant environment. In the US yesterday, the Dow fell by 0.5%, the S&P 500 by 0.5%, the Nasdaq by 0.7%, and the Russell 2000 by 1.4%. Asian markets and European futures are lower this morning, influenced by the negative late-hour movements on Wall Street yesterday.  US futures are mixed, with large-cap tech standing out on the positive side.

FI: EUR rates declined during most of Lagarde's press conference yesterday, only to reverse direction following her remarks that the ECB 'has already covered a lot of grounds' in terms of policy easing. Markets took this as a hint that the terminal rate could be closer to today's level than previously assumed. 10Y EUR rates rose 7bp throughout the session, with the 2s10s curve was close to unchanged. Peripheral spreads saw noticeable widening with the BTP-Bund spread up by 8bp for the day, while the Bund ASW-spread was unchanged at 2bp.

FX: EUR/USD fluctuated within a half-figure range multiple times before closing lower, below the 1.05 mark, as the anticipated 25bp ECB rate cut had limited impact on the pair. AUD/USD experienced a volatile trading week but continues to trend lower, hovering around the 0.64 mark. The SNB's unexpected 50bp rate cut prompted a sharp rise in EUR/CHF. EUR/SEK has traded within a narrow range this week, holding above 11.50, while EUR/NOK ended the week unchanged around 11.70 after a brief decline.