Final Euro area HICP data to reveal inflation drivers

In focus today

• Today, we receive the final euro area HICP data for December, which will reveal in more detail the drivers of inflation. The flash release showed inflation rising to 2.4% y/y with core remaining at 2.7%. 

• From the US, we get industrial production for December, consensus expects an uptick of +0.3% m/m following November's -0.1% m/m, and past months with negative growth in figure. 

Economic and market news

What happened overnight

In China, the economy concluded 2024 on a more positive note than expected, with Q4 GDP growing by 5.4% y/y (cons: 5.0%, prior: 4.6%). The growth was aided by the wave of stimulus measures gaining momentum and robust exports driven by pre-tariffs front-loading by US importers. As a result, GDP for 2024 expanded by 5.0%, aligning with the government's official target. Retail sales increased by 3.7% in December (cons: 3.5%, prior: 3.0%), influenced by Beijing's initiatives to bolster lagging domestic demand.

What happened yesterday

In the US, retail sales for 2024 concluded on a strong note. The retail control group sales showed robust growth at +0.7% m/m s.a. (cons: +0.4%, prior: +0.4), despite headline sales increasing slightly less than expected at +0.4% m/m (cons: +0.6%). This indicates strong economic demand and reinforces the Fed's cautious stance on rate cuts in 2025. In the context of rate cuts, Fed's Waller remarked in an interview with CNBC that "inflation is likely to continue to ease and possibly allow the U.S. central bank to cut interest rates sooner and faster than expected". Waller maintained dovish tones heard earlier and suggested that three or four cuts could be possible in 2025. 

Initial jobless claims ticked slightly higher with 14k to a seasonally adjusted 217k (prior: 201k, cons: 210k). though the figure remained consistent with past weeks' typical levels. 

In Poland, the key rate was left unchanged at 5.75%. It will be interesting to see if Governor Glapinski maintains his recent hawkish stance at the upcoming press conference, especially after yesterday's core inflation print surprised to the downside. However, a detailed discussion on future policy is more likely at the March meeting.

Equities: Global equities rose yesterday, buoyed by the cyclical sector in Europe, while the US counterparts significantly underperformed despite the release of strong key figures from the US. Europe has outperformed the US by approximately 2% year-to-date. However, what is more intriguing is the noticeable lacklustre appetite for high-valued global, and particularly US, tech growth companies lately. Actually, the tech sector is the second worst performing sector year to date. US tech and growth have been the dominant trades of 2023 and 2024, and one should exercise caution when moving prematurely against such a strong trend. Nevertheless, there are increasing signs of fatigue in this trade, which is particularly interesting to observe. If investors suddenly realise that the premium on US tech growth, or more specifically the MAG 7, is unjustifiably high, there could be significant room for downward adjustment. Remember, the MAG 7 is trading at a 100% premium to the S&P 500 equal weight. The notion that "big is beautiful" has not always held, and just to remind you, 15 years ago, it was the other way around, with the equal weight S&P 500 trading at a 10% premium to the cap-weighted index. In the US yesterday, the Dow fell by 0.2%, the S&P 500 by 0.2%, the Nasdaq by 0.9%, while the Russell 2000 rose by 0.2%. Asian markets are mixed this morning despite some solid Chinese key figures, with Chinese markets among the better performers. European and US futures indicate a higher opening this morning.

FI: Global bond yields declined, and the curves steepened on the back of comments from Federal Reserve's Waller, that the Federal Reserve could cut again in the first half of 2025 if inflation stay well-behaved. Hence, he was striking a very dovish tone compared to comments from other Fed Officials earlier this week.

FX: The drop in global yields continue to drive an overperformance in the JPY with USD/JPY notably setting new lows just north of the 155 area. Despite intraday volatility EUR/USD remains close to the 1.03 level while a slight underperformance in NOK has returned NOK/SEK back close to the 0.98 figure. Finally, EUR/GBP continues to trade just north of 0.84.