Focus on Euro area inflation after country releases surprise on the upside

In focus today

The focus today is the euro area inflation print. Inflation was expected to be 2.4% y/y in December, up from 2.2% in November. But with Germany rising 50bp and both Spain and Portugal rising 40bp, inflation will most likely come in higher. We expect headline inflation at 2.6% y/y, while we expect core inflation at 2.8% y/y. In our view, an upside surprise in December inflation should not alter the near-term outlook for the ECB, as the focus remains on weak growth prospects. We also receive data on unemployment, which we expect to show a small uptick to 6.4% from 6.3%, as surveys have pointed to a softening in the labour market; overall, however, the unemployment rate remains historically low.

This morning, we receive Swiss inflation data for December. Headline and core inflation are expected to drop further and remain at the lower end of the SNB's target range of 0-2%. We expect the SNB policy rate to bottom at 0% this summer following two consecutive 25bp cuts.

In the afternoon, both the December ISM Services and November JOLTs Job Openings are due for release from the US. The latter is a key measure of labour demand for the Fed.

Economic and market news

What happened yesterday

In Germany, inflation rose to 2.9% y/y in December from 2.4% y/y, beating expectations of 2.6% y/y. The increase in German inflation was mainly due to energy base effects, as energy inflation rose to -1.7% y/y from -3.7% y/y. Core CPI inflation rose slightly to 3.1% y/y in December from 3.0% y/y. The monthly momentum in underlying inflation presents a somewhat softer picture of inflation in December than the increase in yearly headline inflation, but underlying inflation continued to rise at a pace faster than what is compatible with 2% annualised inflation.

In the euro area, we received the final release of the service PMIs for December. The PMIs for the whole euro area were revised upwards, signalling stronger activity in the euro area than initially thought. The French services PMI was revised up to 49.3 in the final print from 48.2 in the flash release. The services PMI is thus now back above the October level after the sharp decline in November. The quarterly average for Q4 is below the Q3 level, indicating lower activity even excluding the Olympics, but the upward revision does provide some relief.

USD broadly weakened after The Washington Post reported that US President-elect Trump's plans to impose tariffs on trade partners would be less comprehensive than initially presented. More specifically, the report stated that Trump was considering tariffs that would be applied only to critical imports. Previous comments from Trump suggested a 25% tariff on all imports from Canada and Mexico, and an additional 10% tariff on imports from China. Trump commented on the report and said that it is wrong that the tariffs will be pared back. Last night, the US Congress formally certified Donald Trump' election victory. The broad USD index began yesterday at 108.9 and ended in 108.2. Before Trump's comments it briefly fell below 108.

In Canada, Prime Minister Justin Trudeau resigned after nine years in power. An election was already scheduled for October but is now likely to happen sooner. The parliament is now set to resume work in late March, which means that a new election is unlikely to be held until May at the earliest. The Conservative Party leads Trudeau's Liberals by more than 20 points in the pre-election polls. Mark Carney, the former governor of the BoC and BoE, has said he is considering entering the race to replace Trudeau.

Equities: Global equities were higher yesterday on a day that reminded us of what the next four years will bring. Whether we like it or not, we must prepare to deal with a new and higher level of noise as the new US administration comes in. However, even before the Wall Street Journal article about the potential winding down of tariff plans, equities were already higher in Europe. Naturally, the story further boosted those moves. As Trump denied the story on Truth Social, some of this optimism faded. It brings back memories of Trump's first term as president and serves as a good reminder that we need to be extremely careful when interpreting political headlines over the next four years.

Beneath all the political noise, we had yet another day of significant cyclical outperformance, which brings us closer to the point where one should start considering reducing cyclical exposure as they have simply been running too far ahead of fundamentals.

In the US yesterday, Dow -0.1%, S&P 500 +0.6%, Nasdaq +1.2%, and Russell 2000 -0.1%. Asian markets are mixed this morning, illustrated by the Nikkei 225 being higher by 2% while the Hang Seng is down 2%. Futures on both sides of the Atlantic are lower this morning.

FI: The combination of supply as well as higher inflation pressure is putting pressure not only in Euroland but also in the US, where 30Y yields rose to 4.85%, which is close to the old top around 5% from back in 2023. Germany followed US Treasuries, and the Bund ASW-spread is still trading around 50bp.

FX: The broad USD softened across the G10 space following reports of more moderate tariff plans than initially anticipated. Although Trump later denied these reports, they nevertheless contributed to a wave of broad-based USD depreciation. EUR/USD edged higher toward 1.04, while USD/JPY approached the 158 level. EUR/CHF has remained range-bound between 0.93 and 0.94 over the past week. In the Scandies, NOK's recent outperformance has paused, with EUR/NOK stabilising just above the 11.70 level.