Focus turns to Scandinavia

In focus today

Today is a light day on the international data front, but we get a lot of Nordic data.

In Denmark, we get CPI inflation for December 2023. We expect to see that inflation has continued to climb higher to 1.1% y/y, due to base effects from December 2022's decline in fuel and electricity prices. We expect the underlying price pressure to remain low, as it has for the last 3-4 months.

We also watch out for core CPI inflation in Norway for December 2023. Inflation has been more persistent in Norway than in many other countries, in part due to a weakening of the NOK, which has triggered direct and indirect price impulses, and we expect that core inflation will hold up at 5.6% y/y in December.

Finally, we get a slew of November indicators for Sweden. Retail sales should shed some light on how Black Friday sales might have affected consumer spending, while the production value indicator and new orders will shed light on supply-side developments. The broader economy will be summarized by the GDP-indicator, also set to release today.

Economic and market news

What happened overnight: Overnight, wage data from Japan surprised to the downside with a mere 0.2% y/y increase in total cash earnings for November. In real terms, this corresponds to a decline of 3.0% y/y, which highlights the erosion of purchasing power the past years. Looking at the details however, growth in regular workers' core pay only slowed marginally to 1.9% y/y. JPY weakened slightly on the release, as wage growth is a key criteria for the BoJ to be ready to hike the policy rate. We are not likely to see significant growth until the annual Shunto wage negotiations have concluded in the spring. We expect the BoJ to be ready to hike the policy rate out of negative territory and release the grip on the yield curve in Q2 this year.

On geopolitics, US foreign secretary Antony Blinken said Israel must stop undercutting Palestinian governance. Likewise David Cameron expressed concerns that Israel may have broken international law during the Gaza conflict. This on the same day as the Houthis reportedly undertook their largest attack on merchant vessels to date in the Red Sea. As of last night, however, no ships reported having taken damage.

What happened yesterday: It was generally a quiet day in the US, as investors brace for Thursday's CPI release. European yields rose slightly with the 10Y German government bond yield rising some 5-6bp, while 10Y US Treasuries were more stable. Eurozone unemployment surprised to the downside, declining to an all-time low of 6.4% in November. Conversely, the malaise in the German industry continued in November, where production declined 0.7% m/m in real, seasonally adjusted terms. We expect that the German industry will eventually rebound, as leading Asian indicators suggest that the global manufacturing cycle has bottomed out, but it might take longer than in the rest of the Euro area as German industry is more affected by the shutdown of Russian gas supplies.

In line with expectations the Polish central bank yesterday kept their policy rate unchanged at 5.75%.

In China, the PBOC signalled that more monetary easing is on the way, as the head of the monetary policy department said it will use a variety of tools to provide "strong support" for a reasonable growth in credit. Markets reacted by raising the expectations of a cut in the Medium Lending Facility rate, where consensus is for a 10bp cut.

Equities: Equities mostly retreated after the Monday rally. US and European equities shaved off around -0.2%. Despite the small moves, risk off re-emerged behind the surface. The defensive rotation returned, this time financed with materials and energy selling off 1-2%. Small caps also came under renewed pressure (Russell 2000 -1.1%). The sentiment is improving in Asia, and primarily Japan, rallying another 2% this morning. US futures are mildly negative.

FI: There was an upward pressure on European yields with the 10Y German government bond yield rising some 5-6bp, while 10Y US Treasuries were more stable, but still closing just above 4%. There has been a modest tightening of the 10Y spread between Italy and Germany after it initially widened since late December. The spread was trading around 155bp before x-mas and then widened to almost 170bp, but are now back to 165bp after yesterday's successful syndicated deal from Italy.

FX: After a poor Monday the NOK was yesterday's outperformer in Majors space with EUR/NOK moving back to the low 11.30s. EUR/USD edged lower while both EUR/SEK and EUR/GBP moved modestly higher in an overall quiet session. The biggest underperformers were found in the CEEs and in MXN. JPY weakened slightly following lower than expected wage data for November.