Weekly focus: Disinflation continues

This week, inflation came in below expectations in the euro area and the US. In the euro area, headline inflation fell much more than expected to 2.4% y/y (consensus: 2.7% y/y) in November from 2.9% in October. The decline was broad-based as core inflation ticked down to 3.6% from 4.2%. Remarkably, the monthly change in core inflation was - 0.15% m/m seasonally adjusted. This was a major surprise as the previously sticky service prices also fell in the month. Markets reacted quickly and priced in an extra full 25bp cut in the ECB deposit rate next year thus seeing it at 2.75% in December 2024. We think it is still too early to declare victory over inflation as wage growth is strong and expect just three 25bp cuts next year starting in June, which will bring the policy rate to 3.25%.

In the US, PCE inflation was slightly lower than expected in October at 3.0% y/y (consensus 3.1%, prior: 3.4%). Underlying inflation continued to ease as the Fed's preferred measure, core services PCE inflation, slowed down in both m/m (+0.21%) and y/y (+4.6%) terms. This signals that the Fed continues to make progress on cooling underlying inflation.

The Chinese PMIs sent mixed signals for activity in November. The official PMIs from NBS were weaker than expected while the private version from Caixin pointed to improvements in manufacturing. We lean more towards the Caixin index painting the right picture and expect further improvements in the manufacturing sector over the coming months. Regarding the service sector, it is a concern that the NBS continues to weaken if it reflects low private consumption. To support domestic demand, both the Chinese central bank and government agencies unveiled measures to support financing for the private sector this week and we expect more to come.

OPEC+ decided to keep status quo on production in a signal that we should not expect deeper cuts in production. 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.

The Reserve Bank of New Zealand (RBNZ) kept the policy rate unchanged at 5.50% as expected this week. The RBNZ communicated a hawkish stance by signalling a longer hold and slower rate cuts than previously. The RBZN now sees the first rate cut in Q2 2025.

Next week, focus will be on US data releases with both the November jobs report, ISM services, and the University of Michigan survey scheduled. We expect a further cooling in non-farm payrolls on Friday to +140k and see average hourly earnings growth stable at 0.2%. Markets will keep a close eye on the Michigan survey on Friday after two consecutive months of rising short-term inflation expectations. We also have several central bank meetings next week in Poland, Canada, and Australia. We expect unchanged policy rates from all three.

China and EU will have the first face-to-face summit in years which may attract some attention on Thursday and Friday. From China, we receive the November trade data on Thursday that will give clues as to whether global manufacturing recession is easing. On Tuesday, we closely follow the Caixin service PMIs after the weak NBS service PMIs.

On Tuesday, we publish new macroeconomic projections for the Nordic countries as well as the euro area, US, China, and UK in our Nordic Outlook publication.

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