Today we get the HICP inflation numbers for the Euro-Zone. After yesterday’s lower-than-expected Spanish and German data, the consensus is for the eurozone figure to come in at 2.5% y/y.
At 14:30, the FED‘s preferred inflation gauge will be released. The consensus is for the core PCE to slow to 0.2% m/m SA, mirroring a similar decline in the previously released CPI measure.
OPEC+ meets on Thursday after their last scheduled meeting was postponed.
The 60-second review
Heavy data releases from the Euro-Zone showed declining inflation, below consensus estimates, and mixed consumer confidence. European bond markets reacted strongly to the inflation release, sending yields lower from the front end as additional rate cuts were priced in. German 10-year yields fell to a multi-month low of 2.42%. The German and Spanish inflation print came in below expectations at -0.4% m/m (cons.: -0.1%, prior: 0.0%) and -0.4% m/m (cons.: 0.1%, prior: 0.3%) respectively in November.
This, combined with slowing inflation in Belgium and Ireland, means that today’s flash inflation print for the euro area is pointing to a release of 2.5%. The EU Commission’s confidence indicator was mixed across sectors, with improved confidence in the services sector and lower confidence in industry. However, over the past few months, industrial confidence has stabilized from the sharp declines of recent years, signaling a bottoming out of activity as we have seen in the PMIs.
In the U.S., we have had positive economic data, including an upwardly revised Q3 GDP growth rate of 5.2% annualized, which has strengthened the broad USD, but the Beige Book has signaled an economic slowdown prior to November 18th.
Overnight, the Chinese PMI pointed to a slowdown in the manufacturing sector with a print of 49.4, while the services sector pointed to a largely stagnant sector with 50.2, both indicators below consensus.
Yesterday we published an article on the EU fiscal rules and what to expect from the negotiations on a new set of rules. Currently, there is no agreement on the new fiscal rules and the clock is ticking as the old rules will come back into force on January 1, 2024. We believe that EU member states are unlikely to sign off on a final set of rules before the end of the year, but we expect them to agree on a “landing zone” for the new rules at the ECOFIN meeting on December 8.
We expect the “landing zone” to reinstate the old 3% deficit and 60% debt targets, but with greater flexibility to adjust country-specific fiscal adjustment paths. The fiscal stance in the euro area is set to tighten in the coming years, with a renewed focus on sustainable public finances. Read more in Euro Area Research: New fiscal rules in the EU – aligning theory and practice,” November 29.
Stocks: Stocks were mixed on Wednesday, with the U.S. slightly lower and Europe half a percent higher. The European outperformance was in part due to benign inflation numbers, but also due to catching up from the previous session. Interestingly, the drop in yields has not sparked a new wave of equity risk taking. The AAII bull/bear spread is back at July highs, so positioning is probably a piece of the puzzle. Cyclicals are beating defensives, though, with an odd mix of banks and real estate among the best sectors. US futures and Asian markets are a bit higher this morning.
FI: Inflation releases from Spain and Germany sent yields lower throughout yesterday’s trading session, with 10y Bunds ending the day down 6bp at multi-month lows of 2.42%. Intra-euro area spreads were little changed. Curves steepened from the front end as markets added to rate cut expectations with another 10bp added to the 2024 pricing yesterday. Compared to Monday’s close, markets have added a total of 22bp, with a total of 111bp of cuts priced in by 2024.
FX:EUR/USD continued to consolidate just below the 1.10 level amid a prevailing strengthening of the USD. USD/JPY has been on a downtrend and is currently trading just above 147. Meanwhile, the EUR/GBP saw a further decline, settling in the mid-0.86 range. EUR/SEK dropped below 11.40, and EUR/NOK is hovering around 11.70.
Credit: The credit markets were positive again yesterday, with the iTraxx Main tightening 1.5bp to 66.8bp and the Xover tightening 10.2bp to 367.1bp. In addition, the primary markets remain wide open with several financial and corporate issuers active with deals across the Nordic region and five Eurobond transactions. Current market sentiment shows constructive credit conditions for most types of loan transactions, but some seasonal slowdown is expected soon to affect the current high level of activity.
Riksbank Governor Bunge talks about monetary policy and the latest decision. Recall that the silent period has not yet passed, so she can not speak for herself, only on behalf of the joint decision of the board.