The most important data release of the day will be the US ISM Manufacturing Index for November. The consensus is for a modest rebound, as several other leading indicators for the global manufacturing sector have recently shown signs of bottoming out, although the US Flash PMI still ticked lower in November.
Manufacturing PMIs are also due for release from Sweden and Norway.
Fed Chair Powell will participate in a fireside chat at 17CET. The FOMC blackout period begins tomorrow, so this will be an important opportunity to provide the markets with some final comments ahead of the December meeting. We continue to believe that the Fed is already done hiking and will begin its tapering cycle in March.
The 60-second review
Euro area: HICP inflation in the euro area fell more than expected, as suggested by early country releases. The monthly decline of 0.5% m/m in the euro area HICP vs. consensus of -0.2% m/m translated into an annual growth rate of just 2.4% y/y, even below the market’s pricing of 2.5%. Core inflation eased to 3.6% y/y (consensus: 3.9%, prior: 4.2%). Overall, the slowdown in inflation was broad-based and the momentum is slow, which is important for the ECB. The previous base effects that drove inflation down are now fading and therefore the low monthly price momentum is what will bring inflation to target. Therefore, this print is clearly positive for the ECB with the ECB done on rate hikes, but the easy financial conditions open for a discussion to end full PEPP reinvestments at the upcoming December meeting as Lagarde also hinted at earlier this week.
US: In the US, October PCE inflation was slightly below expectations (+0.0% m/m). The Fed’s preferred core PCE inflation continues to slow both m/m (+0.21%) and y/y (+4.6%). We don’t see this as big news for the markets, although it is another signal that the Fed continues to make progress in cooling underlying inflation.
Oil: OPEC disappointed the oil market yesterday with its decision to maintain the status quo and roughly extend current production levels into next year. In the face of deteriorating global demand, the decision not to tighten supply further was underwhelming. However, we were not surprised. We downplayed the importance of OPEC, and we were right. Going forward, we expect the oil market to be in the hands of global growth and the dollar, and see Brent averaging USD80-85/bbl.
China: Overnight, China’s Caixin manufacturing PMI unexpectedly rose to 50.7 from below 50 last month.
Stocks: Stocks were higher again yesterday.This was interesting because a new relationship came back into play: Stocks rose along with yields. This was because the right data was strong (manufacturing) and the “wrong” areas were weakening (jobless claims, inflation).Value cyclicals such as industrials and banks did well.There was a huge dispersion between value indices such as Dow Jones +1.5% vs. Nasdaq -0.2% as investors found funding in Big Tech. S&P 500 0.4% and Stoxx 600 0.6%. US are flat this morning.
FI:European rates were volatile yesterday, with a rally initially seen across maturities on the back of low French, Dutch and European inflation data.However, in what appeared to be a buy the rumor, sell the fact reaction to the European inflation release, markets gradually sold off throughout the rest of the day amid US data releases that were broadly in line with expectations during the afternoon (PCE core, jobless claims).The markets took 3bp out of the 2024 rate cut pricing and are now pricing in 110bp of cuts by the end of 2024.The first full 25bp cut is priced for April 2024.The decline in yields in both the US and EA has been driven by the front end, with both countries adding a full 25bp cut to their policy expectations for next year this week. We don’t find the data compelling enough to validate this move, particularly on the euro side, and we are therefore looking to fade this rally.
FX:EUR/USD fell below 1.09 on a day when the USD was broadly higher across the G10, although risk assets ended a strong November with another day in the green. USD/JPY is trading just above 148 – although the pair trended higher in yesterday’s session, the JPY seems to be increasingly reacting to the notion of a peak in global yields.EUR/GBP dropped to the lower end of the 0.86-0.87 range.The Scandies had a bad day as both the SEK and NOK sold off.EUR/SEK rose to around 11.40, while EUR/NOK climbed above 11.75.
Credit: Credit indices drifted wider yesterday, with the iTraxx Xover widening 6.5bp to 373.5bp and the Main widening 1.2bp to 683bp.The slightly cautious tone was also seen in the primary market where activity was subdued.