An Eventful Week Ahead – Action Forex

In focus today

In the euro area, the Sentix indicator will give us the first indication of the European investor confidence in December.

Overnight, the Reserve Bank of Australia (RBA) will have a monetary policy meeting. We expect an unchanged rate decision, which is the clear base case by consensus as well. Markets price in a very slim (10%) chance of RBA initiating its rate cutting cycle.

The rest of the week will be eventful with several key releases. In China, the top leadership will meet on Wednesday and Thursday to discuss the economic priorities for the coming year. Wednesday’s star of the show is the US CPI for November, and Bank of Canada also announces its rate decision on the same day. On Thursday, the Swedish inflation is out in the morning, followed by the SNB’s monetary policy decision. The ECB announces their deposit rate on Thursday afternoon. Early on Friday, the BoJ’s extensive quarterly Tankan Business survey is released.

Economic and market news

What happened overnight

In China, inflation for November was weaker than expected printing 0.2% y/y (cons: 0.5%), and -0.6% m/m (cons: -0.4%). Lower fresh food prices and continued factory deflation contributed to the weaker inflation.

What happened since Friday

In the US, the job market rebounded on Friday after the impact of hurricanes and strikes. Non-farm payrolls for November came in higher than expected at 227k (cons: 200k). Additionally, September and October numbers were revised up by a total of 56k. The unemployment rate, less affected by one-offs, crept up to 4.2% in November. At the same time, labour force participation edged down to 62.5%, contrasting with the stronger-than-expected job growth. Wage growth was unchanged at 0.4% m/m (cons: 0.3% m/m). The uptick in the unemployment rate supports our call for a 25bp cut at next week’s meeting.

After the release, various Fed policymakers shared their views. The SF Fed President Daly (a hawk and a voting member) said the labour market is strong and indicated no objection to a December rate cut. However, she called for a more cautious approach as the policy rate near its settling point. The Fed Governor Bowman (a hawk and a voting member) and the Cleveland Fed President Hammack (a voting member) echoed a gradual, cautious stance amid the still-elevated inflation and sound labour market. Lastly, the Chicago President Goolsbee (a dove and a non-voting member) mentioned that he expects rates to come lower over the next year and noted that an unexpected jump in inflation or a surprise tightening of the job market could alter the Fed’s course.

The University of Michigan’s consumer sentiment survey showed that the consumer sentiment rose for the fifth straight month in December, climbing to 74. Consumers’ inflation expectations were more mixed, as 1-year expectations increased to 2.9% (prior: 2.6%), whereas 5-year expectations declined slightly to 3.1% (prior: 3.2%).

In the euro area, compensation per employee, the ECB’s preferred wage growth measure, declined to 4.4% y/y in Q3 – much in line with their September staff projection estimate of 4.5%. With quarterly growth at 0.9% q/q SA, momentum is also easing, supporting the view of underlying inflation converging towards the 2% target.

The labour market remained resilient in Q3 with employment up 0.2% q/q. However, hours worked were unchanged at 0.0% q/q indicating that more people are working on short-term schemes, and the overall labour market is stagnant. That said, there were marked differences across countries, with employment rising in Spain, but declining in Germany. While we expect the labour market to cool further in the year ahead, the overall labour market should remain strong in a historical context, which will support private consumption.

Lastly, GDP data revealed surprisingly strong domestic demand with investments rising 2.0% q/q (cons: -0.5%) and household consumption up 0.7% q/q (cons: 0.6%). While these dynamics bode well for growth, as domestic demand is projected to be the main growth driver next year, we remain cautious since data is volatile on a quarterly basis. In fact, we have revised down our forecast for growth in H1 due to continued struggle in the manufacturing sector, cautious consumers and the weak German economy. For more details, please see Research euro area – Still breathing, 5 December.

In Germany, industrial production for October surprised to the downside, printing -1.0% m/m SA (cons: 1.2%), reflecting the struggling German manufacturing sector.

In Norway, manufacturing production came in at -1.6% m/m, taking the 3M/3M to -0.6 %. Hence, it seems like the strong momentum in the manufacturing sector during Q3 is fading, in line with the signals from leading indicators. The slowdown is based on both mainland exports and oil-related industries. For now, the manufacturing sector will add some downside during Q4.

In the Middle East, President Bashar al-Assad’s regime collapsed as Syrian rebels seized the capital, Damascus. Assad and his family are reportedly in Moscow, where they have been offered asylum. The ending of the Assad family’s iron-fisted rule is yet another loss for the Russia-Iran axis, and a victory for Turkey who has been long supporting Syrian opposition. The new regime may struggle to rebuild the nation’s foreign relations. The main armed opposition group – Hayat Tahrir Al-Sham (HTS), originally an offshoot of Al-Qaeda, is designated a terrorist group by both the US and the EU. The Gulf states also oppose HTS. Hence, uncertainty prevails.

In South Korea, President Yoon Suk Yeol survived the impeachment on Saturday, as members of his party, People Power party (PPP), boycotted the vote. PPP has announced that Yoon will be excluded from his duties, also saying that they would find a “more orderly, responsible” way to negotiate Yoon’s exit.

Equities: Global equities were higher on Friday, with the MSCI world index ending last week 1.5% higher. Cyclicals outperformed defensives by 1% on Friday and a total of almost 4% last week. This is extraordinary, especially considering that 7 out of 10 sectors were lower last week. Hence, we currently have a very narrowly led market, particularly by the three heavyweight sectors: technology, consumer discretionary, and communications services. The AI, growth, and technology-led rally also resulted in large caps outperforming small caps last week. That said, looking outside the news catching US, we had Stoxx 600 outperforming the S&P500 last week and European markets showing broad-based sector gains. With the NFP data coming in benign on Friday, the VIX took another leg lower, down to 12.6. In the US on Friday: Dow -0.3%, S&P 500 +0.3%, Nasdaq +0.8%, and Russell 2000 +0.5%. Asian markets are mostly lower this morning, led by South Korea, with the government crisis continuing. US and European markets show very little change this morning, and financial markets are barely taking notice of the Syrian news over the weekend.

FI: It has been an eventful week in the financial markets on the back of the political turmoil in France, where the French government bond market has showed strong resilience against the political turmoil and the spread between 10Y OATs relative to Bunds has tightened.

FX: The USD opened steady following the collapse of the Syrian government, entering a week marked by US CPI data and monetary policy decisions from the ECB, SNB, RBA, and BoC. EUR/USD remained largely stable after Friday’s consensus-aligned jobs report, trading within the 1.05-1.06 range. USD/JPY eased to around the 150 level, reflecting lower US yields post-NFP. EUR/CHF is trading just below 0.9290, with markets turning attention to Thursday’s SNB meeting. Meanwhile, EUR/SEK saw upward momentum on Friday, hovering near 11.55. NOK struggled at the end of last week, with EUR/NOK rising from the low 11.60s to just below 11.80.