In focus today
Tonight, FOMC will publish minutes from its November meeting. Markets remain divided over whether the Fed will continue cutting rates in December, so any clues about the most likely policy rate path will be followed closely. In the afternoon we receive the conference board consumer confidence.
In Sweden, Riksbank vice governor Anna Seim will discuss the concept of a neutral rate. Erik Thedéen said in his speech at Danske Bank last week that the views put forward by Seim today should be seen as the board’s and the Riksbank’s common view. The speech will be published on their website at 08:30 CET and will be webcast live. At 08:00 CET Statistics Sweden publishes producer prices for October, which is kind of old news given that the big spike in energy prices occurred in November. That said, the Riksbank has said that it (the spike) will not affect monetary policy as long as there are no second-round effects.
Overnight to Wednesday, the Reserve Bank of New Zealand (RBNZ) will have a monetary policy meeting. We expect a 50bp cut to the Official Cash Rate following a similar move in the previous October meeting. Markets are even speculating with a small probability for a very aggressive 75bp move.
Economic and market news
What happened overnight
In the US, President elect Donald Trump said that he will impose tariffs of 25% on all US imports from Canada and Mexico on his first day in office. Furthermore, he will add 10% extra tariff to the existing tariffs on Chinese goods. Trump said that the tariffs will continue until drugs, in particular fentanyl, and migrants stop crossing the US borders. USD strengthened after the announcement.
In the Middle East, rumours of Israel and Lebanon being close to a ceasefire deal started emerging last week and now it seems an agreement to end the hostilities is very near. President-elect Donald Trump has previously communicated to Israeli Prime Minister Netanyahu that he wants the wars in Lebanon and Gaza to end before he enters office. Hence, Netanyahu’s willingness to sign a deal with Hezbollah could be part of his effort to please Trump and ensure he can still have US backing for his residual activities in Gaza, and possibly for targeting Iran. Oil prices fell yesterday in response to the ceasefire news, but we stress that the situation in the region remains explosive, and Trump’s re-election adds to unpredictability.
What happened yesterday
In Germany, the Ifo indicator declined slightly more than expected to 85.7 (consensus: 86.0) in November from 86.5 in October. The decline was due to the assessment of the current economic situation that fell to the lowest level since Covid. In contrast, expectations about the future situation increased marginally. With the Ifo indicator declining in line with the PMIs the German economic situation likely turned worse in November. As employment has also started declining, we expect that the economy likely stagnated or contracted slightly in Q4 and we do not expect growth in the first quarter of 2025 neither.
ECB’s chief economist Lane said yesterday that monetary policy should not remain restrictive for too long, otherwise inflation risks falling below target. There seems to be increasing concerns in the ECB over monetary policy potentially overshooting the negative effect on inflation, as Villeroy and Nagel said something similar last week. In the markets there is speculation about ECB increasing the speed of monetary easing with the current market pricing slightly below 50% probability for a 50bp rate cut in December.
Equities: Global equities were higher yesterday, with cyclicals outperforming and the VIX ticking lower on a day devoid of significant news. Three key developments stood out: massive small-cap outperformance, tech underperformance, and a significant drop in the long end of the US bond curve. The most intriguing aspect for us is the performance of small-caps. It makes sense to see this style outperform given the solid macro tailwinds, impending deregulation, loosening monetary policy, and the long end of the yield curve not skyrocketing as feared following the US election. Additionally, investors had been underweight in this style heading into the election, and it currently trades at a sizable discount to large caps.
In the US yesterday, the Dow was up 1.0%, the S&P 500 increased by 0.3%, the Nasdaq also rose by 0.3%, and the Russell 2000 surged by 1.5%.
Asian markets are mixed this morning, while European futures are down approximately 1%. This is due to President Trump initiating his trade war rhetorically. Despite his messages on Truth Social suggesting significant tariffs, the resilience of Asian markets this morning is notable. This could be attributed to Trump’s focus on the 10% rather than the 60% tariffs. Yesterday, Canada and Mexico were the first targets, with Trump proposing 25% tariffs referencing drugs and immigration issues. It is important to remember that the largest import from Canada to the US is energy, and it is difficult to envision the US imposing a 25% tariff on energy.
FI: Global bond yields continue to decline on the back of the appointment of Scott Bessent as the new US Treasury Secretary. The rally was driven from the long end of the curve as 10Y US Treasury yield declined some 13bp, while the 2Y US Treasury yield declined 10bp.
FX: While yesterday’s session was relatively quiet in FX markets this morning is characterised by renewed Trump tariff fears with CAD, MXN and CNY coming under pressure amid threats of an extra 10% tariff on Chinese imports and 25% tariffs on all imports from US neighbouring countries. Unsurprisingly, the USD is among the few winners this morning and we will closely monitor how the Scandies open in the coming hours.