Greek markets rebounded yesterday, with equities up by more than 3% (bank equities jumping by more than 10%) and government bond yields falling. US Treasury yields rose, while EUR/USD edged slightly higher as well. US equities rose (S&P 500 up by 0.95%), while European markets saw mostly more modest gains.
In the US the weekly initial jobless claims dropped to 265k, the lowest in 15 years. However, we attach little weight to the reading because the week included Martin Luther King Jr. Day. The underlying trend, however, suggests that monthly payrolls growth should remain well above the 200k mark.
December credit data for the Euro area showed cautiously positive developments. The y/y rate in loans to the private sector (adjusted for loans and securitisations) edged to positive territory, 0.1% y/y, while the credit impulse continued to give positive signals. Together with last week’s lending survey, the data points to a gradually improving credit environment.
In Germany, preliminary inflation data for January showed inflation is still very much headed downwards, largely driven by lower energy prices. The EU harmonized measure of inflation plummeted from 0.1% y/y to -0.5%, a much bigger fall than had been expected.
In Greece, the Economic Sentiment Indicator plummeted from 99.1 to 95.3, indicating the political uncertainty has already caused damage to the Greek economy. The confidence is likely to fall further in the near future, and the longer the uncertainty lasts, the bigger will be the hit to the economy.
The Danish Central Bank delivered its third rate cut in two weeks, cutting the rate on certificates of deposit by 0.15%-points to now ‑0.50%. The move further illustrates the fixed exchange rate policy is carved in stone bank will use all means available to defend the fixed exchange rate policy.
Swedish confidence indicators for the total economy, that is, business and households combined, remained largely unchanged in January, in line with expectations.
Day ahead
To close the week, we will today have German December retail sales, Euro-area inflation and unemployment, and from the US Q4 GDP and the Q4 employment cost index (ECI). In Norway, retail sales and unemployment are due.
In the Euro area, we expect lower energy prices to drive the headline inflation rate even deeper into negative territory, to ‑0.5% y/y in January after -0.2% in December. After yesterday’s steeper-than-expected decline in German CPI, risks are to the downside. The core rate (ex. energy, food, alcohol and tobacco) will probably remain unchanged at 0.7%. The unemployment rate is expected to remain at 11.5% in December.
Today’s most important release is the US Q4 ECI, as it will likely be . Modest wage growth would increase the risk of a later lift-off in rates than our current June 2015 forecast. Accelerating wages, on the other hand, would suggest the economy is nearing full capacity. We estimate a 0.7% rise in the ECI (consensus: 0.6%, after 0.7% Q3).
We expect that the US economy expanded at an annual rate of 3.2% in Q4, following a 5.0% pace in Q3 (consensus: 3.1%). If we are right, that would be the fifth time in six quarters that growth has exceeded 3%, something that hasn’t happened since a stretch in 2004 and 2005. The strength of the US economy is not consistent with zero interest rates, in our view.
In Norway, we believe December retail sales will post a 0.6% m/m decline after a 0.2% rise in November. Uncertainty is higher than usual due to the Christmas holiday. Unemployment is forecast at 3.1%, in line with Norges Bank’s estimate.
Rates
After the US 10-year Treasury yield fell around 10 bp after the FOMC decision, part of the move was reversed yesterday, and the yield ended the day up by 3 bp. Another clear increase in today’s US employment cost index could easily push the yield further up.
In Europe, attention was focused on the German CPI numbers which fell below expectations, resulting in market-based inflation expectations taking another step lower. The German 10-year yield, however, ended the day marginally higher.
Intra-Euro-area spread widening continued, but the moves moderated from intraday highs towards the evening. The Greek 10-year yield ended the day around 20 bp lower, though.
FX
The EUR gained yesterday, helped by further weakness in the CHF and weak risk sentiment, which is triggering some squaring of positions. Speculation circulates that the Swiss National Bank is intervening so as to weaken the CHF. Commodity currencies (AUD, CAD, NZD) lost ground as markets are increasingly leaning in the direction of further stimulus from the respective central banks. Scandi currencies did not move that much yesterday. Despite rising expectations ahead of the Riksbank’s next meeting, accounts have sold USD/SEK to bring home profits, which has pushed the SEK in a stronger direction. When this process is over, the SEK could weaken, potentially in the run-up to the Riksbank meeting in February.
Today’s ECI release in the US could pave the way for further USD strength as it could boost fears (or hopes) that the Fed remains on track towards a mid-2015 rate hike.
Nordea