Global slowdown confirmed by November PMIs

Global slowdown confirmed by November PMIs

Market movers today

The main event today will be the Riksbank meeting, where we expect a 75bp hike in line with consensus and market pricing. Focus will be on forward-looking communication, we expect Riksbank to deliver one more 25bp hike in February 2023 after today, which would end the hiking cycle at 2.75%, below the current market pricing.

ECB’s de Guindos and Schnabel will give speeches today.

The central bank of Turkey is expected to continue its unorthodox monetary policies with a 150bp cut despite the soaring inflation. On the data front, German November Ifo is expected to remain at subdued levels following yesterday’s PMIs.

The 60 second overview

European slowdown: Euro area PMIs surprised to the upside with composite PMI increasing to 47.8 in November from 47.3. That said, the figures strengthen the message that the economy is likely headed for a contraction in Q4. Compared to previous months, sectoral dynamics seem to have shifted somewhat, with the downturn increasingly driven by weaker services activity, while manufacturing is experiencing a temporary production boost thanks to easing supply bottlenecks. Also the UK figures ticked in better than expected, with both manufacturing and service unchanged. It still points towards recession in Q4, though.

US: Yesterday, the combination of soft US flash PMIs (composite below consensus at 46.3) and modestly dovish FOMC minutes supported market sentiment and weighed on broad USD. In line with the recent Fed commentary, the minutes suggested that the majority of FOMC members could favour a smaller 50bp hike at the December meeting. While we have been calling for more aggressive tightening, the low October CPI print combined with PMIs now signalling clearly moderating growth and commodity prices declining do suggest that the need for rapid rate hikes is easing. The key upside risk for inflation is still related to the tight labour markets, as wage growth remains too fast to be consistent with Fed’s inflation target, and even the PMI employment indices showed no clear signs of cooling. As such, we think Fed will have to keep hiking and maintain financial conditions restrictive well into 2023 even if the pace of hikes would be more moderate going forward.

Japan: Also Japanese PMIs were weak, as manufacturing is weighed down by the global slowdown and inflation has slowed the service sector rebound. Composite PMI declined to 48.9 from 51.8.

Equities: Equities higher yesterday with bond yields lower, somewhat bad data out of US and not to forget sharply lower oil price. We have seen this before, it is the post summer narrative of “bad data being good data” because it means less inflations and less fear of central bank tightening. Hence, equities are not lifted because of economic growth outlook but simply just less fear of the biggest tail risk fear – inflation staying too high for longer. There this is more of an unloved rally where VIX is softening but remains elevated and cyclicals are not able to outperform. One sector stuck out yesterday in what was a broad based rally – not surprisingly the energy sector. If the low growth and less inflation fear scenarios continue, it should soon mean a goodbye to the inflation semi-hedge story of overweighting the energy sector and hence the massive YTD outperformance is coming to an end. In the US yesterday, Dow +0.3%, S&P 500 +0.6%, Nasdaq +1.0% and Russell 2000 +0.2%. The equity rally continues in Asia this morning with homeland China being the exemption. Both European and US futures are slightly higher as well.

FI: The flattening of the yield curves continues as US PMI data fell more than expected and the minutes from the latest FOMC meeting showed that most officials were backing a more moderate pace of interest-rate hikes. This is also in line with a string of recent comments from various Fed members. A similar picture is seen in the Euro curves.

FX: USD was the big underperformer in yesterday’s session – both during European hours and also in the immediate aftermath of the Fed minutes. That has returned EUR/USD to the 1.04 mark. The Scandies were the top performers with EUR/SEK moving back below 10.90 while EUR/NOK has settled in the mid-10.30s.

Credit: Yesterday the credit market was nourished by renewed hopes of a dovish change of path from central banks amid bad macro numbers. Itraxx Main tightened 2.6bp to 89.8bp while Xover tightened 9.4bp to 451.8bp.

Nordic macro

We expect the Riksbank to pull off a 75bp hike this morning, which is 25bp more than what the central bank suggested in the September repo rate path. This, however, is already priced by the money market and should not cause any volatility. The reason behind our call is that October core inflation again overshot Riksbank’s forecast by a significant margin of 0.5 percentage points, printing 7.9 % yoy. Looking forward, it seems reasonable to expect Riksbank to raise its inflation forecast and on the back of that also raise the “peak rate” of the repo rate path to the 2.75-3.00 % range in the first half of 2023. Such a revision should neither cause any major market reaction as this too is expected by market players.

The Norwegian labour market is still tight, with low unemployment and numerous vacancies, but there are now signs of the tide turning: the number of new job openings is falling, employment seems to have levelled off, and unemployment has bottomed out. We therefore expect the jobless rate to edge up from 3.2% to 3.3% in September (August-October), but with employment more or less unchanged.

Written by Andy KIng