Focus on German inflation today

In focus today

In the euro area, focus is on German inflation data for December, which will provide an important hint of where we can expect euro area data to be tomorrow. Spanish inflation showed higher-than-expected inflation in December, which importantly was also due to core inflation rising more than expected. We expect euro area HICP inflation tomorrow to rise to 2.4% year-on-year in December from 2.2% in November. The increase is mainly due to base effects on energy and food inflation, while we expect core inflation to decline from 2.7% y/y in November to 2.6% y/y. Most importantly, we expect the monthly price increase in core inflation to once again be compatible with the 2% target when annualised. The data is thus expected to support the case for continued rate cuts by the ECB.

In the euro area, we also receive the final service and composite PMI for December. The flash release came very early in December, so the final release could deviate more than usual, warranting close monitoring of the release today. The final manufacturing PMI came in at 45.1, which was revised marginally down from 45.2 in the preliminary release.

We likewise receive service PMIs from the US and the UK.

As described earlier, we receive inflation data from the entire euro area tomorrow. Also, tomorrow we get Swiss inflation and services ISM from the US. On Wednesday, minutes from the Fed's December meeting and Swedish CPI data are released. On Thursday, the ECB releases its Economic Bulletin. On Friday, the US jobs report for December is due for release. We also get inflation data from Denmark and Norway.

Economic and market news

What happened overnight

In China, the Caixin service PMI came in at 52.2 in December, up from 51.5 the month before, and in line with the official NBS survey from last week. The figure signals the highest growth in the Chinese service sector since May.

In Japan, service PMI came in at 50.9 in December compared to 50.5 in November, however lower than the flash print of 51.4. It was the second straight month that service activity expanded in Japan.

What happened over the weekend

In the US, The ISM manufacturing report showed strength, with improvements in new orders, production, and prices, although employment figures were weaker. This presents somewhat conflicting signals compared to the PMIs, where even the revised index indicated that output and new orders remained close to November levels. In the broader context, both ISM and PMI continue to signal stagnant growth, consistent with recent hard data on industrial production and capacity utilisation.

Fed officials Kugler and Daly, voting members, discussed monetary policy, stating that the Fed's task of controlling inflation is not yet complete. However, they also emphasised that they do not want the Fed to risk harming the labour market in the process. They did not specify what these comments imply for their judgement on future rate decisions. On Friday, Fed's Barkin, a non-voting member, expressed a preference for maintaining a restrictive monetary policy, citing more upside than downside risks for inflation. We anticipate the next rate cut at the March meeting, followed by quarterly rate cuts of 25 basis points until March 2026, bringing the interest rate target to a range of 3.00-3.25%.

Equities: Global equities ended higher on the second trading day this year. Looking at the performance in terms of both direction and sector rotation between the US and Europe, one can hardly believe it was the same trading day. In Europe, equities were lower with defensives outperforming, while in the US, we saw sizeable gains with significant cyclical outperformance, with some of the post-election trades once again standing out. It is still early in the year with two weeks until Trump's inauguration, but the exuberant narrative that dominated the latter part of 2024 seems to be continuing into the beginning of 2025. In the US on Friday, Dow +0.8%, S&P 500 +1.3%, Nasdaq +1.8%, Russell 2000 +1.7%. This morning, we have a very mixed performance in Asia, with China and Japan lower, while both Taiwan and South Korea are higher by more than 2%. Futures in the US are mixed as well, while futures in core Europe are higher.

FI: The push for lower rates is still not that clear-cut as the fight against inflation in the US is not over according to comments from two Federal Reserve officials during the weekend and the Federal Reserve needs to be mindful of the labour market ahead of the release of nonfarm payrolls on Friday. We will get inflation data from the eurozone that is expected to rise modestly. Combined with the all the bond issuance and no reinvestments from ECB as the reinvestments from the PEPP ended last week there is pressure on the long end of the European and US yield curves although 10Y yields/rates have risen some 40bp since early December.

FX: Friday' session in FX markets was generally characterised by a reversal of Thursday's moves with not least the EUR and the CEEs gaining ground on European natural gas prices stabilising. This contributed to returning EUR/USD back to the 1.03 level but also EUR/Scandies rose modestly. USD/JPY continues to trade in the high 150s while EUR/GBP remains close to the 0.83 level.