Weak Euro area PMIs raise concerns over growth outlook

In focus today

Today, in Germany we receive the Ifo growth indicator for November. After the decline in German PMIs on Friday, the stage is set for a decrease in Ifo as well. Consensus suggests a decrease to 86 in November compared to 86.5 in October, still suggesting a German economy in weak condition.

ECB's Chief Economist Lane will speak in the afternoon.

This week we look out for FOMC minutes from the November meeting on Tuesday. Markets will look for clues about the policy rate path as markets are divided about whether the Fed will cut rates in December as well. On Wednesday, the Reserve Bank of New Zealand will announce its rate decision, where we expect a 50bp rate cut. We also have PCE data out of the US. On Thursday, we get regional inflation data out of the euro area and on Friday we will get the full euro area flash CPI print. Likewise, Friday we will receive Swedish GDP, Norwegian unemployment and retail sales and Tokyo CPI out of Japan.

Economic and market news

What happened overnight

In China, the Peoples Bank of China injected around USD 124bn into the banking system as one-year policy loans. The measure is intended to help dealing with the liquidity pressure in China's banking system towards the year-end. China has in the past months been stepping up efforts to reduce debt risks and stimulate the struggling economy.

What happened Friday

In the US, PMIs came out strong, where especially services activity growth remains robust (57,0; Oct. 55,0). Notably, services output prices index declines to the lowest level since May 2020. Solid growth and modest price pressures are exactly what the Fed likes to see. Manufacturing new orders data support the diverging picture between the US and rest of the world. Domestic new orders index recovers modestly to 47.9 (from 46.8), but new export orders index collapses to 43.9 (from 49.1).

In the euro area, PMI declined to 48.1 from 50.0 in October indicating the economy has slipped into contractionary territory in the final quarter of the year. Consensus was looking for unchanged PMIs. The decline was due to both services PMI that fell to 49.2 from 51.6 and manufacturing that fell to 45.2 from 46.0. The PMIs today have increased our concerns over the near-term growth outlook for the euro area economy. GDP growth in the final quarter of the year will likely be around 0.0% q/q. The outlook for the first quarters of next year has also turned worse. However, we continue to expect growth to pick up during next year as we look for significant easing by the ECB and as real wage growth is set to increase private consumption since the labour market remain strong.

ECB's Villeroy spoke about monetary policy and said the ECB is not behind the curve and that he expects that the euro area is achieving a soft economic landing after being questioned about the very weak November PMIs. However, he said that they are closely monitoring the risk of undershooting inflation and thereby maintaining a too strict monetary policy. ECB's Nagel spoke about monetary policy as well saying that despite the weak PMIs he will wait for the December ECB economic projection before he is ready to take a stance on the December rate decision. He noted however that more rate cuts are coming in 2025. We expect ECB to deliver a 25bp rate cut at the December meeting.

In the UK, we also got weak PMI figures. Composite at 49.9 (cons: 51.7, prior: 51.8), service at 50.0 (cons: 52.0, prior: 52.0) and manufacturing 48.6. The survey notes a rise in input costs, concerns about the business outlook, a drop in business activity with easing in output price inflation. Note, as previously flagged, there is likely some effect from the Autumn statement (UK fiscal budget) on souring sentiment. While the BoE is set to stay on hold in December, we think this argues for a step up in easing pace in 2025, in line with our forecast. We expect the Bank Rate to end the year at 3.25% in 2025.

In Sweden, Riksbank governor Erik Theddéen spoke at a Danske Bank event. He made it clear that he did not intend to send any new monetary policy signals. However, it was interesting to hear him saying that the Riksbank is not keen on negative interest rates and QE again. Instead, they want to see a better policy mix with, and support from, fiscal policy.

Equities: Global equities were higher on Friday, albeit with a significant sectoral divergence between the US and Europe. This was primarily due to very different outcome of flash PMIs, particularly in the services sector, which drove yields lower in Europe and higher in the US, led by the short end of the curve. Not surprisingly, the most noticeable differences were within the banking sector. In Europe, banks were lower, ranking at the bottom of the performance table, whereas in the US banks were higher and outperformed the S&P 500 index by more than 1 percentage point. Despite the disappointing macroeconomic data out of Europe on Friday the week still ended on a high note, with US yields dominating within styles and lifting the value preferences among investors. Both on Friday and over the last week, small caps performed exceptionally well, with the Russell 2000 up by 4.5% last week. In the US on Friday, Dow +0.97%, S&P 500 +0.4%, Nasdaq +0.2%, and Russell 2000 +1.8%. Asian markets were also solidly in the green this morning, with Chinese stocks bucking the trend. Both European and US futures are showing solid gains this morning.

FI: There was a significant decline in both European and US bond yields on Friday as well as a decent bullish steepening of the yield curves on the back of the weak European PMI data. Given the weak eurozone economy, the divergence between US and Europe continued as seen both the EURUSD as well as 10Y Treasury-Bund spread that has widened from 150bp in mid-September to 210bp-215bp. This morning, we have seen that markets have responded positively to the confirmation of Scott Bessent as new US Treasury secretary as US government bond yields declined in Asian Trading hours. He is seen as a more conventional choice who is expected to give some stability to US economy and focus on reigning in fiscal spending.

FX: The last week in FX markets has been characterised by continued USD performance on the one side and heavy European FX underperformance on the other. Not least the CEEs have been under pressure delivering even larger weekly spot losses than the single currency despite poor PMIs adding pressure on the EUR heading into the weekend. The CAD and AUD continue to do well which might also explain why the NOK has done surprisingly well despite the Norwegian currency's usual closer price action to European FX. CHF, SEK and GBP are all found among the underperformers in Majors' space but are still among those European currencies that have suffered the smallest losses vs the greenback. Finally, the JPY has stabilised after the US rates induced setback post the US election.