Flash PMIs Grab Market Attention

Today is a crucial day as market participants turn their attention to the December flash Purchasing Managers' Index (PMI) reports for the euro area. Last month, November's PMI data showed a significant drop that led to considerable market reactions. The services PMI fell below the neutral mark of 50 for the first time since January, recording a value of 49.5. Meanwhile, the manufacturing PMI stagnated at 45.2, indicating ongoing weakness in this sector. As such, the economic outlook remains challenging, and we expect only slight declines in the December PMIs. Specifically, we forecast the manufacturing PMI to dip to 44.9, while the services PMI is anticipated to hold steady at 49.5.

In addition to the euro area PMIs, we will also look out for flash PMI figures from the US and the UK later today, which may further impact market trends.

In France, there’s significant political activity as the National Assembly discusses a "special law" that would enable the 2024 budget to extend into 2025, helping to avoid a government shutdown. The National Rally party stated it would support the legislation, allowing the caretaker government to manage essential expenditures until a new government is formed. Although the passage of the law seems likely, there remains a risk that it could fail, which would create further political uncertainty. Should this happen, President Macron may need to use a constitutional provision to enforce budgetary measures without parliamentary approval.

Economic and Market Overview

Recent Developments

In recent news from China, retail sales data for November disappointed, coming in at 3.0% year-over-year, which was below expectations of 5.0% and a drop from 4.8% in the previous month. This follows a trend of slowing credit growth and a decrease in money supply growth, prompting calls for increased economic stimulus from the authorities. Consequently, Chinese stock markets experienced minor declines following these data releases.

In France, a significant political change occurred over the weekend, as veteran centrist politician Francois Bayrou was appointed the new prime minister. Bayrou has strong ties with President Macron and leads the centrist Democratic Movement. The far-right National Rally plans to abstain from a no-confidence vote against him, which may stabilize the new government to an extent. However, the challenges from a divided National Assembly remain, resulting in minimal market reaction to the announcement. Adding further strain, Moody’s downgraded France’s credit rating from Aa2 to Aa3 due to concerns over future public finances.

Turning to the UK, the monthly GDP figure for October fell unexpectedly by 0.1% month-on-month, contrasting with a forecasted increase of 0.1%. This downturn is attributed to negative sentiment surrounding the Autumn statement and was broadly based across sectors, notably affecting industrial production due to adverse weather conditions.

Global Equity Markets

Global stock markets saw lower performance last week, with minimal movements stemming from seasonal trading patterns amidst a busy schedule for central banks. Despite equities reacting only marginally to rising bond yields, growth and technology sectors exhibited strong performance. Small-cap stocks, however, struggled, declining nearly 1% in comparison to large-cap stocks. On Friday in the US, the Dow Jones industrial average fell by 0.20%, the S&P 500 held steady, the Nasdaq rose by 0.1%, and the Russell 2000 decreased by 0.6%. Most Asian markets opened lower today, and European futures are also trending downwards, while US futures show modest gains.

Fixed Income and Currency Markets

Last week was eventful for European fixed-income markets, exacerbated by the ECB meeting and the Moody’s downgrade of France. Following the ECB’s meeting, swap rates for both 2-year and 10-year bonds rose by approximately 10 basis points, even amidst a dovish tone from the central bank's president.

In foreign exchange, the US dollar strengthened broadly throughout last week, outperforming most currencies except the Norwegian krone. The USD/JPY pair was rejected at the 150 level but closed up by 2.5% at over 153.50, reflecting rising US yields. EUR/USD fluctuated between 1.0450 and 1.0600, ultimately closing the week around 1.0500. After an unexpected 50 basis point rate cut, the Swiss franc weakened, pushing EUR/CHF to one-month highs. This coming week is set to see significant central bank activity, with five interest rate decisions scheduled over a span of 17 hours on Wednesday and Thursday.

PMI, Economy, Market