Flash PMIs and Economic Updates

Today, the focus is on the euro area as we await the December flash Purchasing Managers' Index (PMI) reports. The significant decline in November's PMIs has caused noticeable fluctuations in the markets. November's report revealed a concerning trend, with the services PMI dropping below the critical mark of 50 for the first time since January, settling at 49.5. Meanwhile, the manufacturing PMI was stagnant at 45.2, indicating ongoing struggles in this sector. Looking ahead, we anticipate that the economic conditions will not see much improvement since November. Our forecast suggests a slight dip in the PMIs for December, projecting a manufacturing PMI of 44.9 while the service sector PMI is expected to hold steady at 49.5.

Later today, we will also receive flash PMIs for November from the United States and the United Kingdom, which will provide further context on these economies.

In France, the National Assembly is set to debate a "special law" that aims to carry the 2024 budget over into 2025, helping to prevent a government shutdown. Notably, the National Rally party has expressed support for this legislation, allowing the current caretaker government to manage essential state expenditures until a new government is established. While we believe the law is likely to pass, there is the potential for delays, creating additional political uncertainty in France. If the law does not pass, President Macron may need to resort to an unprecedented constitutional measure to enforce budgetary actions without needing parliamentary approval.

Global Economic and Market News

Overnight Developments

In recent developments from China, economic activity appears sluggish. Retail sales for November showed a disappointing growth of only 3.0% year-over-year, compared to expectations of 5.0%. This decline, alongside easing credit growth and a struggle in the money supply—illustrated by an M1 decline of -3.7% year-over-year—suggests that additional stimulus from Chinese authorities may be necessary. As a result, Chinese equities experienced minor losses in reaction to these figures.

Updates Since Last Friday

In France, veteran centrist politician Francois Bayrou has been appointed as prime minister. As an ally of President Macron and leader of the centrist Democratic Movement (MoDem), Bayrou has received tacit support from the far-right National Rally, which has stated it will not challenge his position. However, despite this new leadership, Bayrou is likely to encounter the same divisive political challenges as his predecessor, Barnier. Consequently, markets appeared to remain relatively unaffected by the announcement. Over the weekend, Moody's issued a downgrade for France, lowering its status from Aa2 to Aa3, citing serious concerns over the country's public financial outlook.

In the UK, monthly GDP data for October was slightly worse than expected, registering at -0.1% month-over-month, against a projected 0.1%. This negative surprise reflects factors including the adverse impacts from the Autumn statement and previous PMI results, with industrial and manufacturing sectors particularly affected by weather-related disruptions.

In the realm of equities, markets experienced downward trends both on Friday and throughout the previous week, reflecting limited activity yet notable hints of early holiday trading within a period characterized by central bank announcements. A significant development during the past week involved movements in the bond market, where yields showed a consistent upward trajectory. Interestingly, equities reacted only modestly to these shifts in the bond yields. The growth and technology sectors demonstrated resilience, while small-cap stocks fell behind their larger counterparts. As of Friday in the US, the Dow dropped by 0.20%, the S&P 500 held steady, the Nasdaq gained 0.1%, and the Russell 2000 faced a decline of 0.6%. Currently, most Asian markets are down, while European futures appear lower along with a slightly optimistic outlook in US futures.

In the fixed income market, the past week was notable due to the negative market response following the recent European Central Bank (ECB) meeting and the unexpected downgrade of France from Moody's. Both the 2-year and 10-year EUR swap rates increased by about 10 basis points post-ECB meeting, despite a dovish tone from President Lagarde.

Lastly, in foreign exchange, we observed a stronger USD last week, with the Norwegian Krone performing notably well, whereas the Japanese Yen and Swiss Franc lagged behind. The USD/JPY pair struggled at the 150 mark but ended the week up by 2.5% at over 153.50, responding to rising US yields. Meanwhile, the EUR/USD fluctuated between 1.0450 and 1.0600, concluding around 1.0500. The Swiss Franc weakened following an unexpected 50 basis point rate cut while EUR/CHF climbed to a one-month high. The EUR/SEK pair remained stable just above the 11.50 mark, and EUR/NOK eased slightly from 11.80 to about 11.70. This week promises significant central bank activity with five interest rate decisions scheduled within 17 hours on Wednesday and Thursday.

PMI, Economy, Europe