Focus now turns to the Euro area

In focus today

In the euro area, we receive data on retail sales for November. The data will give us an indication of how private consumption fared at the end of 2024, which is important as consumption is expected to drive growth this year.

In Germany, industrial production data for November is due for release. While yesterday's weak factory orders printed -5.4% m/m SA, new orders ticked up when excluding large-scale orders. Hence, we expect industrial production to stabilise after its declining trend in recent months.

Economic and market news

What happened overnight

In China, consumer price inflation fell to 0.1% y/y in December, in line with market expectations. The full-year consumer price index rose 0.2% in 2024, affirming that the Chinese economy is struggling with deflation pressures. This can also be viewed as one of the key reasons for the recent decline in Chinese bond yields. For an update of the Chinese economy, please see China Headlines, 8 January.

What happened yesterday

In the US, the ADP's private sector employment report for December delivered a modest downside surprise, printing 122k (cons: 140k). Hiring is still primarily driven by education, health care and leisure and hospitality sectors, while manufacturing employment declined for the third straight month. While ADP and Tuesday's JOLTs signal that firms have slowed down their hiring, jobless claims are still at very modest levels, indicating that labour demand remains healthy.

Importantly, although the ADP report gives some hint of what to expect from Friday's Jobs Report, it is not the most precise indicator. We project that Friday's Jobs Report will show nonfarm payrolls coming in at 170k (cons: 163k, prior: 227k) - for more details on our current assessment of the labour market, please see Reading the Markets USD, 8 January.

Turning to the Fed, Governor Waller gave dovish signals, stressing that he does not expect potential tariffs from the incoming Trump administration to produce persistent inflation that would influence policy rate decisions. At the same time, Waller pointed out that he believes inflation will continue easing in 2025, supporting the notion of further rate cuts, though the pace will depend on how inflation progresses. Later, the FOMC minutes from the December meeting showed that officials were aware of the upside risks to inflation this year coupled with a number of participants incorporating "placeholder assumptions" regarding the impact of potential trade and immigration policy changes from the incoming Trump administration into their projections. At the bottom line there was limited new information, leading to a muted market reaction. The Fed most likely stays on hold in January and will continue with gradual cuts later in 2025 - we expect a cut in March.

On the political front, Trump is considering a national emergency declaration to set up tariffs. Availing of the national emergency declaration under the International Economic Emergency Powers Act (IEEPA), Trump would quickly be able to impose a universal tariff of at least 10% on all imports into US. The uncertainty around Trump's potential policies spurred an uptick in 10Y UST yield, which exceeded the 4.7% mark for the first time since April.

In Sweden, the preliminary inflation report for December was weaker than both our and markets' expectations - and quite a bit below the Riksbank's forecast. Details of the print will be released next week with the final data. The outcome gives some relief to the Riksbank, which has expressed some concerns due to the higher readings the past two months. While we have adjusted our profile, now expecting the next cut in March, we acknowledge that this inflation print coupled with a seemingly split Riksbank reopens the door for a January cut - which for now weighs somewhat on the SEK.

Equities: Global equities were flat yesterday after considerable fluctuations, with some sectoral and regional variations. Macro data played a secondary role as investors attempted to anticipate developments post-20 January, when the already vocal new president of the US takes office. In the US yesterday, Dow +0.3%, S&P 500 +0.2%, Nasdaq -0.1%, and Russell 2000 -0.5%. Asian markets are mostly lower this morning, mirroring the futures in Europe and the US.

FI: Long-end EUR rates continued moving aggressively higher through yesterday's session as fiscal worries in Europe and the US are pushing term premia up. 10Y EGB yields ended up 5-6bp, while the UK - where worries about debt sustainability are flaring up again - saw very aggressive jumps in the long end in the magnitude of +10bp. The current fixed income market jitters about supply mirrors the experience last year, where a big part of the drop in yields through November/December was reversed. However, the high outright yield levels across the US and Europe today leaves current pricing sensitive to any negative macro news going forward.

FX: EUR/USD ventured lower early in yesterday's session, testing the waters below 1.0280 before closing the day just above 1.03. The GBP had a rough session with Cable dropping more than 1% on renewed focus on the UK public debt situation. Tighter global financial conditions weighted on the NOK, and we see mounting topside risks to NOK-crosses in the near-term. EUR/SEK closed the day unchanged at 11.50, following an initial knee-jerk move higher on the slightly dovish Swedish inflation print.