European data indicating slow but steady improvement...
- The eurozone composite PMI was steady at 50.9 in December (November: 50.9, consensus: 51.2). Whilst services sentiment was slight weaker (52.2 from 52.8 in November), the manufacturing index improved from 46.3 to 47.8 over the month. On a country level, Germany saw broad base gains over the month as the composite reading reached a 5-month high of 51.1 (November: 50.2), driven by improvement in the manufacturing sector. In France, the composite fell to 51.5 (November 52.0), largely driven by weakness from the services sector (reading 51.7), which was affected by ongoing rail strikes that disrupted activity.
- UK flash estimates reported a beat in PMI expectations, reflecting a post-election bounce in sentiment. The composite reading was 52.4 (November: 49.3, consensus: 50.7), the highest level seen since September 2018. The improvement over the month was mainly driven by the services sector which tipped back into expansion reading 52.9 (November 50.0). This has reduced the probability of a rate cut at Mark Carney’s final Bank of England meeting next week, although GDP and retail sales have been weak and there is still little sign of inflation.
- UK unemployment was unchanged at 3.8% in November, and regular pay growth was in line with expectations +3.4% 3m/yr. Salary growth remains starkly different across sectors – construction and finance workers saw the largest increases (4%+), whilst hotel and distribution workers saw just 2% growth. Despite the flat growth rate over the month, employment numbers rose strongly, +208,000 (consensus: +110,000).
- The UK CBI report released on Wednesday reflected the uptick in business optimism since the general election. The share of manufacturing respondents expecting an improvement in business conditions was 23% higher than those expecting conditions to worsen – the most optimistic levels seen in more than 5 years.
Central banks in "risk management" mode...
- The Bank of Canada left the policy rate unchanged at 1.75% in their first meeting of the year. The meeting was more dovish than expected, as policymakers focussed on the recent economic slowdown in Canada and the potential that the current growth trajectory could persist. December headline and core inflation both came in slightly below expectations, +2.2% and 2.1% respectively. In the outlook statement, the committee notes that the Governing Council “will be paying particular attention to developments in consumer spending, the housing market and business investment”.
- The Bank of Japan also voted to hold rates at -0.1% overnight rates, target 0% for 10-year bond yields, and continue the current pace of asset purchases at ¥80tn per year. The BOJ said they “would not hesitate” to take further easing measures if there is sign of inflation edging up towards the 2% target. Policy board members increased GBP forecasts slightly from +0.6% to +0.8% and +0.7% to +0.9% for 2019 and 2020 respectively. They also committed to a full review of the effects of the consumption tax rises from 8% to 10% (effective end of January 2020) on the economic recovery at their next meeting.
- The ECB also maintained their policy stance at their meeting on Thursday, but were more optimistic on the outlook as downside risks subside. President Christine Lagarde acknowledged that there had been a “moderate” increase in underlying inflation and stressed the need for continued accommodative policy – confirming expectations that the current rates are unlikely to change in the near future. At the meeting, the ECB also formally launched its promised strategy review, which will last for the calendar year and introduce subjects such as incorporated climate change factors in ECB reviews and the potential for digital euro.
Both of which are supportive for risk assets...
- Despite some jitters as the coronavirus spreads, equity markets remained generally firm (ex China and Hong Kong, which were down 3-4% in the holiday-shortened week – they will be closed for most of next week for the Lunar New Year holiday).
- Credit markets continue their very strong run, with spreads continuing tighten despite a torrent of new issuance at the start of the year.
- Rates continue to grind lower – core government bond are typically yielding around 20bp less than at the start of the year.