December’s Growth Chronicle
- The spotlight today is on relative growth momentum with the release of the December PMI readings for the EU, UK, and US. Japan’s PMI improves while Australia’s worsens.
- China economic activity data for November was soft and argues for immediate fiscal support.
- Busy week ahead. 5 G10 and 9 EM central banks hold policy-setting decisions. All the details in our Drivers for the Week Ahead and EM Preview for the Week.
USD kicked-off the week on the back-foot against most major currencies. Stocks in China fell on weak Chinese domestic demand activity. US and European equity futures are mixed. US economic outperformance continues to favor USD strength. Indeed, the steepening in the US yield curve (10 minus 2-year Treasury yields) points to resilient US economic growth.
The US December preliminary PMI is forecast to be indicative of an encouraging growth outlook (2:45pm London). The composite index is expected at 55.1 vs. 54.9 in November, the manufacturing PMI is anticipated at 49.5 vs. 49.7 in November, and the services PMI is projected at 55.8 vs. 56.1 in November.
EUR/USD is firmer above 1.0500. ECB President Christine Lagarde reiterates that more rate cuts are in the pipeline while Governing Council member Martins Kazaks sounded cautious. Kazaks warned against taking the policy rate below neutral (estimated to between 1.75%-2.50%) because growth is not so weak, and inflation is not set to undershoot. However, Kazaks also noted that the market’s 2025 easing bets is “not massively out of line”. The market implies 140bps of cuts over the next 12 months and the policy rate to bottom between 1.50% and 1.75%.
The Eurozone’s soggy growth outlook should continue to undermine EUR. The Eurozone December preliminary PMI is due today (9:00am London). The composite PMI is forecast at 48.2 vs. 48.3 in November, the manufacturing PMI is expected at 45.3 vs. 45.2 in November, and the services PMI is projected at 49.5 vs. 49.5 in November. The country breakdown is expected to show economic activity in Germany (8:30am London) and France (8:15am London) firmly in contraction territory. The German composite PMI is forecast at 47.5 vs. 47.2 in November while France’s composite PMI is projected at 46.0 vs. 45.9 in November.
The Eurozone Q3 labor costs data is also due today (10:00am London). The ECB projects labor cost growth of 4.5% y/y in Q3 vs. 4.7% in Q2. The ECB expects growth in labor costs to fall sharply to 2.0% by 2027 reflecting rising productivity and falling wage growth.
German Chancellor Olaf Scholz faces a vote of no confidence today (between 12:00pm and 4:00pm London) which will trigger a snap election in February 23. Polls currently show the opposition conservatives under Friedrich Merz lead by a wide margin at around 31%, followed by the far-right Alternative for Germany at about 18%, and Scholz’s SPD at 17%.
Merz is open to relax the so-called debt brake - which restricts annual structural deficits to 0.35% of GDP in any fiscal year - “if extra borrowing were to boost investment.” Nonetheless, fiscal support to the Germany economy will require time to take shape as the formation of a new coalition government could take weeks or months. In the meantime, the ECB will have to do the heavy lifting to support the Eurozone economy.
EUR/GBP is holding on to last week’s gains triggered by the UK’s poor October GDP report. The UK November preliminary PMI is forecast to remain consistent with unimpressive economic growth (9:30am London). The composite index is forecast at 50.6 vs. 50.5 in November, the manufacturing PMI is expected at 48.5 vs. 48.0 in November, and the services PMI is projected at 51.0 vs. 50.8 in November. The BOE is widely expected to keep the policy rate unchanged at 4.75% Thursday. Bottom line: monetary policy trend between the ECB and BOE still favors a lower EUR/GBP.
USD/JPY is consolidating near recent highs around 153.60. Japan private sector activity improves in December. The composite PMI rose to a three-month high at 50.8 in December vs. 50.1 in November, the manufacturing PMI improved to 49.5 vs. 49.0 in November, and the services PMI increased to 51.4 vs. 50.5 in November. Nevertheless, the BOJ is expected to leave the policy rate at 0.25% Thursday. The risk is the BOJ paves the way for a January rate hike because economic activity and inflation are tracking the BOJ’s projection. Markets price-in 70% odds the BOJ resumes normalizing rates in January.
AUD/USD is range-bound just above last week’s fresh cyclical low of 0.6337. Recent Australia private sector activity worsens in December. The composite PMI fell to a three-month low at 49.9 vs. 50.2 in November, the manufacturing PMI slumped to a two-month at 48.2 vs. 49.4 in November while the services PMI dipped to a five-month low at 50.4 vs. 50.5 in November. At its December meeting, the RBA kept the cash rate target at 4.35% as was widely expected but set the stage for a policy rate cut in February. RBA cash rate futures imply 50% probability of a 25bps cut in February.
USD/CAD remains under upside pressure following last week’s follow-up 50bps Bank of Canada (BOC) rate cut to 3.25%. BOC Governor Tiff Macklem speaks today (8:20pm London). The title of his speech “Economic factors shaping Canada’s monetary policy.” Last week, Macklem effectively ruled-out additional jumbo cuts, pointing out that officials will consider further rate cuts but likely at a slower pace. The BOC’s dovish guidance is an ongoing drag for CAD.
China economic activity data for November was soft. Retail sales growth unexpectedly slowed to 3% y/y (consensus: 5.8%) following an online shopping festival boost of 4.8% in October. Industrial production growth matched consensus at 5.4% y/y vs. 5.3% in October while fixed asset investment growth unexpectedly eased year-to-date to 3.3% y/y (consensus: 3.5%) vs. 3.4% in October.
Last week, China’s Politburo recently vowed “more proactive” fiscal policy and a “moderately loose” monetary stance next year. Importantly, the Politburo also pledged to boost consumption “forcefully” and expand domestic demand in all aspects. In the meantime, the People’s Bank of China will set its 1-year MLF rate this week and is expected to keep it steady at 2.0%.