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- The Fed, the ECB and other central banks have signalled that market expectations for rate cuts are too aggressive and, together with strong data for not least the US labour market, those expectations have calmed somewhat.
- Nordic economies are more or less stagnant but not in real decline, and job markets remain rather strong. Swedish inflation is coming down rapidly from its high levels.
- We are back to seeing a strengthening USD and weakening Nordic currencies, while the atmosphere is constructive among borrowers in the bond market and relating to equities
The divergence in economic activity between the US and the euro area continued in the fourth quarter of 2023. The US economy grew 0.8% q/q while economic activity stagnated in the euro area. This brought the 2023 GDP growth rate to 2.5% in the US and to 0.5% in the euro area. One reason for the growth divergence last year was strong private consumption in the US. However, the labour markets are historically strong in both places. The unemployment rate in the euro area remained at 6.4% in December and the US nonfarm employment surprised all expectations in January by increasing 353k plus an upward revision of 126k in December. Moreover, wage growth increased in January and the participation rate declined.
Both the ECB and the Fed pushed back against market expectations for large rate cuts this year and especially for the March meetings but otherwise delivered no new policy signals. The market is now pricing a 13% probability of a cut in March for both Fed and ECB compared to 66% and 52%, respectively one month ago. Especially the red-hot US labour market report pared US rate cut bets. The Bank of England shifted towards a more neutral approach to future monetary policy by removing its tightening bias.
Inflation surprised slightly to the upside in both the US and the euro area as service inflation is still proving sticky especially in the US. US CPI came in at 3.4% y/y in December while euro area HICP increased 2.8% y/y in January. US core inflation picked up to 3.9% and the current momentum is still on the high side. In the euro area, there were a lot of one-offs affecting the January HICP print from different government measures that ended as well as the fact that companies tend to adjust prices in January. While these factors were visible in core services and energy inflation it was to a smaller extent than feared.
Chinese data released this month rung the alarm bell with disappointing retail and housing sales. The housing market is in a bad state and continues to be a drag on activity. Business investments are still strong, and we expect the Chinese economy to muddle through with GDP increasing 4.5% this year as the government will likely increase stimulus. In other Asian countries activity is picking up in manufacturing exports which signals that the global manufacturing cycle is about to turn. This will help both the euro area and US manufacturing that struggled last year. Already, manufacturing PMIs increased significantly in January, although they are still below 50 and hence in contraction. The arrow points to higher levels soon, also supported by the fact that order inventory balances have increased lately, and financial conditions have eased
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