Eurozone stock markets already started the year with modest gains

3 January, 2017

European Outlook: Asian stock markets outside of Japan moved higher after a stronger than expected China Caixin manufacturing PMI. Eurozone stock markets already started the year with modest gains yesterday in very quiet trade, as most of the world remained closed for New Year celebrations. Japanese markets remained closed today, but elsewhere markets are back and it seems stocks are beginning the year in a good mood and optimistic on the growth outlook. Yesterday’s final Eurozone manufacturing PMI readings were also positive and today’s Swiss and U.K. numbers are also expected to confirm that output continues to expand at a solid pace. This should leave the German jobless rate at record lows, while French and German inflation data is set to accelerate sharply on base effects and with risks to forecasts on the upside after the very high Spanish number from last Friday. After the ECB continued ongoing QE purchases for the whole of this year, this doesn’t change the immediate policy outlook, but could temporarily dent the uptrend in Bund futures, that was sparked by Draghi’s affirmation of more asset purchases. The short end meanwhile will remain supported by the abolition of the deposit rate limit.

Overnight Update: China – Caixin Manufacturing PMI for December: 51.9 (expected 50.9, prior 50.9). The figure is close to a 4 year high for the Caixin/Markit Manufacturing Purchasing Managers’ index (PMI). The figure has been above  50 for six consecutive months and Output, at 53.7, rose at the fastest pace since January 2011.  There was evidence of strong domestic demand although export orders remained “sluggish”.  AUDUSD rose to session highs of 0.7230 on the positive news.

Eurozone manufacturing PMI confirmed at 51.9, as expected. The renewed uptick from 53.7 in November means the year ended on a high note and the numbers confirm that the recovery continues and for once on a relatively broad base. with Italy actually surprising on the upside this morning, which shows that the referendum result did little to dent optimism.

ECB Coeure:. The Executive Board member said in an interview with Germany’s Boersenzeitung that personally he doesn’t “exclude upside risks to inflation in 2017 if the reflationary impact of the new U.S. policies dominates“. Coere said “there are signs of an acceleration in headline inflation, above all because of the increase in oil and commodity prices”, adding that the ECB is “still waiting for signs that core inflation is on the rise and will clearly exceed 1%”. He admitted that the ECB’s assessment of the balance of risks, including for inflation, is shifting”, while stressing that the planned cut in monthly purchase volumes this year is “an adjustment not an exit”, and that a phasing out of purchases hasn’t even been discussed yet. Coeure said that a discussion will be needed about normalisation of monetary policy but it needs to be initiated carefully”. And indeed, after the ECB confirmed that asset purchases will remain in place until the end of the year this is not a discussion that will be needed any time soon.

Main Macro Events Today                

German HICP – German HICP is seen rising to 1.1% y/y from 0.7% y/y. The better  than expected Spanish number last Friday suggests a risk on the upside also for the overall Eurozone HICP rate (due Wednesday), which is expected to rise to 1.0% y/y from 0.6%. This is still far below the ECB’s definition of price stability, but the data will confirms that there is no real risk of a deflationary spiral, although after the ECB already confirmed its policy parameters for 2017 that won’t change the immediate policy outlook. It will add further ammunition though to the growing number of central bankers warning that real tapering can’t be delayed for too long, without undermining financial stability throughout the Eurozone.

US ISM Manufacturing PMI – December ISM is out today and should post a headline increase to 53.5  from 53.2 in November and 51.9 in October. Producer sentiment is continuing to benefit from diminished inventory headwinds and the rebound in oil prices. This should allow sentiment to end the year on a firm footing with the ISM-adjusted average of all measures holding at 53, steady from November and up from 51 in October.

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