In focus today

Today, in the euro area we receive November PMIs, an important factor for the ECB decision in December. The growth momentum has recently decreased, particularly driven by a slowdown in Germany. We expect manufacturing sector to remain well in contractionary territory, with the PMI expected to rise marginally to 46.4 in November (prior: 46.0), aligning closely with hard data due to the PMI index’s construction. Meanwhile, the service PMI is likely to remain above 50, indicating growth, but we expect a slight decrease to 51.2 (prior: 51.6), influenced by a modest contraction in expansion and seasonal effects.

We also receive country-specific November PMIs for France, Germany, the US, and the UK.

We have plenty of ECB speeches today including Lagarde and Schnabel.

Economic and market news

What happened overnight

In Japan, October core CPI was reported at 2.3% (cons: 2.2%, prior: 2.4%), holding above the BOJ’s 2% target. Additionally, Japanese manufacturing PMI decreased to 49.0 in November (prior: 49.2), indicating a contraction for the fifth month in a row. The figures will be among factors the BOJ will discuss at its next policy meeting in December

What happened yesterday

In the euro area, consumer confidence declined to -13.7 in November (cons: -12.4, prior: -12.5). The decline comes after a long upward trend during the past two years. Taken at face value the decline increases downside risks to the growth outlook. However, the series does fluctuate a bit from month to month and we have seen similar declines in single months in past two years that are then reverted in the following month. As private consumption is expected to be the main growth driver in the coming year it is important to follow consumer confidence going forward to see whether this month’s decline was just one blip or a more serious change to the previous upward trend.

In the US, jobless claims reached a six-month low at 213k (cons: 220k), indicating a relatively resilient labour market. However, we got a slightly weaker Philly Fed index registering at -5.5 for November (cons: 8.0, prior: 10.3). This figure remains within typical range observed over the past few years, albeit somewhat below average pre-covid levels. Neither of these data releases is expected to have a significant impact on the markets.

Yesterday, one of the Federal Reserve officials Golsbee said that he could see policy rates moving “a fair bit lower”, but that the Federal Reserve would still need to determine the level for the neutral rate, but it was a “long way from where we are right now”. This morning, we have seen US Treasury yields decline modestly in Asian trading.

In Norway, mainland GDP grew by 0.5% q/q (cons: 0.3%, prior: 0.1%). This robust growth in Q3 was largely driven by the petroleum related-, chemical- and pharmaceutical industries, which performed much better than anticipated. From the expenditure perspective, it is evident that oil investments and public sector spending were the primary catalysts for growth, with public investments and consumption alone contributing a full percentage point to Q3 growth.

Equities: Global equities were higher yesterday, with Europe registering a slight outperformance in a global context after a roller-coaster day. The situation in Europe is particularly intriguing at present. While most investors would agree that European equities are considerably cheaper compared to those in the US, just as many would probably concur that the European outlook is much cloudier, with uncertainty leading to a pattern of one step forward and two steps back. A potential game changer for Europe, both in relative and absolute terms, could be a pickup in manufacturing activity. Therefore, today’s flash PMI figures are, in our opinion, the most important data point of the month for Europe.

It is worth noting that yesterday saw relatively broad-based gains, with the utilities sector outperforming along with small caps on the style side. Consequently, we are increasingly observing markets returning to being macro-driven, with the influence of Trump’s trade policies gradually diminishing.

In the US yesterday, the Dow closed up by 1.1%, the S&P 500 by 0.7%, Nasdaq by 0.1%, and Russell 2000 by 1.9%.

This morning, we have Asia excluding China trading higher, with European futures also on the rise, while US futures were slightly lower.

FI: There was a modest decline in European government bond yields yesterday, while US Treasury yields rose modestly. This morning, we have seen a modest decline in US Treasury interest rates in Asian trading. One of the Fed members Golsbee stated that he could see rates “a fair bit lower” over the next year and that the neutral rate was a lower than the current level.

FX: The JPY and the USD gained yesterday and in particular vis-à-vis the EUR and the GBP. Notable mentions from yesterday, was the drop in EUR/USD below 1.05 and the rally in NOK/SEK back to parity.

Crude oil prices extended their gains today and were set to end the week higher after Russia shot a new kind of ballistic missile at Ukraine in the latest sign that the escalation there continues.

The strike, featuring a hypersonic medium-range missile that has not been used before in warfare, came in response to a Ukrainian attack with U.S. and British ATACMS missiles on Russian territory. There were fears that Russia would escalate to using nuclear weapons, especially after President Vladimir Putin this week reiterated the changes in Russia’s nuclear doctrine, which stipulate that a nuclear strike is acceptable on a country that is not itself a nuclear power but is being supported by a nuclear power.

“There’s an element of uncertainty as to how far each party could go in its attacks, which is injecting some anxiety into the oil market,” energy analyst Vandana Hari told Bloomberg.

At the time of writing, Brent crude was trading at $74.34 per barrel, with West Texas Intermediate at $70.23 per barrel, both up on Thursday, after booking a 2% rise on Thursday. The price rise could have been more substantial, perhaps, had it not been for the latest EIA weekly petroleum status report, which showed builds in both crude oil and fuels.

“We will be expecting a rebound in production as well as US refinery activity next week that will carry negative implications for both crude and key products,” Jim Ritterbusch from Ritterbusch and Associates told Reuters.

In a note from earlier this week, ING’s Warren Patterson and Ewa Manthey wrote that the impact of the Russian-Ukrainian escalation on oil prices was muted by the news that Iran was ready to cap its enriched uranium stocks, which would reduce the risk of harsher U.S. sanctions that would threaten supply security. They also noted the return to normal operation at the Johan Sverdrup field in Norway after a short suspension due to a power outage.

Source: OILPRICE

Macro data and headlines:

Equities

Volatility

Fixed Income

Commodities

Currencies

The positive surprise just got less positive. The second estimate of German GDP growth in the third quarter showed that the economy only just avoided a summer recession. GDP growth came in at 0.1% quarter-on-quarter, from +0.2% QoQ in the first estimate. Given that the economy shrank by 0.3% QoQ in the second quarter, today's headline number shouldn't be taken as a sign of a rebound, but rather as a confirmation that the German economy is stuck in stagnation and is now hardly any larger than at the start of the pandemic more than four years ago. 

What is new today is the GDP components showing that private consumption and inventory build-up were the main drivers of the economy in the third quarter, while net exports and investments were a drag. The large contribution of inventory build up over the last two quarters in particular does not bode well for the next quarters as soon as inventory reduction takes place.

Winter recession looming

You have heard it before that the current state of the German economy is the result of both cyclical and structural headwinds. The pandemic and the war in Ukraine have accelerated the structural weakness but are not the core reasons for the current situation. In a world where China has become the "new Germany" – at least in manufacturing – Germany’s old macro business model of cheap energy and easily accessible large export markets is no longer working. The negative news flow of recent months with company restructurings, a still-growing number of insolvencies and even the collapse of the government illustrate the toll four years of stagnation can take.

Looking ahead, there is very little reason to expect any imminent change for the economy. In fact, the expected economic policies of the incoming US administration as well as continued policy uncertainty as a result of the German government’s collapse are likely to weigh on sentiment in Germany. Whether it’s the prospects of tariffs or US tax cuts and deregulation indirectly undermining German competitiveness, it’s hard to see how US economic policies will not be negative for the German economy.

On a more positive note, a new government could – emphasis on could, not will – finally end the current economic policy paralysis in Germany and provide the country with the long-awaited economic policy certainty and guidance on how to restore growth and competitiveness. The policy prescriptions of deregulation, lower taxes, reducing red tape and investments in infrastructure, digitalisation and education are all very well known. Implementing them without at least temporarily deviating from the fiscal debt brake currently looks like an almost impossible challenge.

Even if the German economy avoided a summer recession, a winter recession is looming. Looking beyond the winter, the German growth outlook will heavily depend on the new government's ability to strengthen the domestic economy amid a potential trade war and even stronger industrial policies in the US.

Swiss Franc and US Dollar appreciated broadly today as investors sought safe-haven assets in response to escalating geopolitical risks. Gold extended its near-term rebound, while Bitcoin surged to a new record high, reflecting heightened demand for alternative stores of value.

The catalyst for this shift was a warning from Russian President Vladimir Putin that the conflict in Ukraine is escalating toward a global scale. Putin stated that Russia responded to Ukraine’s use of US and British-supplied missiles by launching a new hypersonic medium-range ballistic missile at a Ukrainian military facility. He indicated that additional actions could follow, intensifying concerns about a broader confrontation involving major powers.

Despite these developments, the risk-off sentiment was not uniformly reflected across global markets. DOW closed significantly higher overnight, while NASDAQ edged lower. In Asia, market performance was mixed; Japan’s Nikkei 225 advanced whereas Hong Kong’s HSI and China’s SSE trade in red.

Australian Dollar pulled back slightly but remains one of the week’s strongest performers, despite mixed PMI data. Meanwhile, Yen continued to trade within familiar ranges, showing limited reaction to both the geopolitical developments and stronger-than-expected Japanese CPI data.

Attention is now turning to the Eurozone’s PMI data scheduled for release today. This data will be particularly significant after Euro’s broad-based decline yesterday, breaking key support levels against several major currencies.

Technically, EUR/CHF’s near term decline resumed and breaks through 0.9305 support. Attention is now on whether it picks up downside momentum for breaking through 0.9209 low decisively.

In Asia, at the time of writing, Nikkei is up 0.76%. Hong Kong HSI is down -1.70%. China Shanghai SSE is down -1.58%. Singapore Strait Times is up 0.07%. Japan 10-year JGB yield is down -0.0101 at 1.086. Overnight, DOW rose 1.06%. S&P 500 rose 0.53%. NASDAQ rose 0.03%. 10-year yield rose 0.026 to 4.432.

Japan’s CPI eases to 2.3% in Oct, core-core rises to 2.3%

Japan’s inflation data for October revealed persistent and broadening price pressures. Core CPI (excluding food) eased slightly to 2.3% yoy, down from 2.4% yoy but exceeding expectations of 2.2% yoy. This marked the 31st consecutive month core CPI has stayed at or above BoJ’s 2% target.

Core-core CPI (excluding food and energy) rose from 2.1% yoy to 2.3% yoy, underscoring renewed strength in underlying inflation. Headline CPI moderated from 2.5% to 2.3%, partly due to slowing energy price gains, which decelerated sharply to 2.3% yoy from 6.0% yoy in September. However, food prices surged 3.8% yoy, accelerating from 3.1% yoy, while services prices edged up to 1.5% yoy from 1.3% yoy.

The combination of steady inflation momentum, recovering consumer spending, and Ten’s renewed weakening bolsters the argument for a BoJ rate hike at its upcoming policy meeting in December.

Japan’s PMI manufacturing falls to 49.0, services rises to 50.2

Japan’s PMI Manufacturing index edged down to 49.0 from 49.2 in November, signaling a deepened contraction in the sector. In contrast, PMI Services rose slightly to 50.2 from 49.7, indicating a renewed, albeit modest, expansion. PMI Composite improved marginally but remained below the neutral mark at 49.8, up from 49.6.

Usama Bhatti, Economist at S&P Global Market Intelligence, noted that demand conditions were “stagnant,” while employment grew at the fastest rate in four months. Price pressures persisted across sectors, driven by rising raw material costs and Yen’s weakness. Firms responded with sharper increases in prices charged for goods and services, aiming to pass on these higher cost burdens to customers.

Australia’s PMI composite falls to 49.4, second contraction in three months

Australia’s PMI Manufacturing improved sharply from 47.3 to 49.3 in November, marking a six-month high but remaining in contraction territory. Conversely, PMI Services index dropped from 51.0 to 49.6, hitting a 10-month low and signaling contraction. PMI Composite fell from 50.2 to 49.4, its lowest level in 10 months, indicating a slight overall contraction in private sector output for the second time in three months.

Jingyi Pan, Economics Associate Director at S&P Global Market Intelligence, highlighted the significance of the services sector’s slowdown. “The November S&P Global Flash Australia PMI posted the lowest reading since January, bringing the fourth-quarter average thus far below that of the prior quarter,” Pan said.

The report also noted that easing capacity pressures and subdued activity contributed to slower employment growth, which fell further below the long-term average. In addition, selling price inflation eased as businesses showed caution in raising charges. This combination of softer employment growth and reduced price pressures supports expectations of lower interest rates.

Looking ahead

UK will release retail sales and PMI flash in European session. Germany will release GDP final. Eurozone will also release PMI flash. Later in the day, Canada will release retail sales. US will also release PMI flash.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.0439; (P) 1.0497; (R1) 1.0532; More…

EUR/USD’s fall from 1.1213 resumed by breaking through 1.0495 temporary low. Intraday bias is back on the downside for 1.0447 support and then 1.0404 key fibonacci level next. Strong support could be seen from this zone to bring rebound. But risk will stay on the downside as long as 1.0609 resistance holds. Decisive break of 1.0404 will carry larger bearish implications.

In the bigger picture, price actions from 1.1274 (2023 high) are seen as a consolidation pattern to up trend from 0.9534 (2022 low), with fall from 1.1213 as the third leg. Downside should be contained by 50% retracement of 0.9534 (2022 low) to 1.1274 at 1.0404, to bring up trend resumption at a later stage. However, firm break of 1.0404 will raise the chance of reversal and target 61.8% retracement at 1.0199.

Source: ACTIONFOREX

GEORGE TOWN (Nov 22): Frequent water supply disruptions, high industrial land prices and talent shortages are among challenges faced by the Penang government in its effort to position the state as the Silicon Valley of the East.

Chief Minister Chow Kon Yeow said that challenges for the digital economy sector include the lack of Grade A office spaces or MSC Cybercentre buildings capable of meeting high investor demand, as well as competition from other states and countries in offering attractive incentives.

“Nevertheless, the state government, in collaboration with the federal government and relevant agencies, is working to address these challenges effectively.

“This is to ensure that Penang is the top choice for local and international investors,” he said at the state assembly sitting on Friday.

Chow was responding to a question from Lee Khai Loon (PH-Machang Bubuk), who wanted to know the state government’s efforts to establish Penang as the Silicon Valley of the East.

Chow also said that the state government is actively strengthening its ties with the headquarters of corporate investors, including in the United States (US), which have chosen Penang as their investment location.

The chief minister further said that during his recent investment mission to the US, he had visited companies such as Agilent Technologies, AMD Inc, Brooks Instrument, Centific, Coherent Inc, Cohu Inc, Dexcom Inc and TTM Technologies.

He explained that the state delegation’s visit to these companies aimed to promote Penang as the prime investment destination for the electrical and electronic, semiconductor, medical devices, GBS and other sectors.

“A strong industry and ecosystem are key factors in attracting foreign direct and domestic investments to Penang,” he said.

Source: Theedgemarkets