London Pre-Open: Stocks Seen Down as Investors Mull Retail Sales, Borrowing Data

In focus today

In the euro area, we get data on consumer confidence for December. Consumer confidence has been on a rising trend the past two years but in November it unexpectedly declined. It will be very import for the growth outlook to see if the decline was just a blip or it continued in December as we expect private consumption to be the main growth driver in 2025.

From the US, November Private Consumption Expenditures (PCE) are due for release today, including the Fed’s preferred measure of inflation. The CPI measure released earlier pointed towards relatively steady inflation pressure in November.

In the US, we will also keep an eye on Congress, which will have to find a deal to avoid a government shutdown, after the House of Representatives voted down the latest version of a funding bill last night.

In the Nordics, we will look out for consumer and business sentiment in Sweden and Denmark.

We also get retail sales, wage data and PPI inflation in Sweden.

Economic and market news

What happened overnight

Japanese November CPI inflation excl. fresh food increased to 2.7% from 2.3% in October. Core inflation increased to 1.7% from 1.6. The underlying price pressure has been stronger in H2 and largely aims with the 2% inflation target. The unwillingness from the BoJ to raise rates further stems from a worry that wage growth will fade in the spring leaving price pressures back where they have been for decades, close to zero. This has added further to downward pressures on the yen triggering verbal intervention from the Japanese finance minister and top currency diplomat.

What happened yesterday

The Riksbank cut the policy rate by 25bp to 2.5% as widely expected but the signals for the future were more hawkish as the Riksbank expects only one more cut during H1 2025. In the rate path, the implied probability is rather evenly distributed between the January and March meetings, but with the overall communication saying they will have “a more tentative approach” and “carefully evaluate the need for future interest rate adjustments” it seems more likely than not that the Riksbank is ready to pause in January, in our view. We therefore have adjusted our call and now expect 25bp cuts in March and June, resulting in an end point of 2.00% (previously 1.75%). At the press conference, Thedéen commented that current policy is likely somewhat stimulative and that once the policy rate reaches 2.25% by Q1 next year, the risks are actually balanced putting an equal probability between cuts and hikes from there. We firmly believe there are more downside risks to the Riksbank’s main scenario.  We now expect two cuts in March and June to 2.0% (previously 1.75%), 19 December.

Also in Sweden, there are plenty of interesting data. We start off with retail sales data for November, and here we will hopefully see more signs of the long-awaited recovery for household consumption. We also get wage data for October and PPI data for November, where the latter will likely see a rise due to higher energy prices (all released at 8.00 CET). At 9.00 CET, we will get a new set of NIER confidence data, and here we also expect to see a continued improvement in sentiment among both households and manufacturing sector. As always, attention will also be on price expectations and hiring plans. NIER will also release new set of economic forecasts at 9.15 CET.

Norges Bank left policy rates unchanged in a decision widely expected by analysts and markets. Importantly the Norwegian central bank firmed its guidance towards a March 2025 rate cut – the first in the cycle – by presenting a rate path suggesting a close to 100% probability of a 25bp rate reduction conditioned on the central bank’s economic projections materialising. Norges Bank notably did not suggest that rates could be cut in January. Further out Norges Bank guided towards three cuts in 2025 although with an elevated risk of a fourth cut. We continue to pencil in the first cut in March alongside three additional rate cuts in 2025 and four cuts in 2026.

The Bank of England also agreed to keep rates unchanged as expected. The decision was taken with three board members voting for a cut, which was a surprise. That said, BoE continues to emphasise a gradual approach to reducing the restrictiveness of monetary policy. We think this supports our base case of the next cut coming in February and a quarterly pace after that.

FI: European curves steepened from the long end mirroring the US yields’ reaction to the FOMC meeting on Wednesday night. However, it was a gradual move through the day, thus it was with some delay that we saw the full effect. With the final central bank meetings of the year behind us, and only a few trading sessions left for the year, we expect a relative tight trading range in coming days, with focus on the supply announcements for next year. Yesterday, the French Tresór said that they plan to sell EUR300bn next year, which is unchanged from the October plan. BoE’s dovish tilt (6-3 split vote for unchanged) relative to market expectations sent UK yields somewhat lower on the day,  we stay positive GBP.

FX: As expected, the Riksbank lowered the policy rate by 25bp to 2.50% and indicated only one more cut in H1. A hawkish cut which strengthened the SEK and supported our call for tactical downside in EUR/SEK. EUR/SEK dropped some ten figures towards the lower end of 11.40’s before erasing some of the losses in the Asian session. Meanwhile, NOK/SEK was down 1.5 figures to below 0.9650. Norges Bank did not rock the boat, but the NOK traded on the defensive as focus shifts to the looming easing cycle that will probably start in March. The selloff in EUR/USD paused in the European session but as US trading opened the cross dived below 1.04 again and is now back close to 1.0350. The relentless selling of the JPY has continued, and USD/JPY was on the verge to break above 158. This morning Japan FM Kato expressed concerns and talked about appropriate action if there are excessive moves. Sterling was lower after Bank of England’s dovish voting split to keep rates unchanged.

The EUR/GBP cross drifts higher to near 0.8300 during the early European session on Friday. The Pound Sterling (GBP) weakens after the downbeat UK Retail Sales data. 

Data released by the Office for National Statistics on Friday showed that UK Retail Sales rose 0.2% MoM in November versus a 0.7% decline in October. This figure came in below the market consensus of a 0.5% increase. On an annual basis, Retail Sales climbed 0.5% in November, compared to a rise of 2.0% (revised from 2.4%) prior, missing the estimation of 0.8%. The GBP attracts some sellers in an immediate reaction to the downbeat UK Retail Sales and acts as a tailwind for the EUR/GBP cross. 

On the Euro front, the European Central Bank (ECB) is likely to continue to lower its key interest rate next year. The ECB Governing Council member Gediminas Simkus said on Thursday that the central bank should keep lowering borrowing costs at the current pace as inflation is increasingly under control. ECB President Christine Lagarde said ECB policymakers would keep cutting interest rates if forthcoming inflation data aligns with anticipations.

The ECB will hold its first rate-setting meeting of 2025 on January 30. Investors envisage a slightly more aggressive path of the ECB easing cycle next year, which might weigh on the Euro against the GBP.

Source: FXSTREET

Why did the team downgrade its STOXX 600 target prices for the next year?

What sectors are you optimistic about?

Do lower rates also benefit smaller companies rather than bigger ones?

How might exchange rates impact European stocks?

In terms of economic performance, which region is most important for European companies: the US, the EU, or China?

How do you think lower interest rates and inflation will impact European stocks?

How has the strong performance of US equities impacted European stocks?

Korea's financial authorities said on Friday they would loosen foreign exchange regulations and allow more corporate borrowings abroad, in a bid to defend the won that is trading at a 15-year low with improved liquidity.

"Strict regulations restrain the efficiency of foreign exchange management, and there is a need to take into account worsened foreign exchange liquidity conditions after recent events," the finance ministry said in a joint statement with the central bank and regulatory agencies.

The Korean won dropped on Thursday to its weakest level in 15 years, weighed down by risk-averse sentiment after the U.S. Federal Reserve's cautious stance on more interest rate cuts, as well as domestic political uncertainty stoked by President Yoon Suk Yeol's short-lived martial law order on Dec. 3 and his subsequent impeachment.

According to the statement, measures include allowing companies to take out loans in foreign currencies and exchange the funds for the won, if they are used for investing in facilities such as equipment, property and land purchases.

"It is a paradigm shift in foreign exchange policy, from regulating external debt, to inducing more foreign inflows," a finance ministry official told Reuters by phone.

Traumatized by capital flight during the 1997-1998 Asian financial crisis and the 2007-2008 global financial crisis, Korea has had a tight grip on foreign exchange borrowings even as it has encouraged overseas investments.

At the end of September, the country held a record high of a net $977.8 billion in financial assets abroad, after turning a net creditor in 2014.

"We will continue to loosen regulations on capital inflows from the private sector unless it affects external debt or credit ratings in a negative way," the official, who did not wish to be identified because the person was not authorised to speak to media, said.

The ministry also said the ceiling of foreign exchange futures contracts would be raised to 75 percent of capital holdings for local banks and 375 percent for Seoul branches of foreign banks, from the current 50 percent and 250 percent, respectively.

"They are clearly tools for controlling the weakening pace of the local currency by easing the strain in foreign exchange liquidity," said Park Sang-hyun, an economist at iM Securities.

"But, there will be limitations, as unfavourable external conditions, from U.S. policy to China risks, are putting pressure on all emerging currencies, not just the won," Park said.

The ministry said it would implement the measures in a swift manner and consider expanding them after reviewing the effects. (Reuters)

Source: Koreatimes

The USD/CHF pair holds positive ground around 0.8980 during the early European session on Friday. A hawkish rate cut from the US Federal Reserve (Fed) and stronger US economic data boost the Greenback against the Swiss Franc (CHF). The attention will shift to the release of the US Personal Consumption Expenditures (PCE) Price Index for November, which is due later on Friday. 

The US central bank cut the interest rate by 25 basis points (bps) as widely expected. Nonetheless, the Fed signaled a more hawkish stance on its easing cycle next year. The Fed's dot plot, a chart that projects the future path of interest rates, indicated a half-percentage point rate cut in 2025, compared with a full percentage cut projected in September. According to the Summary of Economic Projections (SEP), or “dot plot”," the Fed intends to reduce the number of interest rate cuts next year from four to just two quarter-percent cuts.

The upbeat US economic data released on Thursday has contributed to the USD’s upside. The third estimate reading released by the Bureau of Economic Analysis showed that the US Gross Domestic Product (GDP) grew at a 3.1% annualized rate in the third quarter (GDP), compared to a previous projection of 2.8%. Additionally, the US weekly Initial Jobless Claims declined to 220K in the week ending December 14, compared to the previous week's print of 242K, and came in below the market consensus of 230,000.

On the Swiss front, the Swiss National Bank (SNB) is expected to deliver a further interest rate cut in March 2025 to 0.25% following last week’s 50 bps reduction in the key interest rate. "The SNB softened its forward guidance for possible further cuts. But with the latest move, the SNB likely cemented the market expectations for lower rates," noted Alexander Koch, head of macro and fixed income research at Raiffeisen.

Meanwhile, the ongoing geopolitical tensions in the Middle East and the conflict between Russia and Ukraine could boost the safe haven flows, benefiting the CHF. Israel's military carried out devastating attacks on Houthi targets in Yemen early Thursday, just hours after the Iran-backed terrorist group's latest attack on Israel. Israel's military claimed that the strikes were in retaliation for Houthi missile and drone attacks on Israel over the past year, most of which were intercepted, per CNN. 

Source: FXSTREET

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six other major currencies, maintains its position near 108.50, the highest level not seen since November 2022. This follows the Federal Reserve's (Fed) hawkish 25 basis point (bps) rate cut on Wednesday, which lowered its benchmark lending rate to a two-year low of 4.25%-4.50%.

The US Dollar strengthened as US Treasury bond yields surged by more than 2.50% on Wednesday, following the Fed's emphasis on exercising caution regarding additional rate cuts. Fed Chair Jerome Powell explained that the central bank would be wary of further cuts, as inflation is expected to remain persistently above the 2% target. As of writing, the 2-year and 10-year yields stand at 4.30% and 4.56%, respectively.

The Fed's monetary policy statement indicated that economic activity remained robust while noting that labor market conditions had softened. The Fed's Summary of Economic Projections (SEP), or "dot-plot," forecasted only two rate cuts in 2025, a reduction from the four cuts projected in September.

In the United States (US), data showed on Thursday that the US Gross Domestic Product (GDP) Annualized reported a 3.1% growth rate in the third quarter, surpassing both market expectations and the previous reading of 2.8%. Additionally, Initial Jobless Claims dropped to 220,000 for the week ending December 13, down from 242,000 in the prior week and below the market forecast of 230,000.

Traders will likely observe key economic figures from the United States including Personal Consumption Expenditures (PCE) and Michigan Consumer Sentiment Index data, scheduled to be released by the US Bureau of Economic Analysis on Friday.

Economic Indicator

Core Personal Consumption Expenditures - Price Index (MoM)

The Core Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The PCE Price Index is also the Federal Reserve’s (Fed) preferred gauge of inflation. The MoM figure compares the prices of goods in the reference month to the previous month.The core reading excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.

Frequency: Monthly

Consensus: 0.2%

Previous: 0.3%

Source: US Bureau of Economic Analysis

Why it matters to traders?

After publishing the GDP report, the US Bureau of Economic Analysis releases the Personal Consumption Expenditures (PCE) Price Index data alongside the monthly changes in Personal Spending and Personal Income. FOMC policymakers use the annual Core PCE Price Index, which excludes volatile food and energy prices, as their primary gauge of inflation. A stronger-than-expected reading could help the USD outperform its rivals as it would hint at a possible hawkish shift in the Fed’s forward guidance and vice versa.

Source: FXSTREET