Signs of resilience in the Eurozone economy

Euro area consumer confidence rose to -20.9 in January from -22 in December, its highest level in almost a year. Although the January reading was slightly lower than consensus expectations of -20, the improvement between December and January may provide further evidence of a more resilient economy than previously anticipated.

Bundesbank president and ECB governing council member, Joachim Nagel, has reportedly made comments to suggest that he thinks the ECB will manage to bring inflation under control without causing a recession in the Eurozone. The ECB is due to make its next interest rate decision on the 2^nd of February, where they are broadly expected to raise rates by a further 50bps. Peter Kazimir, is the latest governing council member to add to the growing chorus of ECB officials pushing back on the idea that a moderation in inflation will soon justify smaller rate hikes. Kazimir suggested that another two 50bps hikes will be needed.

CPI inflation in Lebanon was at 122.0% y/y in December, a slowdown from 142.4% the previous month, but on the monthly measure price growth accelerated, from 3.7% m/m in November to 6.7%. CPI inflation averaged 183.8% in 2022, compared with an average 150.6% in 2021. After inflation peaked in January last year we anticipate that the slowdown will continue this year, forecasting an average rate of 90% y/y.

The US Conference Board leading economic index fell by a greater than expected -1% m/m in December. Expectations had been for a -0.7% fall. The index, a combination of 10 leading indicators of economic activity in the US, is now down -4.2% between June and December 2022. This pace of decline is significantly faster than the -1.9% seen in the first half of 2022.  The historical correlation of the leading index and periods of recession, suggest that the current falls are consistent with the US economy entering a recession in the near-term.

Today’s key economic data and events

• 13:00 S&P Global Eurozone composite PMI (Jan P) forecast 49.8
• 13:30 S&P Global/CIPS UK composite PMI (Jan P) forecast 48.9
• 18:45 S&P Global US composite PMI (Jan P) forecast 47

Fixed Income

• US treasuries drifted lower at the start of the trading week with no material catalyst in the Fed’s blackout period ahead of next week’s FOMC meeting. Yields on the 2yr UST added about 6bps to 4.2274% while the 10yr yield added 3bps to 3.5098%.
• European bonds also came under selling pressure as hawkish ECB officials raised the prospect of a string of 50bps hikes at upcoming meetings. Yields on 10yr bunds added 3bps to 2.197% while French 10yr yields added about the same. Gilts were the only major gainer among developed market bonds overnight with a 1bps drop in yields.

FX

• Currency markets showed no major conviction overnight with the dollar index edging up slightly. EURUSD gained for a fourth day running, up 0.2% at 1.0872 while GBPUSD turned lower, falling by about 0.2% to 1.2379. USDJPY also moved higher with the yen weakening by 0.8% to close at 130.67.
• Commodity currencies were more resolute in gains with AUDUSD up 0.9% at 0.7029 while NZDUSD added 0.3% to 0.649 and USDCAD dropped 0.1% to 1.3368.

Equities

• Trading in Asia was limited on Monday with Chinese and South Korean markets closed. In Japan, though, the sentiment was fairly bullish as the Nikkei closed up 1.3% and the Topix 1.0%. Indian markets were also positive as the Sensex and the Nifty both ended the day 0.5% higher.
• There were solid gains in Europe even as ECB officials continued to peddle the hawkish narrative as the economic outlook begins to look not quite as bad as previously feared. The CAC and the DAX both closed up 0.5%. In the UK, the FTSE 100 added 0.2%.
• US equity markets also closed higher with the Dow Jones, the S&P 500 and the NASDAQ adding 0.8%, 1.2% and 2.0% respectively.
• Locally, the DFM closed down 0.1% and the ADX 0.3%. In Saudi Arabia the Tadawul and Egypt’s EGX 30 both closed 0.4% higher.

Commodities

• Oil prices kept their bullish momentum intact at the start of the trading week with a 0.6% gain for Brent future to USD 88.19/b and WTI adding 0.4% to USD 81.62/b. Both contracts are on track to end January with a monthly gain, with Brent up 2.7% year to date and WTI adding 1.8% since the start of the year.

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