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The Week in Global Markets

Global stock markets generally disappointed in the first week of the year:
– In the United States, we saw the worst weekly performance in months out of the S&P 500, Nasdaq, and the Dow Jones Industrial Average, despite a slight move up on Friday. With the relatively positive jobs report released on Friday, yields on 10-year US Treasuries moved back above the 4% mark and 2-year yields rose to 4.4%.
– In Europe, the picture was generally similar, with German, French, and STOXX benchmark stock indices declining. Similarly, the British FTSE 100 index edged down while Italian MIB and Swiss SMI indices climbed slightly higher. German 10-year government bund yields continued the rise they began in the last couple of days of 2023 to reach over the 2% mark again, as the inflation report came out and showed an increase for the first time since the start of 2023. UK yields also rose after the strong US jobs report and in line with other European counterparts.

policy rate overview

In the table that follows, there is an overview of policy interest rates and inflation rates of a select sample of central banks, including the biggest in the world as well as some of the key economies from each region. It factors in the most recent changes and the change did not happen from the previous week, the date of the latest change is also provided. You can also see the highlights of those central banks that met last week or are about to meet and announce an interest rate decision in the coming week.

At the start of the year, none of the central banks covered here have announced policy changes yet. Next week, the Bank of Korea will be making its rate decision – at the end of last year the board members were less hawkish and the policy rate has not been changed since January 2023. The consensus forecast is that it will remain unchanged.

focus on Germany

1. Retail sales
The German Statistical Office reported a disappointing development in real retail sales performance, per preliminary data for November 2023. It appears that even Black Friday and Cyber Monday events could not motivate German consumers, as sales declined 2.5% on a monthly and 2.4% on an annual basis. The full-year result for 2023 is expected to come in at -3.1% versus 2022. Over the last two years, higher prices effectively annihilated consumer confidence and their propensity to spend, which remained depressed until the end of 2023, in stark contrast to the positive real sales growth during the pandemic period.

2. Inflation
Preliminary numbers show that inflation likely edged back up to 3.7% on an annual basis in December (using the Consumer Prices Index – CPI) and 3.8% annually when measured using the Harmonized Index of Consumer Prices (HICP). This was in line with expectations, as there were base effects from energy prices feeding through – year-on-year they went up 4.1% due to the impact of the government emergency measures in support of German households, implemented last winter. Goods inflation rate also went back up, while the disinflation trend in both services and food continued at the end of the year.

3. Purchasing Managers’ Surveys (PMIs)
Across the board, PMI indices continued to show that business activity in Germany was still in contractionary territory as of December 2023. There was a further decline in both employment and activity in the services sector, without an indication of a recovery, and an increase in price pressures. In manufacturing, things are starting to look less bad, gradually, with the sector probably bottoming out at this point and some positive indications coming from the forward-looking indicators and slowing downturn in new orders. However, the situation in the construction sector remains dire, even though there was a slight uptick in the index. Construction companies continue to cut employment and see a renewed impact from rising input costs. Purchasing activity is still down and there is no turnaround in incoming new work as demand remains firmly weakened. These results most likely point to another contraction of the German economy in the fourth quarter.

focus on the euro area

1. Inflation
Flash estimate shows Euro area inflation rate is expected to be higher in December than it was in November as a result of the energy base effect. The rate will likely move up to 2.9% YoY and 0.2% MoM. Core inflation remains higher than the headline rate, as services disinflation seems to have stalled. Food inflation also remains relatively high at 6.1%. From an individual country perspective, the HICP is still above 6% in Slovakia, above 5% in Austria and Croatia, and above 4% in France and Estonia.

2. Purchasing Managers’ Surveys
Euro area PMI for the end of 2023 remained firmly contractionary, as output continued to fall and factory job losses rose further. There was a reduction in new orders and slowdowns in purchases, signaling a possible trough, while business confidence started to tick up slightly. Among the countries with some positive signs are Germany and Italy, although manufacturing is still in a downturn in both countries, just at a slower rate. Italian manufacturers also signaled a drop in volumes of new work from abroad in December. The country that is really underperforming is France – where conditions continued to deteriorate at an accelerated rate, with a deeper overall contraction, further production declines and drops in new orders, as well as more job losses. As a result of weaker demand, there have been some aggressive production cuts there, and fears of a downturn in sales extending further into 2024 have led French manufacturers to stay pessimistic on output prospects for the next 12 months.