Weekly Focus – Strong Activity ahead of Slowdown

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Markets largely reflected strong macro news this week until fears of a new COVID-19 variant / mutation (B1.1.529) observed in South Africa hit a risk sentiment.. USD continued to strengthen amid strong U.S. data and the re-appointment of Jerome Powell by President Biden as Fed chair. At the same time, COVID-related restrictions weigh on the euro. Yields rose through the week due to a rebound in economic activity and hawkish comments from ECB governing council. In the news of B1.1.529, they fell again and Bunds hit last week’s lows. It was a somewhat quick week for stocks with global indices down the board due to COVID fear after a week with VIX volatility highest since early October. There is also a strong macro news side for stock markets these days as it brings us closer to monetary tension.

In anticipation of a coordinated release of strategic oil reserves from the United States, China, Japan, India and South Korea, oil prices traded lower, but ultimately the release was not enough to meet expectations and oil rose back to levels around USD82 per barrel before plunging to 78 levels amid B1.1.529 fear.

The European economy is doing better than expected with the November eurozone PMI surprisingly on top. In particular, the service sector picked up pushing a composite PMI higher for the first time since the reopening smoke slumbered in July. However, German Ifo figures indicate a slowdown in the coming months especially in the service sector, as further restrictions are hidden ahead and consumer confidence is going lower in Germany, and in the euro area, as high inflation erodes purchasing power. COVID-related restrictions are spreading across Europe as the number of cases grows in many places. This will inevitably weigh on the service economy.

We have seen strong macro data also outside Europe with U.S. initial unemployment claims below 200,000 for the first time since the pandemic. October consumer spending and capex orders were also strong. The recent recovery in Japan is also solid with increases in both manufacturing and service PMI indicating slight supply chain problems and a strong rebound from the reopening of the economy on 1 October.

Next week markets will start setting the November inflation figures for Spain and Germany on Monday and then the euro area on Tuesday. We expect a small increase of 4.1% to 4.2% in the main HICP inflation of the euro area. We will also pay attention to possible new restrictions in Europe. The Netherlands and Austria are already locked up and more countries could follow.

In the U.S., we also have several key releases next week, most notably the jobs report, but also ISM manufacturing and ISM non-manufacturing. In China, we expect another weak release of PMI. On the oil market, all eyes will be on OPEC, as the group said earlier that they consider release of strategic reserves unjustifiable from market conditions and could respond by reconsidering plans to add supply to the market.

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