The main release this week was US inflation, which surprised slightly to the upside with core inflation coming in at 3.9% y/y (consensus 3.8% y/y) as service inflation is still proving sticky. It contrasts with the signals in the euro area where we have seen a clearer decline in core inflation, see Global Inflation Watch – diverging signals in December. Recently, a rise in freight rates poses moderate upside risks to goods price inflation. An airstrike on Houthi rebels in Yemen by the US and UK on Friday marked an escalation of the situation in the Middle East and a risk of further widening of the conflict in the region.
German industrial production (IP) dropped 0.7% in November, the seventh monthly decline, highlighting the strong underperformance of German industry this year. French IP increased 0.5% m/m in November. Despite the manufacturing woes, euro area unemployment declined to a new record low in November, at 6.4%, illustrating a still very tight labour market. EU sentiment data showed a rise in service confidence, and decent activity in the service sector partly explains the robust labour market. It also puts the ECB in a dilemma, as inflation momentum is broadly in line with its 2% target but tight labour markets and high wage growth make it too early to declare victory on inflation.
Despite a US inflation print on the high side US bond yields declined this week whereas German yields increased. Stock markets regained some positive momentum after the small setback in the first week of 2024. EUR/USD moved broadly sideways at just below 1.10.
EU-China trade tensions continue to simmer as China this week started an anti-dumping investigation on EU brandy. It looks like retaliation for the EU’s anti-subsidy investigation on Chinese EVs and an attempt to temper EU restrictions on China.
Over the weekend, focus will turn to the Taiwan election on Saturday with the election of a new President as well as the parliament (Legislative Yuan). Polls are not allowed 10 days before the election but the most recent surveys show a tight margin between the ruling party DPP’s Lai Ching-te (36%) and KMT’s Hou Yu-ih (31%). A victory for Lai would point to more of the same, with an independence-leaning stance, whereas a victory by Hou could ease tensions in the Taiwan Strait, as KMT has a less confrontational stance towards Beijing. However, even if Lai wins, China-Taiwan tensions might ease, as Lai will have a weaker mandate to confront China than the current president Tsai Ing-wen, who got support from close to 60% of the voters in 2020. DPP will likely also lose its majority in the Taiwanese parliament, as a fairly new Party, Taiwan’s People’s Party (TPP), and its leading candidate, Ko Wen-je, have close to 25% support in the polls.
In the US, politics will also be in focus next week as the US election year kicks off Monday with the Iowa Republican Caucuses. Prediction markets see Trump as the clear favourite to win the Republican candidacy, and he is projected to win over half of all votes in Iowa according to the latest polls. The Iowa caucuses are often seen as a bellwether of the rest of the spring, and either of Trump’s closest challengers, Ron DeSantis or Nikki Haley, would likely have to come out as a close runner-up to maintain their hopes of clinching victory in the end. On the economic front, US retail sales and Chinese GDP for Q4 23 will be in the spotlight. China will also release home sales for December, a key gauge of the state of the housing crisis which so far has shown no signs of bottoming. On inflation, Japan will take centre stage on Friday with the December CPI print.
