Good morning from Copenhagen.

After one of the most volatile starts to the year in equities — driven by tighter liquidity trends around year-end, signaling funding stress in the banking system — the traditional Santa rally was effectively canceled, and tax-driven equity selloffs were brought forward. However, we are now seeing a return to more normal market conditions.

Our call on bond yields has not played out as expected through late December and early January. Additionally, our growth models for the US have shifted to the upside, reducing the likelihood of an imminent turn in bond yields.

That said, we anticipate a strong January for risk assets, supported by two key factors:

1. Liquidity has tightened significantly, increasing the chances of a Fed response to inject liquidity.
2. US growth remains resilient.

We enter the week with the following short-term allocation: 

Long US equities: Increasing probability of the Fed altering the liquidity picture to avoid liquidity tightening too much and decent growth picture favors equities throughout January. Equities have held up well against higher bond yields so far, and the correlation between stocks and bonds is slowly turning again after being positive since mid December. Our signals on European equities are a bit more mixed, with France/Italy suffering heavily from Chinese weakness.

Neutral US fixed income / USD: The uptick in growth in our nowcasting models is signaling that US macro surprises could potentially start to turn more upbeat during the course of January, and the NFP print Friday will likely not be as weak as previously anticipated – which doesn’t provide a strong argument for holding USTs / selling the USD. Hiring is still weak however, and we will monitor the labor market closely to find out whether the labor market is simply normalizing or whether it will weaken beyond the pre-covid trend.

Long energy commodities / short industrial metals: We have seen oil break out technically recently, and we are now trading at the upper part of the range which oil has been trapped in for the past 6 months with very strong momentum last week. We expect this momentum to continue into this week, with inventory data and US growth boding well for oil. That said, we are leaning more bearish on everything with a link to China, and metals like iron ore, steel and aluminum will likely continue to suffer.

Let’s have a look at the week ahead and in which direction we lean on key macro events!

European Inflation (Monday/Tuesday)

This week is a significant one for inflation in Europe, with key data releases from Germany, France, and Italy. Last week, we received an early indication of what may lie ahead, as Spanish CPI came in hotter than expected. This was primarily driven by a surge in energy prices in December and base effects from 2023 reflected in the year-on-year figures.

Markets are anticipating strong inflation prints from both France and Germany, and seasonally adjusted data also points to the likelihood of elevated readings. It looks like inflation in Hesse, Germany, has printed incredibly hot. The YoY figure of 2.7% implies a MoM increase of approximately 0.6%, which is significantly above consensus expectations.

However, we won’t receive details on the core or headline components from Hesse, and the remaining regions will not report until later this week.

For once, the nationwide number serves as the guide, and Hesse’s print, if anything, suggests a materially hawkish surprise.

Chart 1.a: German CPI

Chart 1.b: French CPI