FLASH PMIs

Eurozone business activity returns to growth in January

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index moved back above the 50.0 no-change mark in January and signalled the first rise in business activity in the euro area since August 2024. At 50.2, however, the index was up only slightly from the reading of 49.6 in December and pointed to a marginal increase in private sector output.

Looking at the two broad sectors covered by the release, data showed that the overall expansion in business activity was centred on services. Services activity increased for the second month running in January, albeit only modestly and to a slightly lesser extent than in December. Meanwhile, manufacturing production continued to fall. The rate of contraction remained solid, but eased to the weakest since May last year.

There were signs of improvement in the euro area’s largest economy, with business activity in Germany stabilising at the start of the year, ending a six-month sequence of decline. France remained in contraction, but the pace of reduction eased to the weakest since last September. The rest of the Eurozone continued to outperform the largest two economies, seeing a further modest expansion of output, the thirteenth increase in a row. That said, the pace of growth slowed from December.

Limiting the pace of recovery in output across the Eurozone was continued demand weakness. New orders decreased for the eighth consecutive month, albeit only slightly and to the smallest degree since August last year. As was the case with output, a rise in services new business contrasted with an ongoing decline in the manufacturing sector.

Efforts to secure new orders continued to be hindered by particular demand weakness in international markets. New export orders (which include intra-Eurozone trade) have decreased continuously on a monthly basis for almost three years, and the rate of decline remained solid in January despite easing to a six-month low. International new business was down across both monitored sectors

Signs of improvement in business activity meant that staffing levels neared stabilisation at the start of the year. Employment decreased for the sixth consecutive month, but only marginally. The fastest increase in workforce numbers in the service sector for six months was almost sufficient to cancel out a marked reduction in manufacturing employment. Germany and France posted further reductions in employment, while the rest of the euro area continued to register job creation.

As has been the case in each month since April 2023, backlogs of work were reduced in January. Companies lowered outstanding business at a solid pace, but the rate of depletion eased to an eight-month low.

A sharp and accelerated increase in input costs was recorded in January. The rate of inflation quickened for the fourth month running and was the steepest since April 2023. The rise in input prices was also faster than the series average. Although manufacturing input costs rose for the first time in five months, the rate of inflation in the sector was dwarfed by that seen in services where the latest rise was substantial. In fact, the increase in services input costs was the most pronounced in nine months.

The pass through of higher cost burdens to customers meant that output prices rose further at the start of the year. Here too the pace of inflation quickened from December, and was at a five-month high. Charge inflation was led by Germany, where the rate of increase was the fastest since February 2024. The rest of the Eurozone also saw the pace of output price inflation quicken, while selling prices in France decreased for the first time in almost four years.

The ongoing deterioration in manufacturing business conditions was reflected in data on purchasing activity and inventories. Companies reduced input buying for the thirty-first successive month, albeit to the least marked extent since last May. Weaker declines in both stocks of purchases and finished goods were also signalled in January. Meanwhile, suppliers’ delivery times continued to lengthen marginally.

Business confidence was broadly stable at the start of 2025, with companies remaining optimistic that output will increase over the coming year. Sentiment was still weaker than the series average, however. There were contrasting trends at the sector level as manufacturing optimism strengthened to a seven-month high, but services confidence dipped. Sentiment in Germany rose sharply, while confidence at French firms was only just inside positive territory. Strong optimism was signalled in the rest of the Eurozone.

Commenting on the flash PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:
“The kick-off to the new year is mildly encouraging. The private sector is back in cautious growth mode after two months of shrinking. The drag from the manufacturing sector has eased a bit, while the services sector continues to grow moderately. Germany played a major role in improving the eurozone economy, with the composite index jumping back into expansionary territory. In contrast, France’s economy remained in contraction.

“In a surprising twist, employment in the service sector increased more robustly than in December, when it barely grew. It’s also encouraging that services incoming new business, which had either shrunk or broadly stagnated over the last four months, returned to growth. However, the situation remains fragile as outstanding business shrank again, and the same goes for new export business, which includes tourism.

“The manufacturing sector is still in recession, but the pace of decline eased a bit. The sector continues to shed staff rapidly, and new orders are falling too. On the flip side, companies are much more optimistic about the future, envisioning higher output a year from now. This might be an unexpected Trump effect or due to the view that the bottom has been reached after a near two-year recession.

“Ahead of the ECB meeting next week, news on the price front is not encouraging. Cost inflation has increased in the services sector, which ECB president Christine Lagarde has said to monitor closely. Selling prices in the sector have risen at a similar rate to the previous month. Worryingly, input prices in manufacturing have increased, ending four months of stable or decreasing costs. This higher price pressure might be due to the weaker euro and the increased CO2 tax in Germany. In the services sector, it’s likely due to wage increases, which rose in the eurozone at the highest rate since the euro’s inception during the third quarter of 2024, according to Eurostat. However, given the weak state of the economy, the ECB will likely stick to its gradual pace of cutting interest rates, for the time being.”

Japan: Strongest rise in private sector activity for four months

“Manufacturing output fell at the strongest rate since last April. Manufacturing new orders fell at the most marked rate since last July.”

  

Japan Hikes Rates, Solidifying Exit From Rock-Bottom Borrowing Costs

The Bank of Japan raised its key policy rate Friday to the highest level since 2008 and took a more bullish view on the strength of inflation, fueling expectations for more rate hikes and supporting the yen.

Governor Kazuo Ueda and his fellow board members lifted the overnight call rate by a quarter-percentage point to 0.5% at the end of a two-day meeting, according to a statement from the central bank. A hike was almost fully priced into market expectations ahead of the announcement.

The decision to wait until January to hike the rate appeared tied to a need to confirm wage trends, and gauge the initial market reaction to the return of Donald Trump to the White House. The BOJ flagged in its statement the relative stability of current global financial markets as a favorable factor, an indication that it had been monitoring the response to the first days of the new US administration.

“We’ll raise rates and adjust policy if our outlook is realized,” Ueda said in his post-decision press conference, repeating his existing stance. At the same time, he didn’t indicate the BOJ had any specific timing in mind for its next move. “We have no preconception on the pace of rate hikes, given it’s dependent on the future state of the economy and prices,” he said. (…)

The rate hike followed a report earlier Friday showing consumer prices excluding fresh food rising at a faster pace of 3%, well above the central bank’s inflation target.

In its outlook report, the BOJ raised most of its inflation projections, with all six of them currently at 2% or more for the first time since it started publishing them. The confident view on the strength of inflation is likely to reinforce a broad market perception that the BOJ will raise rates at a gradual pace of once every six months or so, provided the yen doesn’t succumb to renewed weakness. (…)

Ueda’s comments on the neutral rate — where policy is neither accommodative or restrictive for the economy — hinted that the BOJ doesn’t necessarily share economists’ view that the end point of the current cycle will be 1%.

“We do think there’s still some distance to the neutral rate” said Ueda, while noting one BOJ analysis that suggested the neutral rate could be somewhere between 1% and 2.5%. “We’ll continue our analysis of the neutral rate, but it’s also a problem that’s very difficult to figure out in real time.” (…)

Trump Tells Davos: Make Your Product in America—or Pay Tariffs President suggests lowering oil price to pressure Russia over Ukraine

(…) “My message to every business in the world is very simple: Come make your product in America and we will give you among the lowest taxes of any nation on Earth,” Trump said in a video address from Washington on Thursday (…). “But if you don’t make your product in America, which is your prerogative, then, very simply, you will have to pay a tariff.”

Expressing frustration at tariffs the European Union places on American farm products and cars, Trump said the bloc treats the U.S. unfairly. “They put tariffs on things that we want to do.” (…)

Trump also sought to take a firmer grip on global affairs, calling on the Saudi Arabia-led Organization of the Petroleum Exporting Countries to lower the price of oil. He suggested such a move could put pressure on Russia to call off its invasion of Ukraine, given much of the Kremlin’s revenue comes from energy sales. (…)

In a Wednesday social-media post, the president urged Putin to sit down for talks and strike a deal. If not, he warned, “I have no other choice but to put high levels of Taxes, Tariffs, and Sanctions on anything being sold by Russia to the United States, and various other participating countries.” (…)

Philly Fed’s January 2025 Nonmanufacturing Business Outlook Survey

The critical data early in 2025 is services employment, wages and prices. Tomorrow we get S&P Global’s flash PMI. Yesterday we got the Philly Fed’s own services survey.

The diffusion index for current general activity at the firm level edged down from a revised reading of 4.6 in December to 2.2 this month. Almost 29 percent of the firms reported increases, slightly exceeding the 27 percent that reported decreases; 43 percent reported no change in activity.

The new orders index rose from -4.6 to 1.6 this month.

Overall, the firms reported mostly steady full-time employment, as the index edged down from 3.2 in December to 1.5 this month. Sixty-four percent of the firms reported steady full-time employment levels, while 16 percent of the firms reported increases, and 14 percent reported decreases.
The part-time employment index fell from 8.9 to -0.3 this month, its lowest reading since March.

Price indicator readings suggest continued increases in prices for inputs, while prices for the firms’ own goods and services fell. The prices paid index moved down 2 points to 28.9. Almost 31 percent of the respondents reported higher input prices, 52 percent reported no change, and 2 percent reported decreases.

Regarding prices for the firms’own goods and services, the prices received index fell from 23.3 to -0.3 after rising 21 points last month. Roughly equal shares of respondents (8 percent) reported increases and decreases in prices received. Most of the firms (71 percent) reported no change in prices for their own goods and services.

The Daily Shot has the most important chart:

• Business Inflation Expectations Increased to 2.2 Percent

From the Atlanta Fed:

Firms’ inflation expectations for the coming year increased to 2.2 percent. Sales levels compared to “normal times” remained unchanged, but profit margins decreased, according to the Atlanta Fed’s latest Business Inflation Expectations survey.

Federal Reserve set for an extended pause

(…) In fact, the risk is that the Fed is actually more hawkish than they indicated. The convention has been that potential government policy changes aren’t typically factored into forecasts until they have been implemented. However, with President Trump having just won re-election and his policy plans differing so starkly from President Joe Biden’s, Fed Chair Jay Powell acknowledged that some felt the need to incorporate the potential policy shifts into their December 2024 projections ahead of time. However, not all did and since his inauguration, there has been little sign of any moderation in Trump’s key policy thrust.

President Trump wants to ensure a low taxation environment with light touch regulation in order to boost growth prospects while implementing tariffs to improve US manufacturing competitiveness and promote re-shoring of economic activity. At the same time, trade protectionism will raise prices in the near term while immigration controls could prompt some labour shortages in sectors such as agriculture and construction that also add to inflation pressures. Consequently, Fed officials will likely need to see a marked slowdown in job creation and cooler inflation pressures to justify cutting rates further.

That means no change to monetary policy is a certainty on 29 January and it makes our previous call of a March rate cut look unlikely – currently just 6bp of a 25bp move is discounted by financial markets.

Macrobond, Bloomberg, ING

IMF Raises U.S. Growth Estimates The agency reduces growth projections for big European economies, Canada

The United Nations financial agency raised its estimate for full-year U.S. growth in 2025 to 2.7%, up from 2.2% in the previous round of projections from October. Meanwhile, growth expectations for big European economies such as Germany’s, France’s and Italy’s were all downgraded, as was Canada’s.

The estimates underscore a potent formula that has powered the U.S. economy through a turbulent global backdrop: a stretch of strong productivity growth, a labor market that has softened but stayed resilient, and a largely effective policy response to rising prices from the Federal Reserve.

The IMF projects that American gross domestic product expanded by 2.8% in 2024, after rising by 2.9% a year earlier. That vastly outpaced the eurozone, which likely recorded a 0.8% growth rate last year. (…)

In Europe, countries such as France and Germany have experienced an energy crisis that followed the outbreak of war in Ukraine, and manufacturers, especially in the car industry, are contending with an influx of Chinese imports.

Businesses in the U.K. are girding for higher taxes as financial markets exert pressure on the government to discipline its spending.

In Canada, weaker natural-gas prices have hit the country’s important energy sector. As in the U.S., the labor market cooled through 2024, but from a weaker starting place. Canada’s estimated 2024 growth was 1.3%, according to the IMF.

In addition to regional setbacks, these economies have also been largely passed over by notable growth in U.S. labor productivity, a trend that promotes low-inflation growth and that American economists are still working to understand fully.

(…) increasingly, the split between the U.S. and Europe looks like something different: evidence of structural divergence between the regions that could push the U.S. even further ahead, he wrote.

“Over time, this translates into higher returns on U.S. investment, increased inbound capital flows, a stronger dollar and U.S. living standards pulling away from those of other advanced economies,” Gourinchas wrote. (…)

Global inflation-adjusted growth is projected to stay steady at 3.3% both this year and next. The agency thinks that inflation around the world could fall to 4.2% in 2025, from 5.7% last year—and fall further to 3.5% in 2026.

Cooler inflation should generally allow global central banks to ease interest rates down toward more neutral levels, putting the worldwide economy closer to an equilibrium, the IMF said. (…)

The IMF sees China’s full-year growth roughly in line with other emerging markets next year, at 4.6%. But the agency warned that the country could fall into a deflationary trap if fiscal and monetary stimulus aren’t strong enough to boost the country’s economy.

The World Bank:

The World Bank raised its growth forecast for the U.S. in 2025 to 2.3% from 1.8%, and its forecast for China to 4.5% from 4.1%.

But it lowered its growth forecast for developing economies other than China to 3.8% from 4%, a rate of expansion that makes it difficult for them to catch up with the income levels enjoyed in developed economies.

“All of our studies indicate a declining growth potential across the board,” said Indermit Gill, the World Bank’s chief economist. “One of the bright spots is the U.S.. The other bright spots are India and Indonesia and a few others. But in general it’s a bleak picture.”

The World Bank estimates that an increase in U.S. tariffs of 10 percentage points would reduce global economic growth to 2.5% this year. If other countries retaliate by raising tariffs on imports from the U.S., growth would cool further, to 2.4%. (…)

Developing economies account for a larger share of global economic activity than they did in 2000, generating 45% of global GDP, up from 25%. And as their share of activity has increased, so has trade between them, with 40% of exports from developing economies now going to other developing countries, compared with 20% in 2000.

But while large developing economies such as China, India and Brazil matter more for the fortunes of other developing economies than they did at the start of the century, the big developed economies—the U.S., the eurozone and Japan—still matter more, about twice as much, according to World Bank estimates.

“The welfare of developing economies, in short, is still strongly tied to growth in the big three advanced economies,” the World Bank said.

Trump’s Arrival Brightens U.S. Outlook, Darkens Everyone Else’s The bankers, government officials and CEOs at Davos see his deregulatory, energy and tariff policies sucking investment from other regions and hurting their exports

When participants at the World Economic Forum look at President Trump’s plans, they become more optimistic about the U.S. and more pessimistic about the rest of the world, especially Europe. (…)

His agenda could extend that outperformance by making the U.S. the preferred destination for foreign investment via lower taxes and regulation and even cheaper energy, while his promised tariffs hurt others’ exports. (…)

One particular source of anxiety in Europe is that its top companies will move to the U.S. in search of higher stock valuations, less regulation and kinder treatment by Trump.  (…)

Share of U.S. companies in China looking to relocate hits a record high, survey finds

About 30% of the respondents considered or started such diversification in 2024, surpassing the prior high of 24% in 2022, according to annual surveys from the American Chamber of Commerce in China.

That also exceeded the 23% share reported for 2017, when U.S. President Donald Trump began his first term and started raising tariffs on Chinese goods. (…)

While India and Southeast Asian countries remained the most popular destination for relocating production, the survey showed 18% of the respondents considered relocating to the U.S. in 2024, up from 16% the prior year.

The majority of U.S. companies did not plan to diversify. Just over two-thirds, or 67%, of respondents said they were not considering relocating manufacturing, a 10 percentage point drop from 2023, the survey showed.

The latest AmCham China survey covered 368 members from Oct. 21 to Nov. 15. Trump was re-elected U.S. president on Nov. 5. (…)

Competition from local state-owned companies or privately owned Chinese companies was the second-biggest challenge for U.S. businesses operating in China, according to the survey. (…) About a third of businesses reported unfair treatment in China compared with local firms, particularly in relation to market access and public procurement. That was around the same level as last year.

The proportion of companies no longer listing China as a preferred investment destination climbed to 21%, doubling from pre-pandemic levels, the survey said.

In the WSJ:

Like Europe, China faces headwinds; tariffs would be just one more.

China’s problem “is not Trump,” said Keyu Jin, a British-based economist specializing in the Chinese economy. “It’s the unemployment numbers. So many companies going under. So much debt the government owes to the private sector. The problems with young people. The ‘lying flat’ problem.”

She said Chinese authorities know the economy needs stimulus, but face a dilemma: “How do you stimulate in the right way” without a “debt explosion?”

Some key charts illustrating China’s challenges. You can get Apollo Management’s complete China chartbook from the link on the sidebar.

Chinese are notorious high savers, but they are now also debtors, mostly mortgages which need to stay above water…

Private entrepreneurs are also feeling the pinch …

… and banks:

This needs to improve for everything else to improve:

AI CORNER

Salesforce chief predicts today’s CEOs will be the last with all-human workforces

The rise of generative AI “agents,” which Benioff described Wednesday as “digital labor,” is among the next wave of advancements for the tech. “We are really moving into a world now of managing humans and agents together,” he said, highlighting his own company’s Agentforce.

Salesforce launched Agentforce in September, with Benioff applauding the technology at the time as “AI as it was meant to be.”

• “Because I’m using Agentforce, I just have that much more productivity,” he told Axios Wednesday, highlighting the increased ability of his Agentforce to resolve support inquiries.
• He added he’s thinking of ways to “redeploy” support agents in sales positions because those employees “don’t have as much to do because Agentforce is so productive for them.”

He also claimed Wednesday that Microsoft “has really disappointed everybody with this CoPilot.” (…)

President Trump, Crypto Billionaire His new family tokens, which have soared in value, are courting legal and political trouble.

The WSJ Editorial Board:

Donald Trump doesn’t always separate his personal interests from his public obligations, and a howling example is his sudden new status as a crypto billionaire. The President is inviting trouble with what looks like remarkably poor judgment.

(…) Mr. Trump and his family have tried to cash in on the mania by minting Trump-branded coins.

On Friday, as a private citizen soon to be President, Mr. Trump announced sales of his $TRUMP crypto token. “It’s time to celebrate everything we stand for: WINNING!” he posted on X.com. Melania Trump debuted her own coin on Sunday. Step right up, Americans, you can’t lose betting on $TRUMP. But what happens when some inevitably do? (…)

Twenty percent of Trump tokens are currently available for trading on crypto exchanges. Trump Organization affiliates hold the other 80%—worth $31.4 billion at its trading price late Wednesday—which is subject to a three-year unlocking schedule. (…)

All of this creates flashing-red political risks and ethical conflicts. Start with who may be buying the tokens. A business or foreign official with interests before the federal government might seek to curry favor with Mr. Trump by announcing plans to buy millions of his token to pump up the price. Or, worse, whispering to Mr. Trump that he’s made the purchases, since crypto holdings aren’t disclosed. If Mr. Trump’s regulators then act in a way that aids crypto or the person seeking the favor, he’ll be accused of aiding the buyer in service of presidential self-dealing. (…)

No careful President would get anywhere near this kind of political risk, and we can’t recall any President who has. Where are Mr. Trump’s lawyers? In his first term, Mr. Trump was often deterred from some of his worst impulses by legal advisers who saw their job as serving the Presidency as much as this President. The crypto caper is a worrisome sign that Mr. Trump’s current advisers don’t understand the difference any better than he does, or that they are too cowed to speak up.

El Chapo Claims He Was Jan 6 Rioter

In a bid for a presidential pardon, Joaquín “El Chapo” Guzmán claimed on Thursday that he had participated in the Capitol insurrection on January 6, 2021.

The imprisoned drug lord did not explain how he managed to appear in DC for the riot, saying only, “As a felon, I ask President Trump to pardon me out of professional courtesy.”

Vowing that he was ready to turn over a new leaf, he asserted, “If pardoned, I promise to stop selling drugs and will focus on crypto.”

In his closing argument, El Chapo acknowledged he was a controversial figure but added, “I’m not some total maniac like Hegseth.”