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The German composite PMI remains in expansionary territory, but the 51.5 December flash reading (vs 52.4 cons) was the second consecutive pullback from 52.4 in November and 53.9 in October. Manufacturing saw a deeper retracement than services to a 10-month low, but both sector's PMIs were weaker-than-expected.

• MNI: GERMANY DEC FLASH MANUF PMI 47.7 (48.6 FCAST, 48.2 NOV)
• MNI: GERMANY DEC FLASH SERV PMI 52.6 (53.0 FCAST, 53.1 NOV)

The details of the release show plenty of services/manufacturing divergences across subcomponents: 

• Weak export demand dragged on manufacturing orders, potentially an ongoing impact of higher US effective tariff rates.
• Despite the overall services PMI remaining in expansionary territory, the fall in year-ahead business confidence was driven exclusively by that sector – manufacturing confidence rose relative to November. 

Key notes from the release:

• “Total inflows of new business were unchanged in December compared with the month before, after having risen in both October and November. Service providers reported a modest increase in new work that was the weakest in the current three month period of expansion”.
• “Demand conditions meanwhile deteriorated in the manufacturing sector, with new orders falling for the third time in four months and at the quickest rate since January. This partly reflected a deepening decline in factory export sales.”
• “Concerns about the health of the economy, the unsettled geopolitical environment and the competitiveness of German companies weighed on business confidence in December”….“ That said, the overall drop in expectations was driven exclusively by the service sector and masked an uptick in confidence among manufacturers”
• “On the labour market front, December’s flash data indicated a slight reduction in employment”…. “reflecting a pick-up in the pace of job creation in services and a slightly slower decrease in factory staffing levels”
• “Services firms noted the sharpest rise in input prices since February, while manufacturers recorded an increase in average purchasing costs prices for the first time since January 2023”…“ Strong competition for new work led to another modest decrease in average manufacturing output prices in December. However, due to a faster rise in prices charged by service providers, the overall rate of output price inflation ticked up”

Gilts tick lower after wage data came in firm vs. market expectations, although the totality of the labour market report points to ongoing softening on the quantity side and a slowing in wage growth that should at least match BoE expectations, providing no impediment to a rate cut later this week.

• Futures -17 at 91.12 vs. lows of 91.04, with spillover from soft German PMI data providing support in more recent trade.
• Initial technical parameters in the contract remain unchanged
• Recent price action in futures highlights 90.53, the Nov 25/26 low, and 91.93, the Nov 27 high, as the important short-term directional triggers.
• Yields 1bp higher across the curve.
• 2s10s and 5s30s remain ~6bp above respective post-Budget lows after yesterday’s bull flattening.
• GBP STIRs little changed vs. pre-gilt open levels.
• SONIA futures last flat to -2.0, BoE-dated OIS still showing 21.5bp of easing for Thursday and ~61bp of cumulative cuts through ’26.
• UK flash PMI data due this morning, ahead of tomorrow’s CPI data and Thursday’s BoE decision.
• On the supply front, the DMO will come to market with GBP4.25bln of the 4.125% Mar-31 gilt.

• MNI: GERMANY DEC FLASH MANUF PMI 47.7 (48.6 FCAST, 48.2 NOV)
• GERMANY DEC FLASH SERV PMI 52.6 (53.0 FCAST, 53.1 NOV)