Market movers today
Today we have a lot of important data releases across markets, with a slight disappointment in PMIs out of China (see below) setting the scene for the day.
In the euro area, we are due to get the Q1 GDP print, which we expect to show how much the weak manufacturing sector has dragged down growth at the start of the year. The service sector has been strong on the back of rising domestic demand though and we expect a 0.3% q/q print. Also in the euro area, the German inflation print will give us a glimpse of where Friday's euro-area inflation print is heading. Last month, inflation fell on the back of seasonal effects from the timing of Easter - we expect the print to rebound on the back of this effect and due to rising energy prices.
The Hungarian central bank (MNB) is due to announce its rate decision today. At the March meeting, the central bank kept its key rate unchanged and hiked the overnight deposit rate by 10bp to -0.05% to respond to hawkish market expectations. We expect the loose monetary policy to continue and look for no key rate changes today but the prospect of further implicit tightening through liquidity tools remains.
In the Scandi region, we are due to get retail sales and unemployment data from Norway and data on house-price developments in Denmark.
Selected market news
Overnight, Chinese PMIs were weaker than expected: official (NBS) manufacturing PMI fell to 50.1 in April (50.5 in March), short of expectations it would be unchanged after a significant jump in March. The fall was broad based, with the new orders sub-index down a little, however, the export orders component rose, suggesting external demand may be improving somewhat. The non-manufacturing index also fell, to 54.3 (54.8 in March), disappointing against expectations of a small rise. The private (Caixin) manufacturing PMI fell to 50.2 (50.8 in March) after a strong rebound in previous months - its non-manufacturing counterpart is not due until next week. Overall, while Chinese PMIs disappointed and hinted that at this stage we have nothing more than a fragile stabilisation in Chinese activity, we stress (i) some weakness was to be expected after the rebound in recent month(s), (ii) all indices are above the 50 boom/bust level and (iii) an extensive trade deal in Q2 should help stabilise China into H2.
Ahead of the PMI disappointments out of China, risk sentiment was off to a good start in US hours with S&P 500 rising just shy of the 2,950 mark and reaching a new record close, as US data on Monday afternoon left the impression of muted inflation amid healthy consumer spending. However, in US after-hours trading, Google conglomerate Alphabet (NASDAQ:GOOGL) missed revenue estimates. In the Asian session, Korean electronics giant Samsung (KS:005930) missed analyst expectations. US Treasury yields initially rose and ended the day a few basis points higher across the curve, with the sell-off concentrated at the long end. USD weakened and EUR/USD held up towards the 1.12 mark despite Chinese weakness. Crude oil was steady around USD71.50/bbl for Brent.
Next up is the Fed, which is widely expected to keep rates unchanged but its description of the economy and what it needs could be key in setting the scene for risk assets.
Scandi markets
Norway. There have been considerable monthly variations in retail sales since the autumn but the underlying trend has been weak since spring 2018. We think this weakness is largely a result of extremely high power prices sharply eroding purchasing power over the period. Forward power prices suggest a substantial decrease in inflation in H2, which, together with higher wage growth, would bring a clear improvement in purchasing power. This effect is unlikely to affect retail sales this time around but we still expect an increase of 1.0% m/m as a rebound from the weak February figures. We expect the LFS unemployment rate to fall marginally to 3.8%.
Fixed income markets
We have Italy in the market today with taps in the 5Y, 10Y and 6Y CCT-eu. BTPs initially performed yesterday versus Bunds after the S&P rating announcement on Friday, which effectively underlined that a downgrade of Italy is not imminent. However, the rally fizzled out later in the day. Furthermore, we have EUR24bn in redemption and coupons coming to the Italian market tomorrow. Hence, we expect some strong auctions today. In respect of the BTP curve, we prefer the 2-5Y segment, as this part of the curve provides the best roll/carry risk-adjusted.
Spain continues to perform and the 10Y outright yield and spread to Bunds are both close to 100bp. A level that had previously been difficult to break through. However, as the election is now behind us and the ECB fuelled ‘hunt for carry’ continues, we would expect a break of this 100bp level in the near future. We continue to recommend 5Y Spain versus 5Y France.
Today, the German Finanzagentur intends to tap EUR4bn in the Mar-21 Schatz.
FX markets
Yesterday we published FX Strategy – EUR/SEK forecast revisited, in which we discuss the outlook for SEK on the back of last week’s dovish shift from the Riksbank. Overall, we maintain our medium-term bearish view on the SEK but we no longer see a trigger for a near-term correction lower in EUR/SEK. Therefore, we lift our 1M and 3M (NYSE:MMM) forecasts to 10.60 (from 10.35 and 10.20, respectively), our 6M forecast to 10.70 (was 10.40) and our 12M forecast to 10.80 (previously 10.50). Furthermore, the outlook for a weaker SEK supports our call for a higher NOK/SEK (see Reading the Markets Norway - Too wide long-end swap spreads vs peers, 29 April, for more details).
Ahead of Wednesday’s FOMC meeting, USD money-market conditions continue to be relatively tight with the effective Fed funds rate stuck at 2.44%. We look for further liquidity tightening to arrive in mid-June due to, among other things, the Fed’s balance sheet reduction (QT). This would put further upward pressure on short-term USD rates and EUR/USD FX forwards via a widening in the EUR/USD OIS basis.
