Market movers today
In the euro area, the ECB minutes from the December meeting are due out. See page 2.
In the US, several speeches by FOMC members are expected, including Fed Chair Jerome Powell and Vice Chair Richard Clarida, which might be of interest given the current market repricing of the Fed hiking cycle.
In the UK, the Brexit debate has begun ahead of the vote next week, which Theresa May is expected to lose.
In Denmark and Norway, CPI numbers for December are due out and in Sweden, November production data is being released.
Selected market news
Recent FOMC communication, including yesterday's release of FOMC minutes, continues to highlight the Fed's flexibility on further rate hikes, as the FOMC members think they can afford to be patient hiking further as long as inflation remains under control. As the Fed would probably like to see a rebound in market risk sentiment and an improvement in the global business cycle (and a continuation of solid economic data releases in the US), it supports our view that it will skip a hike in Q1 and wait until Q2 (either in May or June, the timing is more difficult this year now that all meetings may be 'live', as Powell now holds a press conference after every meeting). One important dovish twist in the FOMC minutes is that 'several participants' noted the recent drop in market-based inflation expectation gauges, suggesting it may be an important variable to follow again.
Another new thing is that the Fed now also signals some flexibility on the reduction of the balance sheet ('QT'), which may stop earlier than the Fed has aimed for previously (although it has never explicitly set a target for the level of the balance sheet), something we have highlighted many times that it might be forced to do. A more flexible Fed should be positive for risk sentiment. US equities and Treasuries rallied initially after the release only to fall back a bit later in the evening as news broke that Trump might be cancelling a trip to Davos, where he is supposed to meet with the Chinese Vice President.
PM Theresa May suffered another heavy defeat on Brexit yesterday, as the House of Commons passed an amendment forcing her to present a Brexit 'plan B' for Parliament within three days if she loses the vote on her deal next week, which seems very likely. Note that a previous amendment passed last year means that the members of the House of Commons can debate and amendment her statement (i.e. they can try to tie May's hands by telling her what she should seek to get in the negotiations). With less than three months to Brexit day we are in uncharted territory, and it is difficult to predict where Brexit will end. In our view, May's deal (or something very similar) being passed at a later stage or a second EU referendum are the two most likely outcomes right now, but something needs to give before either happens.
Scandi markets
Denmark. We expect inflation to edge down to 0.7% in December from 0.8% in November. On the one hand, lower energy prices are continuing to weigh on inflation, and we expect to see a decline in the previously strong contributions from the ever-volatile airfares, charter travel and books. On the other, the big slide in food prices in December 2017 will drop out of the data and help prop inflation up. We expect inflation to pick up over 2019 – see Flash Comment Denmark, 2 January.
Norway. Core inflation surprised on the upside towards the end of 2018. That said, food prices and airfares, which are notoriously volatile, were much higher than normal in November, and we expect a partial correction here, especially to airfares, in December. We therefore anticipate a moderate decrease in core inflation from 2.2% y/y in November to 2.0% in December. This is in line with consensus and marginally higher than Norges Bank expected in the latest MPR (1.9%).
Sweden. Volatility is generally large in the production data figures (industry and service). PMIs, however, have remained on a descending trend, suggesting that producers are losing some momentum. Also, German industrial production has been quite poor recently and over time, business conditions in Sweden move very much in tandem with Germany.
Fixed income markets
The periphery performed well on the back of the Irish and Portuguese syndicated deals launched yesterday. The European government bond market has been able to digest the string of syndicated deals launched this week, where Slovenia, Belgium, EFSF, KfW, Portugal and Ireland in the SSA space have sold bonds for some EUR18.5bn. The bid-tocover, which is usually impressive, has been even stronger than last year, despite the lack of QE to support the European government bond market this year. There are also regular tap auctions, with the Netherlands, Germany and Austria selling bonds for some EUR6bn.
There has also been decent new issue premium as well, as the market had underperformed ahead of the syndicated deals. Today, France will be in the market with a tap auction for EUR8-9bn in the 10Y, 15Y and 30Y benchmarks and tomorrow Italy will be in the market.
Traditionally, we would expect that the Bund ASW spread to tighten, but this has not happened despite the German Debt Agency also launching a new 10Y benchmark this week. One reason is likely to be ECB reinvestments, where this week’s statement showed redemptions of EUR6.5bn in the PSPP portfolio. The bulk part of this is likely to be from the German bond, which matured on 4 January. Hence, there has been a decent reinvestment need even though this can be smoothed out.
In the ECB minutes, we will look for the discussion on the growth and inflation outlook – not least the comments on the decade-strong, wage-growth numbers. In detail, we will carefully watch for language potentially containing hints on the growth outlook and whether it might be changed at the 24 January meeting (to the ‘downside’ from ‘broadly balanced’).
The Danish mortgage banks are announcing dates and amounts for the upcoming refinancing operation in February. Realkredit Danmark (RD) has announced both dates and amounts, while Nordea has announced dates and Nykredit has announced total amounts and dates. RD will sell some DKK26bn in the 1Y, DKK15bn in the 3Y and DKK12bn in the 5Y. Nykredit will total DKK44bn.
FX markets
With yesterday’s Fed speakers and minutes cementing ‘Fed flexibility’, USD looks set to stay under pressure very near term – not least if trade talks progress further. As previously argued, Fed-induced USD strength seems to be drawing to a close, but we are likely to need a more confident ECB before EUR/USD can break firmly out of autumn ranges on the upside. The ECB minutes today may not enlighten us much further here.
Upward pressure on EUR/DKK eased slightly yesterday as the stabilisation in equity markets has started to weigh on the pair. Front-end rates and FX forwards are still trading at very low levels with the CITA fixing coming out at -0.59% – the third consecutive low fixing. We contribute this development, which is at odds with speculation on a near-term rate hike in Denmark, to the very high net position. It was DKK243bn yesterday – the highest since November 2015.
Finally, the price on Brent crude rose above USD60/bbl yesterday. Oil prices are buoyed by improved risk sentiment in equity markets and OPEC+ production cuts beginning to take effect. Bloomberg survey data showed that Saudi Arabia, as announced, started to scale back production already in December. We forecast Brent to average USD65/bbl in Q1 and thus look for the recovery to extend further.
