Market movers today
The US-China high-level trade talks continue today. Look out for any statements from the two sides tonight when the negotiations conclude. We believe we will see some progress in areas like intellectual property rights and technology transfer, where China has already laid out new legislation that it aims to pass at the annual People's National Congress in March. Enforcement will be one of the tricky issues in the talks.
In the euro area, Q4 GDP is expected to show an unchanged meagre growth rate of 0.2% q/q. If so, it will be the weakest performance over two quarters since 2013. Although temporary effects from German car sector bottlenecks explain some of the growth drag, the overall economic environment, with a Chinese slowdown, Brexit and fragile risk sentiment in financial markets, also weigh on growth prospects. In light of the latest months' disappointing industrial production data and falling sentiment indicators, we do not believe the euro area economy picked up speed in the past quarter.
In the US, we will get initial jobless claims, which fell to a new cycle low last week. The US Employment Cost Index for Q4 is likely to add to the picture of rising wage costs. Chicago PMI is set to correct lower as it is still at a much higher level than other regional surveys and ISM manufacturing.
Selected market news
As widely expected, the Fed did not raise its target range, which remains at 2.25-2.50%. The FOMC now states that it can afford to be 'patient' in raising rates, waiting to see better global data, a robust improvement in risk sentiment and higher inflation. Based on our positive macro outlook for the US and the global economy (and hence markets), we still expect the Fed to hike this year, but it is no longer a given that the first one would come as early as June, which is our current base case. We still think the Fed will end its hiking cycle this year. The Fed also seems ready to end the balance sheet run-off sooner rather than later (see FOMC review - All we need is just a little patience , 30 January 2019).
US Bond yields declined and the US government yield curve bull steepened as the Federal Reserve sounded a dovish tone to the market, while the USD weakened against G7 counterparts and US equity futures advanced. Asian stocks are in the green this morning, after official Chinese NBS PMI manufacturing numbers for January showed signs of stabilisation in Chinese activity, despite remaining in contraction territory at 49.5.
Ireland's Central Bank Governor Philip Lane has become the only nominee to replace Peter Praet as ECB Chief Economist in June. Lane is considered a centrist who would be likely to continue the gradualist course of President Draghi. The next steps in the appointment procedure involve an EU Parliament hearing and a final confirmation by EU leaders.
Yesterday PM Theresa May's plan to convince the EU to renegotiate the withdrawal agreement already got a first damper, when Jean-Claude Juncker warned that the chances of a disorderly Brexit have increased, telling European leaders they should 'prepare for the worst' (see Brexit Monitor: May has two and half weeks to renegotiate the backstop , 29 January 2019).
Scandi markets
Today, we get Danish December unemployment numbers. The number of people out of work has fallen as employment has risen but only slowly in the final months of 2018, suggesting there are still more people entering the labour market. The same picture can be seen with the jobless rate (number of unemployed as a percentage of the labour force), which has been stable at 3.9% since June.
Fixed income markets
The FOMC followed the same path as the ECB as seeing the risks on the downside. What does this imply for the European markets? We expect the Bund future to move higher, but the EU curves will bull flatten as there is limited room for a decline in the front end; but also that the periphery will perform as the major central banks are ‘proactive’ despite Italian PM Conte yesterday warning about a contraction of the Italian economy in Q4. Yesterday, we published our view on the auctions of non-callable mortgage bonds by the Danish mortgage banks, which will take place next week. The supply at the auction is modest as the refinancing degree is as low as 65%, and thus plenty of excess liquidity to snap up some cheap 3Y and 5Y non-callables. See February Auctions, 30 January.
FX markets
The dovish Fed last night, which notably removed its reference to ‘further gradual rate increases’, put USD under renewed pressure and EUR/USD jumped a big figure above the 1.15 mark. In our view, yesterday’s message cements the sense of a ‘Fed on hold’, which is key to the FX market as this means that USD carry momentum is fading, notwithstanding a few more hikes down the road. USD is vulnerable to such a shift as positioning is likely to remain stretched on USD longs. However, in order to see a sustained move higher from the recent range around 1.15, we believe the eurozone cyclical outlook has to improve and this is not likely until late H1.
While EUR/NOK yesterday initially broke through the important set of support levels within 9.69-9.70 on SEK weakness – and hence NOK/SEK buying – the dovish Fed aided the move further. We have previously emphasised the close positive connection between global inflation expectations and NOK/SEK and with the Fed’s dovish message it adds to the domestic arguments for being long NOK/SEK. Today’s Norwegian data releases are unlikely to move the NOK spot much and we therefore expect the global environment and technical follow-through to set the tone and direction in today’s session. We remain short EUR/NOK and long NOK/SEK.
