Market movers today
Today, we have a hectic day ahead of us. Markets will continue to digest the potential ECB tiering system as well as the aftermath of yesterday's Brexit votes. On the data from, we get preliminary German inflation data for March. We see scope for a small rise to 1.8% y/y (from 1.7%) on the back of the recent increasing oil prices.
In the US, we get February housing market numbers and 2018 Q4 private consumption print. Recently, the housing market has started to show a bit weakness especially home sales numbers, which we expect is driven by higher mortgage rates. However, housing market data are quite volatile. The day also brings a number of Fed speeches, but these are going to fade into the background for some time, as the Fed has clearly signalled it is on hold for the rest of the year, see FOMC review: Fed done hiking rates .
Overnight, Japanese industrial production and retail sales are released.
This morning we published our Nordic Outlook for March 2019 (see page 2).
Selected market news
In yesterday's indicative votes, the House of Commons rejected all eight Brexit options . Readers of yesterday's Danske Daily will know this was not a big surprise given the House of Commons had rejected most of the options in one way or another in previous votes. Next step is likely more indicative votes on Monday 1 April, where members of parliament may vote again but on fewer options. Within the Conservative Party more Brexiteers are now backing May's deal after she promised to resign soon after Brexit has been delivered, but unfortunately for May, the supporting party DUP from Northern Ireland remains against. May's deal will likely be dead on arrival if brought forward for a vote tomorrow. With just about two weeks to go, uncertainty is high. In our view, there seems to be four possible ways forward now: May's deal, no deal, second EU referendum or May's deal including a permanent customs union. Risk of snap election might have gone up, though. For a more detailed analysis, please see 'Brexit Monitor: No No No No No No No No ', 28 March. EUR/GBP is likely stuck in the range 0.85-0.87 for now.
Yesterday's ECB watchers conference shook markets . The comments from Mario Draghi, Peter Praet and Luis de Guindos on attention to banks' profitability fuelled with a Reuters ECB-sourced story sent yields lower. Their comments predominantly focused on the weak banking sector profitability and what ECB could do to mitigate this. However, it was not until the Reuters story around 14:00 CET that the significant market move took place. This morning, Praet said that ECB staff are looking into the possibility of a tiering system should a monetary policy reason warrant that. That also means that all options to mitigate the side effects from the negative deposit rate are on the table. However, we expect next step from ECB is announcing the TLTRO3 modalities, which could be made very favourable, should they find the need before a tiering system were to be announced.
Scandi markets
This morning we have published the Nordic Outlook - March 2019, our quarterly outlook for the Nordic economies. We call for a sharp slowdown in Sweden as housing investment head down, but strong growth in Norway supported by oil investments. Danish exports have accelerated despite the global slowdown, and the recovery has some way to go yet. Finland is returning to more normal growth levels after three strong years. The Outlook does not contain new financial forecasts but underpin our expectations of rate hikes in Norway but not in Sweden.
The only Swedish data set for release today is retail sales for February. Given the modest rebound (still below the benchmark of 100) in consumer and retail confidence noted in yesterday’s release of NIER’s economic tendency survey we might see a small uptick in retail sales, although the downwards trend will most likely be kept intact.
Fixed income markets
Yesterday, Draghi and Co. brought back the discussion of a tiered deposit system. Praet officially confirmed this morning in a Bloomberg interview that the ECB is looking at tiering, but underlined that the ECB would need a monetary policy case to introduce it. But the signal is the important thing here: When ECB is ready to look at the side effects of negative rates, ECB are aware that negative rates might very well be here for extended period of time and even new rate cuts could be on the table.
We believe the rally in Bunds can continue. The discussion of further ECB easing has just started and it seems our earlier call that we would reach -10bp in 10Y Bund yields is now too modest. Especially, as we do not expect to see an imminent turn-around in Euro zone key-figures. 10Y Bund yields dropped 6.5bp and the curve 10s30s steepened 3bps after the speech. The market is now pricing a tiny probability that the next move could in fact be a cut from the ECB. The rally continued in the US where the market is now pricing some 20bp cut at the September meeting. Fed’s Kaplan said he would be ready to cut rates if the inversion of the curve would last for longer or the magnitude changed. The comments came after Stephen Moore – whom Trump might nominate for the Fed – called for an imminent 50bp cut earlier in the day.
Periphery markets could now follow Bunds higher and underperformed slightly. In BTPs the reason was probably some concessions ahead of the new 5Y BTP that will be introduced today. Italy will sell up to EUR 3.75bn in the 5Y and EUR 2.75bn in the 10Y benchmark bond. The 5Y point still offer a health carry-roll in Italy and demand should be no problem.
FX markets
EUR actually proved rather resilient to ECB hints of a tiered deposit system yesterday notwithstanding the significant drop seen in euro rates across the curve. On the one hand, to the extent that tiered deposits allow ECB to keep rates lower for longer it is clearly a EUR negative. On the other hand, to the extent that this leaves the impression of an ECB that is severely challenged on its toolbox and that low inflation risks becoming entrenched (like has happened for SNB and BoJ) it is a EUR positive down the road. ECB will have to stick to a soft stance near term, and as we wrote in FX strategy: EUR/USD trap – escape routes blocked this may fuel a larger easing risk premium on EUR/USD, but we are not in for a break of 1.10 in our view.
In the Scandies, NOK came under relentless pressure in yesterday’s session in a move that started with a dovish RBNZ, weaker than expected LFS data and general Scandi selling but ended up in broader based NOK selling as important technical levels were broken and stops were triggered. The final part of the move seemed heavily overdone and difficult to explain from fundamentals even if the deflationary global tendencies are negative for NOK/SEK as illustrated by this chart. The domestics remain strong as pointed out in this morning’s edition of the Nordic Outlook and overall we think the latest price action is overdone. No major SEK-move expected on retail sales today. We will see a total of SEK 14bn (Ericsson (BS:ERICAs) + SHB) of dividends today, of which approx. SEK 6.5bn is distributed to foreign investors. This should however not have any major impact on the SEK: see our piece on dividends and the SEK for more on this.
EUR/DKK has grinded higher the past couple of days to a high of 7.4669 and close to the peak of 7.4680 in the beginning of January. In our view, the move higher is undramatic and likely owes to the ‘March dividend effect’. The past two years EUR/DKK has edged lower again the beginning of April, which supports our case for the recent move higher to be temporary. We forecast EUR/DKK at 7.4570 in 3M (NYSE:MMM) (see DKK Edge).
In emerging markets, the TRY remains under considerable pressure after a sharp drop in the central bank’s foreign reserves and renewed geopolitical fears. The Turkish central bank drained TRY liquidity in an attempt to halt offshore USD/TRY shorting activity, which stabilised TRY. We expect the pressure to continue on the TRY and cannot preclude an emergencey hike from the Turkish central bank.
