Market movers today
With a relatively light data calendar, a key focus point today will be the start of US and Chinese officials' mid-level trade talks in Beijing. These talks will probably pave the way for more high-level negotiations later in January, where President Trump could meet with Chinese Vice President Wang Qishan at the World Economic Forum in Davos. This week, we should also look out for an announcement on tax cuts for consumers and companies, which have been well signalled by Chinese leaders.
In the US , given the recession fears in financial markets, focus will be on today's ISM non-manufacturing index. The index remains at a very high level, indicating the economy is doing fine, but any substantial decline will be taken as a further indication of a slowing US economy.
In the UK , this week will see the start of the Brexit debate ahead of the vote in the House of Commons - the vote is scheduled for the following week beginning on Monday 14 January (the vote will probably take place on Tuesday or Wednesday).
Selected market news
US equity markets surged on Friday and Asian markets are trading higher this morning, supported by a very strong US jobs report, monetary policy easing in China and Fed Chairman Jerome Powell indicating that the FOMC would be prepared to change the monetary policy course if the outlook shifts.
The US jobs report released on Friday was very strong, with non-farm payrolls gaining 312,000 in December compared to consensus of an increase of 184,000. Wages also gained substantially with an increase of 0.4% m/m and 3.2% y/y in December, suggesting solid momentum in the labour market towards the end of the year.
On Friday, Federal Chairman Powell said that the FOMC's policy is flexible and that officials are 'listening carefully' to financial markets. Powell also said that the Fed will be patient as it observes how the economy evolves and referred to 2016 as an example where the FOMC indicated four hikes but only raised the target range once in December. Powell's comments came after FOMC members Kaplan (on Thursday) and Mester (earlier on Friday) said something similar and overall, the Fed is clearly indicating flexibility in its policy both in terms of the interest rate and quantitative tightening. The market expects the Fed to stay on hold in March.
In China, the People's Bank of China (PBOC) responded to the slowdown and announced a reduction in the RRR for banks of one percentage point, freeing up another USD116bn. See China Weekly Letter: China hits the gas as the economy slows further , 4 January.
The big question for now is whether easing from China and the Fed on hold will be enough to stabilise markets. According to Thomas Harr, Global Head of FI&C Research, it is probably premature to call the bottom, as we may need to see a stabilisation in growth expectations before equities stabilise and head higher . See Harr's View: Market turmoil to continue until growth stabilises , 6 January 2019.
Scandi markets
In Denmark, we have a packed week ahead. The Nationalbank kicks things off today with foreign portfolio investment and securities statistics for November.
Fixed income markets
We expect Portugal and Ireland to come to the market this week with syndicated deals (10Y segment), not least after the more stable market conditions following the strong non-farm payroll report on Friday. In addition, there is also plenty of supply from Austria, Germany, France and Italy as well as a possible syndicated deal from EFSF/ESM. Much of the supply is in the long end of the curve. We have a new 10Y benchmark from Germany and up to EUR9bn from France in the 10-30Y. Hence, if Portugal and Ireland both launch 10Y benchmarks next week and the EFSF/ESM launches a 15-20Y benchmark, the long end of the market is going to be very crowded next week. For more see Government Bonds Weekly, 6 January 2018.
The strong labour market report on Friday pushed US treasury yields higher, but market pricing is still far away from the Fed dots. The market is pricing in a rate reduction for mid- 2020, whereas the dots imply two more hikes this year. Powell said on Friday that he is 'listening sensitively' to the market 'message'. This week, no less than nine Fed officials are due to speak, so there are plenty of opportunities for listening this week both for the Fed and the market. This week we also have the ECB and FOMC minutes from the December meetings. Considering current market pricing for both the ECB and the Fed, as well as the non-farm payroll numbers and upcoming EGB supply, we see risk tilted towards higher Bund yields this week.
FX markets
Towards the end of last week, FX markets were spurred on by improved risk sentiment from the combination of a strong US jobs report and the Fed’s Powell indicating that he is listening to the markets (if not to the President). While we remain reluctant to see the more flexible Fed as a trigger for sustained EUR/USD upside – for that we need a more confident ECB – the continued shift in a softer direction from FOMC members suggests that Fedinduced dollar strength more broadly is drawing to a close. Near term, the still-fragile risk environment should keep JPY and CHF underpinned, but we still do not see a broad-based weakening of USD just yet – for that China simply looks too vulnerable for some time still.
Indeed, USD carry remains attractive despite stretched positioning (note, however, that IMM data has not been released since mid-December due to the US government shutdown). However, if US real rates invoke on a further sustained decline, USD strength could be set to peak – not least if we are right in projecting a trade deal down the road.
The NOK has suffered from an ugly cocktail of global risk-off and year-end effects. That said, we think the fundamental case of positioning for stronger NOK remains intact even if the near-term potential is determined by the global environment. Our short EUR/NOK and long NOK/SEK recommendations have got off to a rough start but we still like the positions. We recommend investors add or increase NOK exposure to utilise the more attractive entry levels created by year-end trading. See Reading the Markets Norway, released this morning.
Similarly, EUR/SEK is very much driven by risk sentiment these days and fair value based on rates and a proxy for risk is around 10.25, in our view. We remain short the cross in our FX Trading Portfolio, 19 December 2018, but as we think the cross could be close to a near-term bottom, we are looking for opportunities to take profit on this. In Nordic Outlook - January 2019, 4 January 2019, we look for a cyclical slowdown in Sweden and less than a 50% chance of another hike this year, which limits SEK strength from here. That said, pricing on the Riksbank has come down quite a bit recently and is already relatively soft at 19bp priced for 2019 and not even two hikes over two years, i.e. market expectations are low already.
