Market movers today
While today is quiet in terms of economic data releases, we have a very eventful week ahead of us!
As we expected, US President Donald Trump postponed the deadline for raising tariffs on Chinese imports.
Trump will meet with the North Korean leader Kim Jong-un this week.
PM Theresa May has said there will be no so-called 'meaningful vote' on a full Brexit deal, as she is still negotiating with the EU . Instead, there will be another indicative vote on Wednesday , where the MPs will again try to force May to ask for an extension to the deadline. The question is, however, for how long if that is the case.
Fed Chair Jerome Powell begins his two-day hearing in the US Congress tomorrow.
In terms of economic data releases, we have plenty of important US releases . Housing market data is due out tomorrow, the initial estimate for Q4 GDP growth on Thursday and ISM manufacturing index on Friday.
In the euro area, preliminary HICP inflation data is due out on Friday.
Selected market news
In the early session, equity markets in Asia advanced with US futures and the CNY climbed after US President Donald Trump postponed the date for hiking tariffs on China 's imports. However, the rise in US futures calmed after China's state-run Xinhua news agency said that talks will be harder at the final stage.
Theresa May has postponed the next so-called meaningful vote , which should have taken place tomorrow, by another two weeks to 12 March, as she still does not have a new deal with the EU . We still have the indicative vote on Wednesday, where the most important thing is whether the House of Commons will force May to ask for an extension of Article 50 or not. As it is not the last chance for the MPs to do this, it will likely be a close call. The problem for Theresa May is that the EU has said it will not give any concessions before May shows a stable majority (see POLITICO). The Guardian indicated that the EU would prefer a long extension of Article 50. We have argued for some time this may be the best way forward without either side losing face, as more details on the future relationship would make the backstop redundant.
On Sunday 24 February, The Telegraph reported that Theresa May is considering a plan under which Brexit could be delayed for up to two months . The UK government has prepared a series of options, which were disseminated over the weekend, in order to avoid resignations by ministers determined to support a backbench bid to take a no-deal Brexit off the table. The options contain making a formal request to Brussels to delay Brexit if May cannot agree on a deal by 12 March. On the other hand, the EU is considering telling her that if she cannot get her Brexit deal through parliament and wants to delay the departure date, the country will have to stay in the bloc until 2021, Bloomberg reported.
Scandi Markets
There is no Swedish data releases today, but Stefan Ingves is expected to hold a speech at Uppsala University, entitled The Economy – According to Stefan Ingves. Likely to be of a more academic/educational twist, there should not be any significant news out of this. Looking ahead, we have the economic tendency survey (NIER), trade balance and household lending to look forward to on Wednesday. Our focal point is the economic tendency survey, where we are primarily interested in whether consumer confidence continues to fall and if manufacturing confidence is managing to hold up despite the broadbased downturn in European manufacturing confidence.
Thursday comes with a bunch of interesting data: December wages from the mediation office, retail sales and PPI for January and this week’s main event, GDP figures for Q4 18. As we argue in Reading the Markets, our indicator suggests that domestic demand is rather weak, but we might still see a rather healthy print of 0.8% q/q (1.9% y/y) on the back of involuntary stock building, which in turn might come back and haunt us in Q1.
The week is then rounded off by February manufacturing PMI on Friday, which will shed further light on the status of the Swedish manufacturing sector.
Fixed income markets
This week is filled with political event with main focus on US-China trade relationship and Brexit. There is plenty that could go wrong and keep yields low. However, the communication from the central banks continued to support the hunt for carry and suppress volatility in rates and equity markets, and we expect that the Fed Chairman Powell will continue this at the two-day hearing in the US congress this week.
We have a quiet week ahead of us in the European government bond market as only Germany and Italy will be coming to the market. Italy will tap in the 7Y FRN, 5Y BTPS as well as launching a new 10Y benchmark – BTPS 3% 08/29 for up to EUR7.25bn. Germany will tap in the 2Y (new) and 10Y. In Scandinavia, Norway will launch a new 10Y benchmark. See more in our Government Bonds Weekly - Modest supply and plenty of redemptions, new 10Y Norwegian government bond, 22 February.
Fitch did not downgrade Italy on Friday. However, it kept Italy on negative outlook as the economic outlook has worsened and it has made an upward revision to the deficit for 2019 and 2020 from 2.2% to 2.3% in 2019 and 2.6% to 2.7% in 2020. This is worse than the current forecast from the Italian government with the deficit at 2.04% for 2019. If Italy is to be downgraded by Fitch, then the deficit and growth has to continue to deteriorate beyond the current estimates. The next update from Fitch is due on 9 August. Hence, we expect to see a positive performance in the Italian government bond market this morning even though they are keeping the negative outlook.
FX markets
EUR/USD remains in a 1.12-1.16 range still as a weak euro cyclical story for now has dampened the likely positive impulse from a trade deal. On Tuesday-Wednesday, the Fed’s Powell due to speak and we will look for hints on whether balance-sheet stabilisation could pave the way for more hikes as we look for. Constructive dialogue from the US-China should help calm the nerves and benefit the commodity currencies, the Scandies and, to a smaller degree, EUR. On Friday, US manufacturing PMIs will provide key hints as to whether the US is finally escaping the soft patch it has been in recently. Indeed, we think the US will recover shortly.For GBP, focus this week will be on the indicative vote in the UK House of Commons on Wednesday where the PMs once again have the opportunity to force the Prime minister to ask the EU for an extension of the Article 50.
Note that PM May has postponed the socalled “meaningful vote” which was scheduled for Tuesday 26 February. Instead, PM May will ask the House of Commons to give her another two weeks (12 March) to close the deal. Hence, the can will most likely be kicked down the road once again this week, which should keep EUR/GBP within the 0.86-0.89 range in the coming weeks. We maintain the view that the risk of a ‘no deal’ Brexit after 29 March is low (although it still could happen by accident), which is also reflected in level of EUR/GBP, in our view. We still expect EUR/GBP to decline sharply towards 0.83 if a deal is reached before 29 March, but the main risk is that Article 50 is extended, which means that GBP appreciation will come more gradually than our forecast indicates.
Stefan Ingves is supposed to hold a speech entitled ‘The economy - according to Stefan Ingves’ this evening, but as it is in front of a student union at Uppsala University, it will probably be more educationally inclined and thus no market mover. For coming SEKrelated events this week, see the Scandi section.
New data from Danmarks Nationalbank shows that the Danish life insurance and pension companies increased their hedge ratio on EUR towards the end of last year, where EUR/DKK hit the highest level in a couple of years. See DKK Edge: L&P's EUR hedge ratio rose last year amid higher EUR/DKK, 22 February.
