- US bond markets continued the sell-off as markets are scaling back expectations of further QE.
- The first Fed funds rate hike is now fully priced in February 2014.
- We expect the SNB to stick to its current policy stance at its monetary policy meeting today.
In China, Bo Xilai, the Communist Party chief of the south western city of Chongqing, has been replaced after a scandal that has been running since February. Bo Xilai was until recently a frontrunner for promotion to the top decision-making body of the ruling Communist party.
US equity markets took a breather yesterday and the SP500 ended the day
down 0.1%. In Asian trading the Nikkei is supported by the weakening of JPY, while other key indices are trading more mixed.
US bond yields extended their move higher that started following the FOMC meeting yesterday. Although there was little news in the FOMC statement, the lack of signals for additional QE has been enough to send 10-year treasury yields up by more than 20bp in two days. It seems that bond markets are finally reacting to the improvement in US data that equity markets have been rallying on for the past months. Expectations for the first Fed funds rate hike have been moved forward and the first Fed funds rate hike is now fully priced in by February 2014.
In FX markets USD got some support against EUR from the narrowing of the yield but the pair has kept relatively stable overnight. JPY continues to lose against USD with JPY/USD reaching its highest level since April last year.
Global Daily
Focus today: Attention will again today centre on US data releases and it will be interesting to see whether the positive sentiment can be boosted further. We expect a slight drop in empire manufacturing to 18.0 after the strong reading of 19.5 in February. Also data on the Philadelphia Fed PMI will be released, where we expect an increase to 11.7 in March from 10.2. Both estimates are slightly higher than consensus. Initial jobless claims and PPI core figures could also attract attention. In Switzerland it is time for the quarterly monetary policy meeting. We expect the SNB to stick with its current policy stance, keeping the floor underneath EUR/CHF unchanged at 1.20 and leaving the minimum target for the three-month Libor rate at zero. That said, the SNB is likely to voice concern about the strong level of the franc, which may trigger an intraday spike in EUR/CHF.
Fixed income markets: US Treasuries sold off further overnight. The 10Y Treasury yields broke through several key levels in the past two days and the narrow range seen since early 2012 was broken. The sell-off has rubbed off on European markets too but US duration has underperformed and US Treasuries are the cheapest they have been compared to Europe since last summer. We think a test of 2.40% for 10Y Treasuries could be looming today and we do not want to go against the momentum right now.
FX markets: USD continues to be bid, as US yields have continued their extension higher and a test of key levels for US treasury yields could be on the cards for today. While EUR has been somewhat shielded by the recent strong performance of equities, USD has broken above key resistance levels versus JPY and USD/JPY is now trading at an 11-month high. Momentum is strong and we would not be surprised to see a further rise in the near term, though we see limits to how much higher the pair should move in an environment in which the Fed is keeping rates low. Today, however, the trend higher could be supported by upside data surprises in regional US PMIs. Also, market attention will zoom in on Switzerland, where the SNB will announce its monetary policy decision. Deflationary pressures have eased somewhat lately, and at this stage a change in the 1.20 floor is not our main scenario. Hence, we do not look for any major changes, though verbal intervention is possible and we could see EUR/CHF drift moderately higher. Finally, we advise clients to stay tuned for our updated G10 FX forecasts, which will be published during the day.
Scandi Daily
Norway: Norges Bank surprised the market yesterday when it slashed rates by 25bp to 1.50% and said that rates will be kept at the new low level until 2013. Contrary to the view expressed in the annual address just one month ago the Norwegian central bank now obviously puts much more weight on the strength of the currency. The surprise move managed to weaken the Norwegian krone close to 2% against the euro and yields fell across the curve. However, we doubt that the effect on the currency will be long-lasting as NOK is still a very attractive currency even after the latest rate cut. First of all, NOK offers a positive carry against most G10 currencies. Secondly, the Norwegian economy is very strong and the latest rate cut will fuel not least the housing market even further.Thirdly, Norway is still attractive from a quality (triple A) and valuation point of view and finally, the elevated oil price is a continuous support for NOK.
Hence, when the dust settles today we are quite tempted to buy NOK once again. That said, there is little doubt that Norges Bank has turned its focus on NOK. Hence, if we are correct that EUR/NOK and USD/NOK will slowly start to move lower once again, the market should also price a significant chance of yet another rate cut from Norges Bank. The latter points to value in the Norwegian yield curve.
Sweden: SCB will release February labour market data at 09:30 CET. We expect seasonally adjusted unemployment to rise from 7.6 to 7.7% and the headline (nonadjusted) rate to stay at 8.0%. Labour market data will be in focus going forward since unemployment trends are typically closely correlated to monetary policy.