Market movers today
- After a hectic day yesterday, today is quieter in terms of data releases.
- This morning in the Scandi space we will get Norwegian industrial confidence in Q4 and Swedish retail sales in December.
- The German IFO survey for January is also due out, where we see further downside risks. Also, the ECB's Survey of Professional Forecasters is also due out.
Selected market news
Yesterday, markets had a volatile session on the back of the ECB, trade war comments, PMIs etc. Equity markets rose marginally across most jurisdictions while, core bond market yields declined. EURUSD ended the day lower. Overnight, equity markets in Asia are in the green at the time of writing.
At the ECB meeting yesterday, it changed its growth risk assessment in light of continued weaker incoming data and persistent global uncertainties. This has been long overdue in our view and with January PMIs (see below) a balanced risk assessment would clearly have challenged the ECB's claim of being data-dependent. We still expect ECB hiking rates this year in December as Draghi was upbeat on the labour market and wage dynamics. We lower our expectation for a liquidity operation in March after the meeting yesterday to 75-80% for an announcement in March.
Norges Bank (NB) left the sight deposit rate unchanged at 0.75%, in a decision widely expected by both markets and analysts. This was a 'small' meeting, including only a press release and the one-page 'Executive Board's assessment', i.e. there was no monetary policy report, no revised rate path and no press conference. This, alongside the central bank having only one month's worth of data and economic developments to digest, limited how big a change in the policy outlook the central bank could signal. NB clearly clarified that markets should expect a rate hike in March. Our call remains for two rate hikes in 2019 (March and September) but, notably, we see the balance of risk skewed towards three and not one rate hike. We also pencil in two rate hikes for 2020 and 2021.
Swedish unemployment (seasonally adjusted) bounced higher to 6.4% in December, more or less as we expected, while the trend adjusted number stayed flat at 6.2%. Employment growth was still solid at +100k. In all, a fairly strong report, although our impression is that unemployment may be starting to find a bottom.
January euro area PMI fell further in line with our expectation to 50.7. Yesterday's PMI readings signal the euro area economy edging closer to stagnation at the start of 2019 (pointing to just 0.1% q/q growth in Q1), which is in line with that latest signals from Macroscope . Yesterday, Handelsblatt reported that the German government revised down its growth expectations for this year to 1% from 1.8%, which is a sizable cut given the new risk assessment from the ECB.
In the US, Markit PMI manufacturing rose in January to 54.9 from 53.8 with the service component broadly unchanged. Despite global manufacturing slowdown, government shutdown and US-China trade tensions, the US still seems in good shape. We could see further negative surprises here going forward (but also positive later in the year if we see a rebound in China and Europa, as we expect).
On the trade war, US Commerce Secretary Wilbur Ross said that there is a ‘fair chance’ of the US and China reaching a trade deal, which is more upbeat from Ross than previous comments. However, Ross also said that China and the US are ‘miles and miles’ away from a trade deal.
Scandi markets
Swedish retail sales had a lousy 2018 and the December numbers out today will not change that. We estimate retails sales rose 1.5% y/y, even though clothing sales suggest a weaker outcome. We estimate sales outside of that sector compensated. We will also get PPI numbers for December.
Fixed income markets
The ECB meeting turned out to be a pleasant surprise for the European bond market as the ECB in light of weak incoming data (most recent PMIs) and the weaker international picture changed the growth assessment to the downside despite no new staff projections.
The market once again postponed the timing of the first rate hike further into 2020. The European bond income market rallied on the news and Bunds touched 165.54. See Flash Comment: ECB Review, 24 January 2019.
Despite the weaker growth assessment, periphery markets rallied strongly on the soft news and the 10Y BTP-bund spread dropped below 248bp. Spain also continued to perform and the momentum for SPGBs remains very strong and further performance is expected today. While ECB reacted to the weaker global economy Norges Bank did not blink yesterday and confirmed its plan to hike rates at the March meeting. We continue to see value in paying SEP 3M (NYSE:MMM) NOK FRAs vs the equivalent FRA in Sweden. See Norges Bank Review, 24 January 2019.
Today, the agenda is less exciting and the market will continue to look out for clues on how severe the weakness in the eurozone economy when the German ifo is released at 10.00 CET.
Finally, we published Reading the Markets Denmark last night.
FX markets
Yesterday’s Norges Bank (NB) announcement clearly shows that NB stands out as the only G10 central bank planning to hike rates in the coming months. As we approach March, the repricing of the short-end (if global risk holds up as we expect) should underpin a stronger NOK on both carry level and carry momentum. We still pencil in a stronger NOK in coming months, primarily on (1) relative growth and relative rates, (2) tighter structural liquidity and (3) global risk appetite and higher oil. We remain short EUR/NOK via options and long NOK/SEK spot outright.
Spillover effects from intra-Scandi NOK/SEK buying yesterday sent EUR/SEK toward 10.30. Today, we expect another weak reading on retail sales (1.5% y/y). But so does consensus (1.2% y/y), and thus it shouldn’t be too bad for the krona.
In the majors EUR/USD notably took a rollercoaster ride yesterday on weak PMIs, the ECB meeting and negative comments from US commerce secretary, Ross on the trade deal outlook with China. Do we have genuine EUR support from ECB? We still think the first hike is a tad too distant/fragile for FX markets to send EUR significantly higher, but as H1 progresses, we expect the next stage in a EUR/USD rebound to reached via a US-China trade deal. Associated CNY appreciation would further help keep the effective EUR from strengthening too much which would in turn pave the way for ECB. For true lift-off in EUR/USD towards the high 1.20s as warranted by valuation, we need to get closer to confirmation that the ECB intends to move on rates - and that will likely not happen until H2, but we are gradually moving in that direction.
