Market movers today
Brexit remains very much in focus this week, with three key votes in the House of Commons coming up starting Tuesday, see Brexit Monitor - Brexit goes to overtime . We think the most likely outcome is that the House of Commons will vote in favour of asking the EU27 for a short extension of Article 50.
The US-China trade talks are also entering the final stage and markets will keep an eye on any headlines announcing a date for the summit between Donald Trump and Xi Jinping.
In the euro area, we get German industrial production figures for January today. Factory orders on Friday showed another monthly decline of 2.6% m/m, but the details revealed that orders from car manufacturers continued to recover in a further sign that activity in the sector is normalising, see chart on Twitter .
In the US, retail sales for January will be an important gauge for the strength of the US economy currently. In December, the retail sales control group fell by 1.8% m/m, the biggest drop since January 2000. We think the drop was a one-off and look for January's numbers to come in at 1.0% m/m (3.3% y/y).
In Scandinavia, Danish and Norwegian February CPI inflation are in focus (see next page). In Sweden, Riksbank vice governor Henry Ohlsson holds a speech at 13:00 CET. We expect him to repeat it's justified to continue to hike rates according to plan. This should not be a market mover, unless he surprises on the dovish side.
Selected market news
Chinese credit data fell back in February following the big jump in January . However, for the two months as a whole, aggregate credit was up around 25% compared to last year. M1 growth also increased from 0.4% to 2.0%, the first tentative sign of a turn in M1 growth. China's central bank chief said over the weekend that there was room to cut the Reserve Requirement Ratio further, see Reuters . We look for a further cut fairly soon.
Over the weekend, Fed chair Powell repeated that the Fed is on hold for now. Powell said that the Fed funds rate is "in an appropriate place" and that the Fed will not overreact to inflation moving modestly above the 2% target. In his view, the current policy is "roughly neutral". That said, he still thinks the outlook is "favourable " and risks to the economy come from China and Europe.
In Germany, the CFU chief, Annegret Kramp-Karrenbauer, has dismissed some of French President Macron's ideas of reforming the EU . Kramp-Karrenbauer rejects a European minimum wage, a unified social security system and joint debt issuance.
PM Theresa May has not been able to finalise a new deal with the EU yet but is ready to fly to Brussels today if there is a breakthrough . According to The Times , May is facing an even bigger defeat tomorrow than the first time (biggest on record). Some Conservative MPs are urging May to put tomorrow's vote on hold. Others are calling for May to resign.
Scandi markets
Norwegian core inflation was a little lower than expected in January, due mostly to bigger price cuts on clothing, footwear and furniture than normal. It has nevertheless been above the 2% target for three straight months. Due to a negative base effect, we expect core inflation to slow further to 2.0% in February, but the risk is to the upside because there is a chance of clothing, footwear and furniture prices correcting in line with the historical pattern. Our forecast, on the other hand, is based partly on weak retail sales continuing to put downward pressure on prices in these segments.
Fixed income markets
This week, the market will continue to scrutinise last week’s message from the ECB. We did see some profit-taking on Friday and periphery widened vs core and we saw a significant flattening of 10s30s in semi-cores like France and Belgium. Going forward, we are in little doubt that the result will be even more hunt for carry and in our Government Bonds Weekly published on Friday we re-opened the recommendation to buy 5Y Spain vs France. We also expect further support to semi-core and we recommended to buy 10Y Finland vs Netherlands. This week, there is a positive cash flow of an estimated EUR15.3bn in the EGB market, as there are large redemptions and coupons from Germany and Austria. In total, EUR28.2bn is coming to the market. Germany, Italy and Spain will tap the markets this week.
In the Danish market, the Housing Authority announced on Friday its intentions to prepay DKK17.9bn worth of subsidised housing loans. We estimate that the largest share of the prepayments will take place in the 1.5% 2047. We see these prepayments as positive for the callable segment, and especially low coupon callables (1.5% 2050/1% 2040), as the obvious reinvestment alternative should benefit.
FX markets
EUR/USD managed to recover somewhat on Friday but even a weak US jobs number did not manage to lift the cross above 1.1250. As we deem that the US is closer to turning cyclically than the euro zone, if data starts to surprise on the upside, e.g. retail sales today where we have an above-consensus call, it could send EUR/USD towards new lows. After the ECB’s dovish signals, we think the cross could slide towards 1.10 near term. Meanwhile, IMM Positioning data suggested that speculators continue to prefer longs in cyclical commodities like oil and copper – a hint that markets are increasingly positioning for a trade deal and a Chinese growth stabilisation. This hints that the knee-jerk to a trade deal may be limited. In case of an extension of Brexit, we could see EUR/GBP move a bit lower towards, but not below, the 0.85 mark, as an extension is probably already priced in. There also seems to be some support around 0.85. If, against our expectation, May’s deal passes, we expect the cross to move down to 0.83. If the House of Commons supports a no-deal Brexit, we expect the cross to move back to the old 0.87-0.90 range. For more details see Brexit Monitor: Brexit goes to overtime, 11 March 2019.
NOK faced a perfect storm last week as (1) Nordic bank worries, (2) a dovish ECB, (3) risk off and (4) confusion over the government’s announcement of the petroleum fund’s divestment of upstream oil divestment all weighed on the NOK. We must acknowledge we have been wrong on these near-term drivers - however, our fundamental predisposition clearly remains to sell EUR/NOK on especially strong domestics. We think the latest move has opened the way for some attractive opportunities when momentum stabilises, see NOK FX Strategy. The coming sessions are set to bring inflation (this morning) and the Regional Network Survey (tomorrow). If these releases (primarily the network survey) come out in line with our calls, we could be inclined to resell EUR/NOK in the not so distant future.
