Market movers today
- Today's key event is the U.S. labour market report after the surprise message from the FOMC on Wednesday. Based on the Markit PMI employment sub-index, we should expect a fairly weak job report in terms of job growth. We expect an increase of around 50,000 (which, however, is pulled down by a strike in General Motors (NYSE:GM), who are counted as unemployed in the job report). Both Markit PMI manufacturing and regional surveys suggest ISM manufacturing has risen in October. We expect a rise to 49.0.
- In the UK, the manufacturing index is due today. Despite the weakness in manufacturing in the rest of Europe, we could see an increase in the UK index, as companies may have stockpiled ahead of the 31 October Brexit deadline. We expect an increase to 49.0 from 48.3 due to stockpiling.
- ECB's resumption of the QE programme in November will commence today. Note that today also marks the first day with a new ECB President as Christine Lagarde takes office.
Selected market news
European and US bond markets continued the rally and the curve flattened further, as the Chicago MNI PMI dropped to 43.2, clearly pointing to a manufacturing recession in the Chicago area. Euro area headline inflation slowed further to just 0.7% in October, although core inflation actually moved marginally higher to 1.1% from 1.0%. That said, we actually had some better Chinese PMI data overnight. The Caixin PMI rose from 51.4 to 51.7. Especially new orders are looking strong. However, note that the official PMI released yesterday did not show any improvement for China.
There were also media reports that China will be reluctant to sign a long-term trade deal with Trump. The reports come as China and the US get ready to sign the 'phase 1' deal. However, the decision by the Chilean President to cancel the November 16-17 APEC meeting in Santiago due to social unrest in Chile has created a logistic issue of where to actually sign the deal.
Global bonds rallied despite the decision by the FOMC on Wednesday to be on hold for now. That said, the Fed is still data dependent and unsurprisingly, Trump sent out yet another Fed-bashing tweet saying that the Fed had called it wrong from the beginning.
The ECB's tiering was introduced on Wednesday and yesterday brought the first STR-fixing set under the new tiering setup. It was unchanged at -0.545% underlining that the tiering system so far has resulted in no upward pressure on short-end rates, which supported bonds in the short end of the curve.
Scandi markets
After falling continuously for three years, unemployment has begun to flatten out in Norway. Unchanged unemployment could indicate growth is approaching trend. However, the number of job vacancies is still growing relatively strongly, suggesting that the demand for labour remains buoyant and that unchanged unemployment is due to bottleneck problems. We therefore expect that unemployment was unchanged at 2.2% (s.a.) in October.
The PMI has vacillated considerably in the past three or four months, but the underlying trend is clearly down. Other indicators, too, are pointing to a slowdown in industrial activity, albeit not so pronounced as the PMI indicates. We therefore expect that the PMI rose marginally to 52.0 in October and see only limited downside given that activity in the oil-related industry remains high. The risk here is that the oil-related industry appears to be under-represented in the PMI.
Fixed income markets
European and US bonds continued the rally due to the combination of weak US data and uncertainty over the trade deal between US and China despite the Federal Reserve signalling being on hold for now at the FOMC meeting on Wednesday. Today, we have the US labour market report and a weak report is set to send bond yields further down. We are seeing a modest rebound in the European swap spreads as yields go lower and ahead of the restart of the QE. However, we are still at some low levels for the swap spreads such as the Schatz-eonia spread and the Bund spread. We expect to see some further widening as the QE starts especially in Germany and some of the other core markets such as the Netherlands and Finland.
In Denmark, the solid issuance of 30Y callable mortgage bonds continues. However, as we are at the announcement date for prepayments for the January-2020 term, issuance will slow down next week in the 30Y callables. This should support more OAS-tightening as the 30Y callables are one of the most liquid Aaa-rated bonds with a positive yield.
FX markets
On NOK we have been through several weeks with a thin domestic calendar. Now we are facing several important releases, which will influence market perception of the slowdown – albeit from high levels – that is facing the mainland economy. While the market impact of the PMI release is likely to be greater, the NAV labour market report is far more important for us in evaluating the state of the mainland economy. Should the releases come out in line with our expectations, it would give us comfort in our fundamental predisposition of picking up NOK from the current low levels.
The sharp drop in Swedish PMI (52 to 46) last month had a marked impact on the krona when EUR/SEK rallied from 10.73 to 10.80. Hence, we will keep a close eye on the data this morning. We do not have a strong opinion on this particular month, but we do think sub-50 will prevail for longer. This would support our view of a slowing economy and provides a headwind for the SEK. USD/SEK will take direction from the payroll number this afternoon, when the Swedish money market has already closed for the weekend (closes at 12:00 CET).
Following Wednesday’s FOMC meeting, weak Chinese PMIs and the news that China doubts a long-term trade deal, repriced Fed yesterday as 2Y USD swap rate dropped about 10bp, 2Y10Y US yield curve flattened and Brent dropped below USD60/bbl. All in all, a good combo for JPY, which saw strong gains yesterday - notably USD/JPY dropped below 108.00. A weak job report today could further extend these moves.
Key figures and events
