Market movers today
Markets will today scrutinise the Trump administration's decision to raise tariffs to 25% on about USD200bn of goods. Moody's has said that a full trade war could push the US economy into recession in 2020.
In Norway and Denmark, CPI inflation rates for April are due out this morning. In Norway, we expect base effects will pull inflation down. In Sweden, household consumption data is due out.
In the UK, monthly GDP data for March is due out and hence will provide a full overview of GDP growth in Q1. GDP growth was solid in January and February, so quarterly GDP growth was probably around 0.5% q/q. This is quite high, but growth was likely supported by companies making Brexit preparations. We expect GDP growth will slow again to around 0.2% q/q in the coming quarters.
In the US, we have CPI inflation for April. We expect CPI core rose +0.2% m/m in April, implying a small increase to 2.1% y/y from 2.0% y/y. The inflation data should not change the Fed being firmly on hold.
Selected market news
President Trump yesterday announced that tariffs would increase by 25% on more than USD200bn of goods from China. There was limited progress in the trade talks between the US and China. An article from Moody's Analytics said that an all-out trade war between the US and China could put the US economy into recession already in 2020. Read more in China Notes - US hikes tariffs leaving high uncertainty in place , 10 May 2019.
Hence, the markets continue to be dominated by the lack of a trade deal between the US and China. The US equity markets fell yesterday, but sentiment in the Asian equity markets is more mixed this morning as most markets are down, while some have risen.
This morning we have published two reports. The first is on inflation in the Euro area, where we expect inflation to bounce back. See more here . The second is a chart pack on the global economy. See more here .
Scandi markets
In Norway and Denmark, CPI inflation rates for April are due out this morning. In Norway, core inflation delivered yet another upside surprise in March, rising to 2.7%. Reasons included stronger-than-expected price increases on plane tickets and food. These two components are notoriously volatile month to month, and particularly in the Easter month. We therefore expect to see a correction in the April figures, which along with base effects could pull core inflation down to 2.3%, exactly in line with Norges Bank’s estimate from the MPR in March. The risk is clearly tilted to the upside, and the consensus forecast is 2.5 %.
In Sweden, we get household consumption data for March. Consumption growth has crawled up a bit from last year’s lows and if retail sales is any guidance an outcome around 2% yoy seems fair. Today’s data is one of the final inputs to our Q1 GDP estimate, which currently stands at around 1% yoy, which is below the Riksbank estimate is 1.7% yoy.
Fixed income markets
The periphery bore the brunt of the sell-off yesterday as the yield spread to Core-EU. This was despite solid demand at both the 30Y Irish syndicated deal and the Spanish tap auction. Given the uncertainty surrounding the trade deal and new tariffs from the US, we could see more pressure on the periphery and especially Italy.
The main event in the Scandi region is the Norwegian inflation data, where a strong print would make a rate in June a done deal. The NOK-EUR yield spreads are already very wide, but the risk is that a strong number would add more pressure to NOK yields/rates. FX markets
The risk-off continued yesterday in USD/JPY and corresponding implied volatility. As the sell-off continues, we are now seeing the (until now somewhat immune) CNH starting to weaken and stress is slightly building here as well – although, so far, the interesting thing about CNH is not the size of the move but rather the direction. We see it as 50/50 whether tariffs are increased and volatility continues, or not.
As expected, Norges Bank yesterday emphasised that June is the most likely timing for the next rate hike, see review. Meanwhile, the NOK FX market reaction was limited by the ongoing uncertainty over the trade negotiations and risk-off in markets. That said, the announcement clearly underpins the NOK potential in a scenario where a trade truce or deal gets reached, as rates markets should be more ready now to aggressively price in a June hike. This morning, all eyes will be on the April inflation print, which is connected to substantial uncertainty on several sub-components. Irrespective, underlying inflation pressures are clearly rising in Norway, which is why we pencil in two additional rate hikes this year (June and December).
EUR/USD remained fairly immune to the bout of trade war-related headlines yesterday. It did shoot temporarily higher to 1.1250 at one point during the European trading session, initiating a temporary move lower in US rates. The move was likely more of a technical matter related to an option expiry than due to a change in fundamentals, in our view.
