Market movers today
- Today we are looking out for the U.S. ADP jobs report, which may attract some attention (despite its poor forecasting ability) given the weak ISM manufacturing report yesterday. We have a below-consensus forecast for non-farm payrolls (Friday). Also look out for Fed comments today, not least with NY Fed President Williams speaking this afternoon.
- Today is the last day of the Conservative Party Conference. With the leaking of PM Johnson's Brexit plan (see below), the next key thing is the response from the EU.
- Yesterday we hosted a conference call on the global recession risk. The recording of the call can be found here .
- Danmarks Nationalbank is set to publish currency reserve data for September; we expect no intervention took place in September. More on Scandi markets on page 2.
- Finally note that the first STR (euro short-term rate) fixing - new benchmark rate within the euro zone - will be published today. We expect STR to fix around -54bp given the fixed spread of 8.5bp and the current EONIA level at -0.457%.
Selected market news
Late yesterday, PM Boris Johnson's Brexit plan was leaked to The Telegraph . Key elements are that the UK leaves both the single market and the customs union in 2021, while Northern Ireland leaves only the customs union but stays inside the EU single market for four years. This would create two borders and implies that Northern Ireland has no free trade with anyone to start with, and the proposal seems dead on arrival in Ireland, which probably means for the rest of the EU as well. EUR/GBP in muted drop on leak.
Yesterday, the U.S. ISM manufacturing came in at a weak 47.8 (down from 49.1 previously), which was quite a disappointment to the market and takes us below the levels of January 2016 when the last U.S. manufacturing recession hit. On the back of the release, U.S. rates fell, with notably 2Y swap rates down some 10bp and the dollar weakened with EUR/USD up roughly half a big figure. Equities down more than 1% in the U.S. and negative sentiment has carried over to Asia. Expectations for the October Fed meeting shifted to now stand at around 60% for an October cut as we indeed call for (compared with 40% before). More key U.S. data coming with the non-manufacturing ISM tomorrow and jobs report on Friday.
Also on Tuesday, the Bundesbank's Weidmann yesterday stressed the need to adhere to the current rules for the ECB's asset purchases and thus lashed out after Draghi's recent call for more unity among board members. This comes after another German, Lautenschläger, left the board last week on likely similar concerns, and thus adds to the internal tensions after September's announcement of 'QE infinity'. We expect the ECB to be on hold for an extended period but incoming president Lagarde will likely need to tackle the question of 'running out of stuff to buy' sooner rather than later to keep market faith in easing.
Scandi markets
Denmark. Danmarks Nationalbank is set to release September figures for its FX reserves. DKK weakened in the wake of the rate cuts from the ECB and the Danish central bank in mid-September. However, this has probably not triggered any intervention, as the Danish central bank has generally shown great patience this year in relation to the sustained weakness of the DKK. Indeed, last time the central bank intervened in the FX market was in January. Furthermore, the Danish government is set to release its draft budget today. Norway. Yesterday, it was announced that it made a USD400m transfer from its sovereign wealth fund in August and foresees more to come as oil revenues are shrinking. Indeed, this is set to be the new normal situation as Norwegian oil revenues decline. But we stress that for NOK flows, it is the size of the non-oil budget deficit that matters. In this respect, note that the Norwegian government is due to present its 2020 budget on 7 October.
Fixed income markets
Global bond yields - especially JGB ones - moved higher yesterday morning after the Bank of Japan scaled back on long-end JGB purchases and Japan’s Government Pension Investment Fund (GPFI) said it will now treat FX-hedged foreign bonds as domestic bonds.
Hence, it can now buy significantly more foreign bonds at the expense of locals. However, the sell-off came to an abrupt end on the weak US ISM report. Italy yesterday announced that today it will sell a new 10Y linker in a syndicated deal. BTPs underperformed slightly vs Bunds yesterday mainly due to the weak risk appetite after the ISM indicator and the new 10Y linker was introduced. Despite the weak PMI data from Sweden yesterday, the market still has a hard time pricing in a new rate cut from the Riksbank.
The new government in Denmark will publish the revised 2020 budget today. The Finance Minister released the updated finance requirement last night. It shows a DKK16bn lower budget surplus in 2020 and consequently the finance requirement has been revised higher from DKK61bn to DKK81bn in one month. It still points towards a DKK65bn DGB issuance target in 2020. The Danish Debt Office will sell the usual 2Y and 10Y bonds today. DGs often perform vs peers in Q4 given the reinvestment needs both in the government and mortgage bond market, more here.
FX markets
EUR/USD went only slightly higher after the dire ISM on Tuesday afternoon. Reflecting on markets: if we had previously been talking about coordinated central bank easing, improving Chinese PMIs and maybe even an - at least temporary - stalemate in both trade and Brexit woes, emerging markets would normally have performed. But these days, EM carry remains out of favour and cyclical currencies such as AUD, SEK and EUR continue to drift lower. On a day like yesterday, with dismal PMIs across regions, central banks do still appear behind the curve. In turn, we think the broad USD will stay strong.
EUR/SEK extended the drift higher after a dire print for manufacturing PMI. Historically, and only when viewed in isolation, the manufacturing PMI is now consistent with Swedish GDP growth running at zero and maybe even negative. Under ‘normal’ circumstances, Swedish PMI is to be considered a second-tier data point but in the aftermath of recent Swedish labour market weakness, yesterday’s PMI drop adds to the sense of Sweden being increasingly hit by the euro-zone slowdown. We do not see the latter abating in the short term and what happens next for SEK is to some extent dependent on how the Riksbank comes across in October. But risks remain very digital: either the Riksbank hangs on to the need for a hike on the argument that monetary policy has run its course – or they go on hold, as we look for. Near term, services PMI and Ingves speaking on Thursday are key; then 10 October is the CPI data. Do note our strategists’ remarks from the latest RtM Sweden that the Riksbank’s communication policy means that board members cannot openly shift opinion on policy in between meetings. This is important to keep in mind for SEK moves: a shift in the stance of board members may arrive as a sort of ketchup effect (bad data since last meeting and policy shift brewing but it might not be publicly visible until the October meet/minutes?). As Swedish data has continued to deteriorate, and given the recent signs that German manufacturing weakness is finally spilling over to Sweden, we believe it is about time that the Riksbank acknowledged the weakness and as a first step postponed their planned hike to sometime in Q2 20 at least. Thus we see a clear and substantial upside risk to our 1M EUR/SEK target of 10.70.
Yesterday’s PMI figures out of Norway also put pressure on the NOK. Meanwhile, we want to emphasise that the details looked a little fishy relative to other indicators of the manufacturing sector. In particular, domestic manufacturing orders looked odd. We want to see next month’s print and not least the SSB industrial confidence release before we conclude that weaker global growth impulses are countering the positive impact from oil investments. Irrespective, we still think this is primarily a story for NOK rates markets as the global investment environment remains far more important for NOK FX at this stage.
This is best illustrated by the four Norges Bank rate hikes and coinciding NOK weakness over the last year. For now, we emphasise that we still see near-term risks skewed towards more NOK weakness on external drivers.
Key figures and events
