Market movers today
In our core markets, all focus is on Norges Bank (NB), which we expect to raise the policy rate by 25bp to 1.00%, as the economy is in very good shape. We expect NB to signal another rate hike this year, with more to come next year, which is more aggressive than current market pricing. See next page for full preview and market implications. See more: Reading the Markets Norway: Norges Bank preview: not as dovish as markets expect , 18 March.
Today, the EU leaders meet to discuss, among other things, whether to grant the UK an extension of Article 50. A final verdict is not expected today. The EU summit starts at 14:00 CET and the Brexit discussion at 15:30. A press conference will be held afterwards.
The Bank of England meets today and Carney & Co seem to be in no hurry to raise rates in the current environment. Our case for a rate hike in November 2019 is under pressure given the other dovish central banks.
The Swiss National Bank (SNB) is widely expected to keep its policy rate unchanged at -0.75% at today's quarterly meeting.
Overnight to Friday, we get Japanese inflation numbers.
Selected market news
Unsurprisingly, the Fed maintained the target range at 2.25-2.50%. However, the biggest change to the statement is that the Fed thinks the US domestic economy has slowed . The 'dot plot' was lowered significantly and the median dots are signalling no rate hikes this year and just one rate hike next year . Five (out of 17) FOMC members think the Fed is on hold until at least year-end 2021.
Based on the dovish Fed, we also have to admit we have misread the Fed. With the new signals, it seems like the bar is high for the Fed to move again on rate hikes. In previous hiking cycles, we have not experienced the Fed pausing for a long time and then resuming hiking and hence we no longer expect the Fed to hike in this hiking cycle . See more in FOMC review: Fed done hiking rates , 21 March.
On Brexit, in a letter to Donald Tusk, PM Theresa May outlined she wants a short extension until 30 June 2019. That said, we see the options being either a very short one to mid-May or a long one lasting into 2020. Our base case remains the latter. The risk scenario is that the EU27 leaders reject an extension, as they are more hawkish on Brexit than Tusk, Juncker and Barnier. Today's EU summit is only expected to discuss the principles of an extension and a final decision can be taken next week right before deadline, as it would allow May to try to get her deal through the House of Commons a third time. Donald Tusk and other leading EU politicians said the EU is ready to grant a short extension IF the UK passes the Withdrawal Agreement (WA). The EU has repeated said there will be no more negotiations on the WA. The EU commission has recommended to grant either a short extension to mid-May before the European elections or a long one lasting until at least end-2019.
On the trade war, in another bow to trade war dynamics, Trump said he intends to keep tariffs in place for 'a substantial period of time' until China adheres to the ceasefire.
Scandi markets
We expect Norges Bank to raise the policy rate by 25bp to 1.00%. The economy is close to capacity, and we expect growth to remain above trend both this year and next, pushing capacity utilisation up further. Unemployment continues to fall, wage growth is picking up, and inflation is above the 2% target and rising, which all suggests that the normalisation of monetary policy should continue. We therefore expect Norges Bank to signal another rate hike this year, with more to come next year. The outlook beyond 2020 is uncertain, with the growing risk of a downturn in both the global and the domestic economy. If we are right, this would be more aggressive than current market pricing, which is coloured by global uncertainty and more cautious signals from the ECB.
In Denmark, today brings the monthly employment figures for January. The labour market looked strong for most of 2018, with an average of 3,800 jobs created per month, but December brought a slightly weaker picture, with private-sector employment increasing by a more modest 1,750, down from a monthly average of 3,400 over the year as a whole. It will be exciting therefore to see which way things headed at the beginning of 2019. We also get March data for consumer confidence, which has become increasingly entrenched at lower levels due to a less positive view of the economy. We expect the indicator to climb slightly from 3.3 in February to 4.0 in March.
Fixed income markets
The FOMC effectively went on ’neutral’ or patience/wait-and mode last night as it signalled it will not tighten this year and only hike once in 2020 according to the dots. The new forecasts and the rhetoric from Powell were clearly to the dovish side. The FOMC also said it would start slowing down the balance sheet reduction in May and halt it in September. The belly of the Treasury curve rallied strongly and 5Y yields dropped 8bp. The curve 2s5s inverted further to -6.7bp, while the 10s30s curve steepened to 44bp. The market stepped up the probability that the next move will be a cut and some 18bp is priced in cuts over the next 12M months.
Today, the EGB markets will have to absorb supply from France and Spain. Spain will sell in 3Y, 10Y and 20Y bonds. We prefer the 3Y-5y segment in Spain given the roll on this part of the curve. Spain is up for review tomorrow by S&P (A-/positive outlook). Given the Spanish growth outperformance, Spain is heading for an upgrade, but with the election uncertainties it is likely that S&P will wait until September before pulling the upgrade trigger. France will open a new 10Y linker (Mar-29). The volume is set at EUR1.5-2.5bn. France will also tap in the Feb-22, May-22, Mar-24 and Nov-25 bonds.
FX markets
In Scandi FX markets, all eyes turn to Norges Bank (NB) today; see scandi section above for a full preview. There is much focus on recent dovishness from other central banks and there still seems to be a perception in the markets that NB “is always dovish” (this is actually an outdated perception, see this table). If we are right, we would expect a move lower in EUR/NOK. The big question is whether we will see a break of support levels in the 9.63-9.65 range in today’s session. Eventually we do think we will see a break to the downside. For more return statistics and a comment on option pricing, see this tweet. We think that a hawkish surprise from Norges Bank would, on the margin, spill over positively to the Swedish krona, where a test/break of 10.40 should be within reach. The dovish Fed sent the USD lower last night and given that the rates market is now pricing a cut next year, we further see limited downside potential for USD from the current level.
Soon focus should shift back to possible additional easing from the ECB. Hence, we remain confident in our 1.13 forecast for EUR/USD on 3M (NYSE:MMM).
After the ECB has deferred a first hike, the SNB will be stuck with a franc that will most certainly still be denounced ‘highly valued’ and a need to reserve its right to intervene to curb CHF strength. SNB is currently priced largely on par with the ECB for the next 12M, which seems fair in our view given that it would require a sustained uptick in EUR/CHF before the SNB looks to shift into ‘genuine normalisation’ mode.
EUR/GBP moved higher to 0.865 yesterday due to Brexit. As an extension before 29 March remains more or less priced, we expect EUR/GBP to remain above 0.85. If EU27 explicitly rejects an extension, which we cannot rule out given the more hawkish Brexit stance among EU27 leaders (10% probability), we should see EUR/GBP break above 0.87, as markets would start pricing in a higher risk of a no deal Brexit again.
