Market movers today
- As Brexit headlines are thinning now that the UK Parliament has been suspended until mid-October, a quiet day awaits us. Markets are in a wait-and-see mode ahead of the ECB meeting tomorrow (have a look at our 'cheat sheet' on what to expect: ECB Meeting 12 September: Predicting the unpredictable - market reaction after ECB ).
- The only releases worth noting today are Spanish industrial production figures for July and OPEC's monthly oil market report, which will contain forecasts for both demand and supply.
Selected market news
It has been fairly quiet overnight as markets still await crucial monetary policy decisions from especially the Fed next week and the ECB this Thursday. This morning most Asian equity indices are trading in green following US counterparties after a late rally during the US session characterised by continued 'value' buying and 'growth' selling. Notably the FI sell-off eased somewhat overnight with 10Y US treasury yields falling back from a one month high. Also 2Y US swap rates are modestly lower this morning after a fairly consistent sell-off that has seen the rate go from 1.42% to a high of 1.68% in just one week.
Yesterday US President Donald Trump ( presumably ) fired his national security advisor John Bolton who has been known for his notoriously hard-line approach against US adversaries. It is well known that Trump's and Bolton's working relationship has deteriorated lately and it seems Bolton advising against a meeting with the Taliban was the straw that broke the camel's back. The market impact was limited upon announcement even though oil slid a little as it could mean a softer stance against Iran. Trump stated he will announce a new - and fourth under his presidency - national security advisor next week.
The release of both inflation and the Regional Network survey yesterday was key for all with interest in Norwegian macro and markets. Core inflation disappointed at 2.07%, which was primarily due to lower imported inflation, whereas domestic core inflation rose modestly (to 2.62%). With the summer weakening of the NOK in mind we think the drop in inflation will prove temporary, as imported inflation is set to rise over the coming quarters as illustrated by this chart . We expect Norges Bank (NB) to make the same analysis even if inflation is a drag on the rate path at the meeting on 19 September. More importantly, for the actual rate setting decision the Regional Network Survey indicated a 2.7% annualised mainland growth outlook for the next six months. This is clearly higher than the economy's potential. Importantly, the survey also showed strong labour demand, a rising share of companies reporting of capacity problems and that heightened international risks so far have not been a significant drag on activity or investment levels.
In June NB clearly indicated a September rate hike and in August the bank concluded that 'the outlook for the policy rate ahead is little changed since June' despite global risks creating 'greater uncertainty about policy rates going forward '. Given all this we expect NB to hike policy rates by 25bp next Thursday whilst lowering the longer end of the rate path to almost flat levels, i.e. indicating that rates have likely been hiked for the last time. In comparison markets price the hike at less than 50% probability.'
Scandi markets
After a couple of eventful days in Scandi markets there are no tier-1 releases due today.
Fixed income markets
The upward pressure on global bond yields continued yesterday with a selloff in Europe, Japan and the US (even if the move has eased overnight, see front page). The move in 10Y European yields (swaps and Germany) is highly correlated with the move in the US and Japanese 10Y government bond yields and thus just not only a reflection of a change in the market expectations of QE by the ECB. Furthermore, the bearish steepening seen in the Euro curves we have also seen in the US curves.
We expect the negative sentiment in the global bond markets to continue until the ECB meeting on Thursday, when we will know more regarding the outlook for monetary policy. See also our ECB preview and possible market reaction here.
Today, Portugal is coming to the market as the Portuguese debt office will tap in the 10Y and 15Y segment. We expect to see strong demand at the Portuguese auction given the recent rise in yields.
One market which is defying the rising rates is Sweden, where the inflation data released yesterday were below the market’s and the Riksbank’s expectations. Hence, we saw a traditional bullish steepener of the Swedish government yield curve as well as a spread tightening to EU peers. We expect there is more to come especially on the spread tightening.
FX markets
Yesterday was a bad day for the Riksbank and for the SEK: first the significant setback in the quarterly Prospera, then the big drop in inflation, which in turn is likely to put further negative pressure on Prospera. Bad timing ahead of the upcoming wage round and, in our view, a reason for the Riksbank to give in on any rate hikes in the near future. There was quite a significant knee-jerk reaction in FX compared to the money market, where RIBA only took 4bp of cuts until April next year, now indicating -9bp. Mr Ingves’s comments in the afternoon should be taken with a grain of salt, since he is basically referring to the monetary policy report. We expect more easing risk to be priced in. EUR/SEK remains a strategic buy on dips in our view.
The NOK also erased a part of recent gains in a move initially started by Norwegian inflation falling short of expectations, amplified by Swedish inflation/SEK weakness and then finally aided lower by the Regional Network Survey headlines falling short of expectations. However, we think markets failed to appreciate the details of especially the Regional Network Survey. Hence, we still see a tactical case for a move lower in EUR/NOK on especially relative rates over the coming weeks.
In the past two weeks, USD/JPY has moved from low 105s to around 107.5 and markets have been unwinding hedges across the board. We remain reluctant, however, to extrapolate the momentum. Ironically, stabilising markets may be just what tips Fed in a more hawkish direction next week. On trade, optimism has been brewing for the October meeting but nothing is tangible as of yet. We view tail risk as elevated going into the coming weeks and maintain our view that USD/JPY and EUR/JPY remain in a downtrend.