Market movers today
In the euro area, the ECB minutes from the December meeting are due out. See page 2.
In the US, several speeches by FOMC members are expected, including Fed Chair Jerome Powell and Vice Chair Richard Clarida, which might be of interest given the current market repricing of the Fed hiking cycle.
In the UK, the Brexit debate has begun ahead of the vote next week, which Theresa May is expected to lose.
In Denmark and Norway, CPI numbers for December are due out and in Sweden, November production data is being released.
Selected market news
Recent FOMC communication, including yesterday’s release of FOMC minutes, continues to highlight the Fed’s flexibility on further rate hikes, as the FOMC members think they can afford to be patient hiking further as long as inflation remains under control. As the Fed would probably like to see a rebound in market risk sentiment and an improvement in the global business cycle (and a continuation of solid economic data releases in the US), it supports our view that it will skip a hike in Q1 and wait until Q2 (either in May or June, the timing is more difficult this year now that all meetings may be ‘live’, as Powell now holds a press conference after every meeting). One important dovish twist in the FOMC minutes is that ‘several participants’ noted the recent drop in market-based inflation expectation gauges, suggesting it may be an important variable to follow again.
Another new thing is that the Fed now also signals some flexibility on the reduction of the balance sheet (‘QT’), which may stop earlier than the Fed has aimed for previously (although it has never explicitly set a target for the level of the balance sheet), something we have highlighted many times that it might be forced to do. A more flexible Fed should be positive for risk sentiment. US equities and Treasuries rallied initially after the release only to fall back a bit later in the evening as news broke that Trump might be cancelling a trip to Davos, where he is supposed to meet with the Chinese Vice President.
PM Theresa May suffered another heavy defeat on Brexit yesterday, as the House of Commons passed an amendment forcing her to present a Brexit ‘plan B’ for Parliament within three days if she loses the vote on her deal next week, which seems very likely. Note that a previous amendment passed last year means that the members of the House of Commons can debate and amendment her statement (i.e. they can try to tie May’s hands by telling her what she should seek to get in the negotiations). With less than three months to Brexit day we are in uncharted territory, and it is difficult to predict where Brexit will end. In our view, May’s deal (or something very similar) being passed at a later stage or a second EU referendum are the two most likely outcomes right now, but something needs to give before either happens.
