Market movers today
Super Thursday has arrived with many important releases and events. In Sweden, all eyes are on the Riksbank. We expect the Riksbank to signal a delay of the intended next rate hike and at least a verbal intervention stating the hike will come in February rather than December. Most likely it will be accompanied by a shift in the repo rate path too. We see no reason to change our call for a February rate cut as we expect data to deteriorate into next year.
The Norges Bank meeting is expected to be less of a market moving event, as we do not anticipate any new signals from the bank at today’s rate-setting meeting. The bank signalled clearly in September that interest rates would probably stay around the current level for a long period. Norges Bank will therefore repeat the message from its September meeting.
In the euro area, we also have a busy day ahead of us. First we get PMI figures from the euro area and Germany. We expect the current manufacturing recession to drag into Q4 19, as trade war effects continue to work their way through the supply chain and since order-inventory dynamics are weighing on production. Domestic demand is still holding up albeit with signs of weakness, so we expect the service print to stay broadly unchanged.
Later today, the ECB will present the outcome of its monetary policy discussions. We do not expect any policy changes or new messages from the ECB at Draghi’s final meeting before leaving office on 31 October. The cacophony from governing council members will receive attention in the Q&A amid declining inflation expectations. See also ECB Preview – Arrivederci Mr Draghi, bonjour Mrs Lagarde, 18 October 2019.
In the US, we get preliminary Markit PMIs for October. We expect manufacturing PMI to remain broadly unchanged. We and others have been caught by surprise by the sharp fall also in Markit PMI services. Unfortunately we do not have good indicators forecasting the service index but expect it to remain above 50. We also get core capex data for September. So far core capex has been holding up despite weak soft indicators, but we expect the coming releases to come in slightly weaker.
Selected market news
Asian equities are generally stronger this morning as earnings from several companies were better than expected mitigating some of the concerns about the global economy’s wavering growth momentum. On Brexit, EU ambassadors agreed that an extension should be granted to the UK, but they failed to agree on how long the extension should last. The French side wants to give the UK a tight deadline of 15 November, while other countries are open to granting the UK the three month extension that it has applied for. EU ambassadors intend to decide on the issue tomorrow when they meet again.
Scandi markets
Further to the comment on the Riksbank on the first page: As far as we have seen, all Swedish banks (economists) expect the Riksbank to lower growth projections and to some extent delay the rate hike that currently is said to be in pipeline late this year or early 2020. Most banks question if there will be a rate hike at all next year. Still we sense that investors are more uncertain. Both private and official forecasters have marked down growth assumptions of late. The National Institute of Economic Research just recently stated that the recovery is over. The Debt Office yesterday raised borrowing projections for the next two years on the back of a steeper decline in growth. From this perspective it appears only natural that the Riksbank will make a similar downward adjustment. So why are investors uncertain? The answer is probably historical experience. Prior to 2014/15 when the Riksbank lost control over inflation expectations and vent into panic mode, there were several episodes when the Riksbank stubbornly held tight to their forecast until the very last minute. One example; in the September 2011 monetary policy report the repo rate projections showed continued rate hikes through 2012. Three months later, in December, when it was obvious that the Euro-zone was in recession, they cut the repo rate and then continued to ease all the way down to -50 basis points. Recent comments by Riksbank board members resemble a bit of the 2011 experience. So, expect some market volatility today.
In Norway, we do not anticipate any new signals from Norges Bank today. The bank signalled clearly in September that interest rates would probably stay around the current level for a long period. Developments since have been something of a mixed bag but, on balance, largely as expected. Norges Bank must recognise the recent weakness of the NOK, but will careful not to be interpreted as hawkish. The Bank will therefore repeat the message from its September meeting. The LFS unemployment rate is expected to drop moderately to 3.7 % in August, but we pay little attention to this measure.
Fixed income markets
Global yields edged lower for a 2nd day as risk appetite remained under pressure in light of the Brexit uncertainty. We published a note yesterday investigating the factors behind the recent move higher in yields.
BTP’s reversed some of yesterday’s gain as investors increasingly are concerned about how the EU Commission will receive the new budget. However, the budget situation is much better than last year where Italy got a deal in the end with the EU Commission. Moody’s said that they do expect a compromise this year and that they do not expect a confrontation like last year. We share this view. Italy is up for review by SP on Friday. We expect that the negative outlook will be changed to neutral or even positive. Note also that Italy saw very good investor demand for the 8y BTP Italy linker that has been sold over the last three days.
Note that the Fed last night increased the overnight repo operations to at least USD 120bn beginning October 24. Hence, the Fed seems strongly committed to keep money market rates in cheque.
FX markets
FX markets looking to central banks today with the Riksbank rate decision a key event in Scandiland. If we are right that the Riksbank will opt for some type of postponement of the currently indicated turn of the year-hike, history suggests this would spell volatility for EUR/SEK as the average intra-day high/low on a lowered rate path has been 15 figures with the cross and closing 8 figures higher on the day, on average. Further, markets are currently pricing a non-negligible probability of a December hike, which should speak in favour of a rather sizeable move should we get our call correct. If so, today could mark the starting point of renewed pressure on the SEK. More in FX Strategy – EUR/SEK response to Riksbank rate path decision, 23 October 2019.
Also for NOK the Riksbank announcement is paradoxically likely to be more important than the Norges Bank meeting today. While developments since the September Norges Bank meeting are pointing towards an eventual additional rate hike, Norges Bank has not had a history of giving new policy signals at these short meetings. What is more, since press conferences were removed from the interim meetings in 2017 price action have been very limited in both rates and FX space on these days; see here. As such, should our call on the Riksbank materialise, we would expect a ‘sympathy’ move higher in EUR/NOK, even if NOK/SEK positions are likely to limit the move.
While today’s ECB meeting may be a ‘non-event’ from a policy perspective, we are less sure if that will also prove to be the case in FX. An ECB which simply commits to its already announced easing plans and talks about caution in evaluating the effect of these would likely not be enough to propel further optimism in to markets about the long and short-term prospects for the euro area. In turn, a ‘passive’ ECB – as we look for -could very make EUR/USD go slightly higher on-the-day. We stress however that the broader risk environment still favours EUR/USD close to – and possibly at times below – 1.11 near term. Finally, note that New York Fed yesterday announced that it will increase the limit on its overnight repo operations to USD120bn (from USD75bn) until 14 November and the limit on its next two term repo operations to USD45bn (from USD35bn). This is an attempt to further ease funding market pressure, in particular over the coming month end.
In Turkey, today we expect the Turkish central bank to cut its repo rate by 100bp to 15.50% as inflation dropped to single-digit territory and the central bank stays under pressure in order to revive sluggish economy. Given the recent easing in geopolitics, a larger cut is also possible. Yesterday, the TRY advanced for the second day as the Erdogan-Putin deal in Sochi opened a door for the end of Turkey’s military operation in north-eastern Syria. Inspired by the news, the US President Donald Trump declared he would remove anti- Turkish sanctions linked to the recent military incursion in Syria. The developments facilitate further stabilisation of the TRY.
