Market movers today
Today we have another thin schedule on the data front. We get August euro area industrial production. With a small decline in the German figures, the strong rebound in recent months is set to fade.
In the US, we have several FOMC members on the wires. We will keep an eye out but expect no new signals.
The 60 second overview
Macro. The new IMF World Economic Outlook was published yesterday and it struck (not surprisingly) a more positive tone than was the case in its most recent outlook from June – thus world growth is now expected at -4.4% in 2020 against -5.2% in June. The upwards adjusted growth outlook concerns in particular the richer part of the world with for example the US now expected to see a GDP growth of -4.3% in 2020 (+3.7pp relative to June projection). With the more upbeat forecast, the IMF is now in line with our 2020 GDP growth forecasts for the US and Eurozone economies of -4.3% and -8.3%, respectively, while it is a little bit more optimistic about the Chinese growth prospects of 1.9% (compared with our forecast of 1% growth).
Vaccine. Eli Lilly has paused further trials of its COVID-19 vaccine candidate following safety concerns expressed by independent health supervisors about the development. The vaccine, which is currently in the so-called ‘test phase 3’ (the last before potential approval), is being tested by the National Institutes of Health on ambulatory and hospitalized COVID-19 patients (for more on vaccine developments see here: Vaccine development – an overview, 10 September). Eli Lilly’s candidate is of the same type recently used to treat President Donald Trump. The news arrives just one day after Johnson & Johnson on Monday said that it too would have to halt further testing after a study volunteer fell ill. Complications such as the above are by no means uncommon when testing a new vaccine and are certainly to be expected given the hastened development timeline.
US fiscal stimulus. The likelihood of a fiscal stimulus package being passed through Congress before the presidential election three weeks from now seems to decrease by the day. Thus, another day passed without Democrats and Republicans nearing any sort of consensus over the details of such a deal. Senate Republican leader Mitch McConnell yesterday opted to propose just a single vote on replenishing funds for the ‘paycheck protection programme’ for small businesses, which, however, was quickly rejected by the Democrats. This contributed to both US and European equities ending the day mostly in red (S&P: -0.63%).
FI. Another session leading to another rates lower / spread tightening session. The same drivers prevail as previous days, but the performance picked up speed on the US open. With no new risk assessment the European curves continue to bull flatten. Bunds declined 1bp to -56bp and while we are approaching the lower end of our expected trading range in coming months, we do not find a particular catalyst for a sell-off. At the same time, we do not expect, even in a risk-off scenario, that we will revisit the levels observed in March, which leaves us with a relatively tight trading range.
FX. The diminished outlook for US fiscal stimulus ahead of the presidential election had a clear impact during the US hours of the FX session: EUR/USD was down roughly 0.5%, while commodity (incl. NOK) and Eastern European currencies posted losses versus the greenback of more than 1%.
Credit. Reporting season kicked off yesterday, with both JP Morgan and Citigroup delivering better than expected results, mainly driven by lower loan loss provisions than expected. Nonetheless, CDS indices widened, with iTraxx Xover and Main 10bp and 1bp wider, respectively. Notwithstanding less upbeat risk sentiment, cash bonds held up and tightened marginally.
Nordic macro and markets
While the Riksbank has downplayed individual inflation prints during the pandemic, the September batch was not good. There were substantial drops in all measures of underlying inflation. This makes it even more interesting to track expectations; the monthly October survey is out today at 08:00 CEST. Eyes are on five-year expectations, which have trended over the past two years and where both CPIF and CPI printed 1.7% in September. Our best guess is that they stayed there in October. The Riksbank Board members seem to agree that these levels are acceptable, but some have explicitly said they would need to take action if expectations deviate much further from 2%. One of them is Martin Flodén who is scheduled for a speech at 08:30 CEST.
Amid a continued liquidity squeeze in the Norwegian money market, today’s monthly unlimited 3M NOK F-loan will attract attention. Given the uneven distribution of NOK liquidity we expect to see healthy demand, which should ease the short-term pressure somewhat. On a strategic basis we still think NOK liquidity is priced too cheaply in the rates curve for 2021 and 2022.
