Market movers today
- After the Fed meeting, we have another interesting central bank day ahead of us.
- We expect ECB to communicate a patient approach to rate hikes although calling an end of the PEPP programme as scheduled in March 2022. We expect new forecasts to show a marked upward revision in the near-term inflation outlook, but with HICP inflation falling back below 2% in 2023 and 2024.
- The big event in Scandi markets today is naturally the Norges Bank meeting. We still expect Norges Bank to deliver the hike but highlight that it has suddenly become a much closer call than expected not long ago as the latest Omicron-induced restrictions have suddenly shed doubt into markets as to whether we will get a hike and rates markets are pricing the hike at roughly 70%.
- In the UK, we expect the Bank of England (BoE) to stay put for the second meeting in a row although inflation is high and labour market is tight, but the possible impact of Omicron and new restrictions on the economy will in our view tie its hands. Markets are pricing in approximately 6-7bp, so around 50% probability of a 15bp rate hike.
- The Swiss National Bank (SNB) is set to leave the monetary policy rate unchanged at today’s meeting. The SNB will also deliver new inflation and growth forecasts, where we expect a comment on the higher inflation with CPI for November reaching 1.5%. Risks are tilted towards SNB commenting on the recent level shift.
- In EM, the Turkish central bank decision is in focus after it cut rates in November and President Erdogan’s call for lower rates despite high inflation and weakening of the exchange rate. Market is expecting another 100 basis point cut.
- In data releases, we get PMIs from the euro area and the US.
The 60 second overview
Fed is catching up to reality: The Fed doubled the tapering pace to USD30bn per month (up from USD15bn), implying QE bond buying ends in March. The Fed now signals three rate hikes in 2022 (up from 50% probability of one single rate hike in 2022 in the September projections). In other words, the Fed is catching up to market pricing and consensus among economists, as the economy is in good shape and inflation is high. As Fed Chair Jerome Powell hinted that he does not see an “extended wait” from the end of QE until the first rate hike, we now expect the Fed to hike already in May (June previously). We still expect the Fed to continue hiking in September and December (and additionally four times in 2023). For more details see Fed Research – Review: Catching up to reality – first rate hike likely in May.
Equities: Equities were in a rollercoaster session as investors digested the Fed meeting. The knee-jerk reaction from a more hawkish-than-expected Fed was sending up short end yields, some relief in equities overall, but growth/long duration stocks selling off. This turned out to be short lived. Nasdaq made a U-turn during the press conference, with growth and defensives abruptly taking the lead, value cyclicals selling off. Tech and health care best performers, banks and energy in the bottom. S&P500 closed up 1.6%, Nasdaq a massive 2.2%, Dow 1.1% and Russell 2000 1.7%. Asian markets less convinced, with mixed markets this morning. US futures point slightly higher.
FI: The European trading session was as uneventful as one may have anticipated as from early morning focus was on the FOMC meeting last night and the string of central bank meetings today. The initial response to Fed’s accelerated taper (of USD30bn, bringing an end to net purchases in March), and the dots signalling three hikes, was a flattening of the curves, however, after Powell’s press conference curves ended steeper on the day (both 2s10s and 10s30s up 2bp, respectively). The little market reaction through the FOMC decision and press conference suggest to us that Powell carefully guided markets ahead of the FOMC’s blackout period, and that the Fed catches up to market pricing (and consensus among economists).
FX: The FOMC message drove a V-like price action in most currency pairs with USD initially gaining on the outlook for tighter US monetary policy but then more than erased gains amid risk performing. Consequently, EUR/USD is now back close to 1.13 while EUR/NOK has moved back below 10.20 and EUR/SEK back in the mid 10.20s.
Credit: The positive sentiment returned to credit markets yesterday where both CDS indices and ash bonds performed well. Itraxx Xover tightened 2.4bp and Main 0.4bp. Both HY and IG bonds tightened 1bp.
Nordic macro
New corona restrictions increase the risk of Norges Bank delivering a “hawkish unchanged” message today by keeping rates unchanged but maintaining a tightening bias. We still think a hike is more likely as the risk of Norges Bank falling behind the curve will be jeopardizing its “gradual” narrative.
