Market movers today
Danmarks Nationalbank (DN) sold DKK in FX intervention for DKK47bn in December amid downwards pressure on EUR/DKK. It was the second highest monthly FX intervention selling of DKK on record. It has created speculation about whether DN would respond with a rate cut and possibly already today – a rate decision would come at 17:00CET. We do not expect a rate cut as we attribute the developments in December to temporary factors.
German HICP inflation in December is due out at 14:00 CET (regional inflation prints are due out during the morning). We are also looking forward to the German factory orders in November after the sharp decline in October.
In the US, ISM services and jobless claims data are due out in the afternoon.
Fed’s Daly and Bullard are speaking tomorrow but we do not expect them to move markets significantly taking the Fed’s hawkish shift in December into account. Fed’s own signals are now very much aligned with market pricing and consensus.
The 60 second overview
Hawkish tilt in FOMC minutes: There was definitely a hawkish tilt in the FOMC minutes from the December meeting released yesterday. The minutes suggested that March is a live meeting (and investors started pricing in a ~75% probability of a rate hike in March), as the economy is in good shape and inflation is high. This also opens the window for not just three rate hikes this year (which is our base case and what Fed signalled in the December dots) but four if the Fed hikes once per quarter as was the case when the hiking cycle started for real after the financial crisis. The Fed also discussed when to start reducing the balance sheet, which is quite large compared to previous rounds of QE. FOMC members indicated that they would like to start “quantitative tightening” earlier and run off holdings faster than last time. That said, the Fed funds target range remains the primary policy tool, according to the minutes. The Fed also said that it prefers holding Treasuries over mortgage-backed securities.
US labour market: According to the ADP rapport, private payrolls jumped by 807,000 in December. ADP is, unfortunately, not a very good indicator of the official jobs report due out on Friday. But if true it is a good sign supporting the case for tighter monetary policy further.
Energy: Energy prices have bounced back again over the last couple of days. Natural gas prices are back at early December levels after a plunge around new years and Brent crude oil has traded back close to USD80 per barrel even after OPEC+ producers stuck to an agreed output target rise for February. Energy prices look set to keep headline inflation at elevated levels through the winter.
Equities: Equities lower yesterday as the US session turned from neutral to very bad and hence Asia and Europe have to do some catching up today. If we focus on the US session, FOMC minutes fuelled the fire and suddenly yield moves went from an acceptable pace to too fast and rotation in equities shifted to sell-off. Please note the level of yields is not yet a challenge for equities, it is the speed of change currently challenging the risk sentiment. With the central bank fear increasing we saw the classic defensive value rotation where large cap and low vol stocks also outperformed. The flip side of this, tech, long duration, small cap getting hammered. With uncertainty increasing the VIX rose 3 points to north of 19. In US Dow -1.1%, S&P 500 -1.9%, Nasdaq -3.3% and Russell 2000 -3.3%. The negative sentiment is feeding through to the Asian session this morning with all markets lower, led by Japan and Australia. Futures in Europe not surprisingly sharply lower while US futures have turned negative as well after being in green in the early Asia trade.
FI: Yesterday was a very low volatile day in the fixed income markets with broadly unchanged yields in Germany and France, but 2.5bp rise in Italian 10Y government yields on a day with the syndicated sale of the 30Y Italian bond.
FX: EUR/USD rose during the day but some of the gains were erased after the hawkish tilt in the FOMC minutes and the cross was still trading above 1.13 at the time of writing. EUR/NOK rose back above 10.00. EUR/DKK was largely unchanged yesterday, as the rates market started speculating in an imminent rate cut following the fast pace of FX intervention in December.
Credit: CDS indices sold slightly off yesterday where iTraxx Xover closed 3bp wider and Main 0.7bp. HY bonds managed to tighten 1bp while IG was unchanged.
