Market movers today
With ECB’s meeting behind us, the markets will remain sensitive to potential sources stories, which may indicate the difference on views on the size of rate hikes at the September meetings and onwards.
The big market mover today is however, the US CPI print for May. Given that base effects are playing into the annual numbers, key focus is on the monthly momentum where expectations are for further increases in the headline inflation while monthly increase in core inflation should remain around 0.6% which would be equivalent to 6-7% in annual terms, way above the Fed’s comfort zone.
In both Denmark and Norway, we also get CPI data for May (see Nordic section for further detail).
Another interesting release is the Michigan consumer survey, where the overall index should stabilise after months of sharp drops. A key thing to watch out for in the report is the inflation expectations especially in the long term.
At today’s policy meeting, the Russian central bank is expected to reduce its policy rate from 11% to 10% on the back of abating inflation pressures.
The 60 second overview
ECB: Yesterday’s ECB meeting ended with wider spreads and flatter curves as ECB is beginning its hiking cycle where 50bp is the baseline for September in our reading. ECB guided for a rate hike of 25bp in July. We believe that it will take significant upside or downside surprise for ECB to deviate from this guidance. Net asset purchases will end on 1 July in line with previous guidance of Q3. We keep our rate hike expectations of a sequence of 25bp, with the exception of September where a 50bp hike is our baseline. Risks are still skewed for more than one 50bp rate hike, but with the current very uncertain outlook we expect the economic outlook will dampen the medium inflation pressure, making our preference for 25bp hike. Markets are now pricing in 148bp by year end (+14bp on the day).
EUR/USD fell on hawkish ECB: In our view, this ECB meeting confirms our view that rate hikes are a global phenomenon intended to make markets rotate towards less risky positions and a lower EUR/USD spot is part of such rotation. For Europe, widening spreads is also crucial to why EUR/USD heads south as we price in higher rates and as explained in, the ECB is fighting strong valuation forces when trying to strengthening the single currency. Looking ahead, we continue to see EUR/USD towards parity.
Getting towards the end of rate hikes in Eastern Europe? At the press conference yesterday following Wednesday’s expected decision to hike its benchmark rate by 75bp to 6%, the Polish central bank governor signalled that a rate cut could come into play towards the end of 2023 and that NBP is “certainly closer to the end than to the beginning of the tightening cycle”.
Equities: Another day with equities lower and both European and US equities finishing close to day-lows. Reasoning being ECB deciding to hit the brakes and thereby joining the increasing group of central banks around the world implicitly acknowledging they are behind the curve. Equity investors are trying to figure out whether central banks can super charge the tightening cycle and still manage a soft landing. Increased uncertainty is the primary result of this and hence the reason why cyclicals underperformed defensive by less than 50bp although MSCI world was down almost 2% yesterday. In US Dow -1.9%, S&P 500 -2.4%, Nasdaq -2.8% and Russell 2000 -2.1%. Most markets are lower in Asia this morning but much less than one could have expected on the back of the Wall Street session yesterday. European futures are down as result of the weak US performance yesterday while US futures are slightly higher this morning.
FI: Yesterday’s ECB meeting ended with wider spreads and flatter curves as ECB is beginning its hiking cycle where 50bp is the baseline for September in our reading.
FX: Cyclically sensitive currencies took a hit in yesterday’s session with AUD, NOK and ZAR leading losses in major space. The USD was the general top performer while the ECB meeting failed to deliver any meaningful support to EUR with EUR/USD falling back towards the 1.06 threshold level.
Credit: Credit markets were weak from the morning and the weakness intensified on the back of the ECB meeting, which made iTraxx Xover close almost 16bp wider and Main 3.4bp wider. Following the last days’ widening, both indices are now close to 2022 highs, with Xover currently at 470bp and Main 94bp.
Nordic macro
Norwegian core inflation has been trending upwards since late last year, and we expect a new lift from 2.6 % to 2.8 % in May. This is clearly in the lower end of the forecasts, which ranges from 2.8-3.2% with an average of 3.1%, as we expect some of the typical Easter effects from April to be at least partly reversed. That said, we acknowledge the fact that the risk is tilted to the upside as global inflation clearly is trending upwards, as illustrated by the recent European and even Swiss figures. This will anyway be above Norges Bank’s forecast of 2.6% in the March monetary policy report, so the question is whether it would be enough to confirm the market’s aggressive expectations of the central bank ahead of the June rate meeting.
