Market movers
The main focus is on the Fed meeting tomorrow and the continued bond rout which pushed S&P500 into bear market territory yesterday.
Sweden CPI today is expected to overshoot Riksbank expectations and pave the way for a 50bp hike in two weeks. We look for CPIF to rise 5.2% y/y, four tenths above the Riksbank but in line with consensus. In Scandi, we also get the Norway regional network survey.
German ZEW will add more information on whether the German economy is heading for recession. After falling sharply in March and April, the index increased slightly in May and consensus looks for a small further rise in todays’ June reading.
In the US we get the NFIB small business optimism index for May, which also provides key inputs on price expectations and labour shortage. US producer prices are also due out.
The 60 second overview
Market wrap-up: Bond yields continued higher yesterday with US 2-year yields rising more than 20bp, which drove the US 2-10 yield curve into negative territory. The money market now prices a more than 90% probability of a 75bp hike from the Fed tomorrow and above 50% probability of another 75bp hike on one of the following meetings. US equities dropped another 3.9% pushing the S&P500 into bear market territory being down more than 20% from the peak. Markets have settled down a bit in Asia with the S&P future up 1% and yields coming off the highs. Asian stocks are lower in a catch-up move with US US markets last night.
Oil: Despite the sharp sell-off in risk markets, oil prices are holding steady around USD 121 per barrel (Brent future). It points to a very tight oil market with more travelling and Chinese post-lockdown rebound pushing up demand. The White House yesterday confirmed that US President Joe Biden is going to visit Saudi Arabia but refrained from giving details on the timing and played down that the talks were aimed at getting the kingdom to pump more oil.
FI: It has been a dramatic few days after the ECB meeting and US inflation data last week with global bond yield rising significantly and spreads widening. The ECB meeting opened up for a more aggressive hiking path from ECB and the US inflation data has created expectations for a potential 75bp hike at the this week’s FOMC meeting rather than the 50bp that was consensus. Hence, the curves have flattened significantly in both US and Euro.
FX: Cyclically-sensitive assets that rhyme with short vol got hammered yesterday. This also extended to FX where everything took a beating except for USD and JPY. NOK leads losses in majors space. EUR/USD was not far from falling below 1.04. EUR/NOK rose to above 10.30.
Equities: Inflation-fear, Fed-fear and recession fear sent European and US session to new-year-to-date lows. Equities were in sharp sell-off, accelerating into the US session. S&P 500 plunged another -4% (-20% from peak) and Nasdaq -5% (-30% from peak). The sell-off was more broad based than the Friday session as the sharp jump in yields governed sector performance, rather than recession fears. Hence, financials and staples were most resistant while energy and real estate sold off the most. US futures are however rebounding roughly 1% this morning.
Credit: In line with equities, the sentiment in credit markets were very negative yesterday. iTraxx main widened 6.4bp to 106.1bp while Xover widened 33.2bp to 534.2bp. These levels are in line with the levels recorded on 15 May 2020, where the initial COVID-19 chocks were still rattling the market. We also note that the liquidity in the cash market remains extremely thin.
Nordic macro
Today, Swedish CPIF data taked centre stage as one of the final pieces of information before the Riksbank’s June meeting. Our core CPIF estimate at 5.2% yoy is four tenths above the Riksbank but in line with consensus, which all in all suggest limited impact on the cross if materialised. That said, such a big surprise on the upside compared to the Riksbank forecast surely bolsters expectations of a bolder, 50bp, move in June – which by the way is already fully priced.
In Norway, the February edition of Norges Bank’s regional network survey somewhat surprisingly saw firms report a stronger growth outlook despite increasing problems sourcing labour and other resources. Capacity constraints appear to have worsened since then, so the big question now is whether this will impact on growth expectations. Construction firms in particular but also manufacturers will probably report weaker growth prospects, and it is possible that retailers will join them. Otherwise, we will naturally be looking to see whether expectations for wage growth this year have risen from 3.7% last time around. A marked upward revision here would be the most important catalyst for more aggressive signals from Norges Bank at its June meeting. It will also be interesting to see what happens to firms’ profitability expectations. Slower revenue growth and faster cost growth have put margins under pressure. This increases the risk of firms passing on higher costs to customers, further fuelling inflation. But it could also ease the pressure on wage growth from a tight labour market and put a damper on investment.
