Market movers
Things can turn around quite rapidly in the current environment and it seems very likely at this point that the Fed makes another U-turn tonight by hiking 75bp (now fully priced by markets) instead of 50bp and signals that another 75bp rate is likely in July. Last time the Fed hiked by 75bp was in 1994 when a single hike of this magnitude was delivered. The Fed is recognising that it is significantly behind the curve and needs to do more to get inflation under control after another higher-than-anticipated print on Friday and too high long-term inflation expectations. We forecast the US will fall into a recession in Q2 23 but with an even faster hiking pace, risk is increasing the recession starts earlier.
On the data front we have US retail sales this afternoon. Retail sales have held up well so far, although big retailers such as Walmart and Target have reported weaker sales of goods outside of groceries lately. Consensus for core retail sales (control group) is 0.3% m/m in May following 1.0% m/m in April.
US also releases a couple of surveys with the Empire index for June and the NAHB housing survey for May.
In Sweden, the quarterly Prospera survey will likely show a further increase in inflation expectations.
The 60 second overview
Market wrap-up: Markets have calmed down ahead of the Fed meeting today. US equity futures a slightly higher in Asian trading while bond yields declined a few bp following a late sell-off yesterday. Oil prices dropped from USD124 to USD121 per barrel last night.
China data: Chinese industrial production and retail sales for May surprised to the upside as industrial production increased from -2.9% y/y to 0.7% y/y (consensus -0.9% y/y) and retail sales moved up from -11.1% to -6.7% y/y (consensus -7.1% y/y). The improvement came on the back of a gradual re-opening and new stimulus and we expect to see a further lift in June when the Shanghai lockdown came to an end. We look for Chinese activity to recover over the summer driven by a renewed stimulus drive and a re-opening bounce but the outlook is blurred by the risk of new outbreaks and lockdowns. Beijing is again on high alert following a covid outbreak related to a bar and is doing mass testing and targeted lockdowns of certain areas.
Gas supply: Gazprom has warned Germany that it will temporarily have to reduce gas supply by 40% through the North Stream 1 pipeline. The official reason is not payment disagreements, but maintenance issues as delivery for a Siemens gas turbine is held up by Canadian sanctions. The German government has so far reacted in a relaxed way, saying that they are monitoring the situation but that gas supply for now is secured. But a pro-longed reduction could create issues with refilling gas storage (currently 55%) sufficiently for the winter months.
FI: An initial rally in bonds was replaced by a significant sell-off in European government bonds. Contrary to the previous sessions, curves steepened, yet the rest of the trends (higher yields and wider spreads) continued. Bunds sold off 12bp to 1.76%, while the Italy-Germany spread widened 2bp. While Italian bonds have underperformed in recent days, the Italian supply yesterday (especially in the long end) saw good demand with bid-to-cover above 2. Front end pricing rose 10bp for the December ECB meeting (€STR) to 181bp, but touched 184bp earlier in the trading session.
FX: Another day where USD was the big winner although EUR/USD ended the day where it started slightly above 1.04. GBP was one of the big losers, as EUR/GBP moved closer to 0.87. Other risk-sensitive currencies such as NOK, AUD and CAD also weakened yesterday. USD/JPY rose further yesterday moving above 135.
Equities: Equities continued lower in a choppy session. However, sector performance reversed completely from the past days. It was now defensives turn to sell off (utilities, staples, health care) while cyclicals (tech, consumer discretionary, industrials) were unchanged. Similarly, growth outperformed value for the first time in a week. In the absence of any Fed surprises today, this would typically be a sign of a trough in bearish sentiment. S&P 500 -0.4%, Nasdaq up 0.2%, Dow -0.5% and Russell 2000 -0.4%. Futures are somewhat higher this morning.
Credit: After a brief rally in the morning, credit spreads resumed their widening trend yesterday. Itraxx main was 2.5bp wider while Xover widened 10.2bp. This leaves these two indices at 108.5bp and 544.4bp respectively. Liquidity in cash space remain very subdued.
Nordic macro
Today’s quarterly Prospera survey in Sweden is likely to show a broad-based uptick in inflation expectations, in line with what the monthly surveys have shown. Together with yesterday’s higher-than-expected inflation outcome, this is likely to add to the pressure on the Riksbank to hike rates by 50bp at their next meeting (30 June). In a medium-term perspective, perhaps even more interesting is the survey outcome regarding wage expectations, especially in light of recent communication from spokespersons representing labour organisations downplaying the need for wage compensations.
