Market movers today
The main event today will be the Riksbank meeting at 9.30 CET (followed by the press conference at 11.00 CET). Consensus expects a hike of 50bp, including Danske. We expect the alternative repo rate path from April to become the new main scenario, with a steeper front and ending at 2.5%. This would be in the middle of market pricing (another 300bp) and our own view (3x50bp plus 25bp in February ending at 2.0%). Market prices 56bp for today, hence, only a significant deviation from a 50bp hike will cause high volatility. As for QE, the Riksbank in April decided to cut the reinvestment volumes in half for H2. We see a chance of another downward adjustment, but it is not our base case.
US personal spending data and German retail sales for May might bring more evidence that higher prices are taking their toll on consumers’ willingness to spend and in turn stoke markets’ recession fears.
French inflation will likely take another jump higher during June with rising fuel costs. Markets will also keep an eye on US PCE inflation, after CPI again surprised on the upside for May.
The 60 second overview
China PMIs: China Services PMI came in much better than expected at 54.7 in June compared to consensus 50.5 and prior 47.8, an obvious reflection of the easing of local Covid outbreaks and restrictions. Manufacturing activity disappointed slightly despite the index returning to expansionary territory with a reading at 50.2 compared to consensus 50.5 and prior 49.6. Asian stocks are mixed in the morning with Nikkei down but Hong Kong and Shanghai stocks in green as investors weigh recession concerns in Western markets against the ongoing recovery in Chinese economy.
Natural rates: Yesterday, we published a piece discussing natural rates: Research Global – Natural rates – regime change or low for longer? 29 June. The key message is that rates are likely to decline again after the current period of high inflation ends, although not all the way back to pre-pandemic lows. This is because the key structural factors that have pushed down the natural interest rate remain in place: increasing life expectancy, slowly growing or decreasing working age population, lower productivity growth, higher mark-ups and risk premia, a shock from the financial crisis and higher inequality all together push neutral rates lower. The key upside risks to natural rates are related to the increased fiscal spending and investments in defence, green transition and digitalisation which could drive higher potential growth going forward, but in net, we expect the desire to save still to dominate the desire to invest.
NATO and Russia: In a widely expected move, NATO called Russia the ‘most significant and direct threat to the allies’ security’ in its updated Strategic Concept document published yesterday. As a response to Russian invasion of Ukraine, NATO leaders committed to increasing the alliance’s combat forces in high alert seven-fold and to modernising Ukraine’s military. Finland and Sweden have now been officially invited to join NATO and the actual ratification process (by member states) may begin next. President Putin said Russia would respond in kind if NATO sets up infrastructure in Finland and Sweden after they join. Over the last few days, Russia has clearly stepped up its attacks in Ukraine. We maintain our view that a frozen conflict in Ukraine is the most likely scenario and consider any escalation unlikely, yet possible (as Kremlin’s actions remain unpredictable). While sanctions have weakened Russia’s economy and its capacity to maintain or develop its artillery, high energy prices ensure sufficient income for Russia to continue its aggression against Ukraine.
FI: Yields ended lower (Bund yields 11bp lower), peripheral spreads tighter and sem-icore spreads wider with the belly of the curve as the biggest performer. German inflation failing to meet estimates was likely the main driver, however, we do not believe the peak inflation has been reached. This view is also confirmed with Spanish and Belgian inflation surprising on the upside. The government initiatives (transport of 9EUR/m during summer and the ‘tankrabatt’) gave cause for lower inflation print in Germany than otherwise expected. The peak in euro inflation is still set for September this year. With stagflation fears in markets, credit spreads generally widened.
FX: With the EUR trading heavy and both USD and CHF staying bid EUR/USD has moved below 1.05 while EUR/CHF has broken below the psychologically important parity level. SEK continues to trade poorly and has been one of the key losers over the last week while NOK has range traded.
Credit: On Wednesday, Credit markets were hit by a further spread widening, amidst risk-off mode in major equity indices. With recession fears creeping back into markets, Itrax main widened 3.3bp to close at 117.7bp, while Xover widened 22.3 to close at 582.4bp. There was no sign of relief for Nordic Real Estate credits, which were once again hit by sell-offs in what has so far been an extremely tough week for the sector.
Nordic macro
Riksbank decision is released 09.30 CET today, followed by a press conference at 11.00 CET. All respondents in BBG expect a hike of 50 bps including Danske. We expect the April alternative repo rate path to become the new main scenario with a steeper front and ending at 2.5 %. This would be in the middle of market pricing (another 300 bps) and our own view for 3*50bp plus 25 in Feb ending at 2.0 %. Market prices 56bp for today, hence, only a significant deviation from 50bp hike causes high volatility. As for QE, the Riksbank in April decided to cut the reinvestment volumes in half for H2. We see a chance of another downward adjustment, but it is not our base case.
