Market movers today
We get the University of Michigan consumer sentiment indicator including inflation expectations, which became a major market mover last summer.
Two more speeches from FOMC members are scheduled after the close of European markets, namely Waller and Harker.
The UK publishes GDP for December and for Q4 as a whole, after the better than expected November print.
In the Nordics, Norwegian CPI is key today, see below.
The 60 second overview
Fed speak: Yesterday, Richmond Fed’s Barkin continued the hawkish tone of recent FOMC speeches, as he emphasized that Fed has its ‘foot unequivocally on the brake’. In addition, Atlanta Fed’s Wage Growth Tracker remained unchanged at 6.1% in January, supporting the view that labour market conditions still remain too tight. Markets’ focus is already turning towards the key January CPI print next week, where we are looking for an uptick in both headline (0.5% m/m) and core (0.4% m/m) terms. Read more details from our preview (Research US – Soft landing to no landing?, 9 February), where we take a look at the inflation components as well as the most recent round of labour market data. We continue to forecast Fed terminal rate at 5.00-5.25% by May and first rate cuts only in early 2024.
Riksbank starts active QT: In Sweden, the Riksbank delivered a 50bp rate hike as expected and new rate path broadly in line with expectations signalling another hike in April. More interestingly, they came with a hawkish surprise in the form of active QT, motivated to strengthen the SEK. The Riksbank decided to actively start selling their government bond holdings from April with a pace of SEK3bn per month in nominal SGBs and 0.5bn per month in inflation-linked government bonds. This can be put into relation to current holdings of SEK 288bn nominal SGBs and SEK45bn in linkers, and issuance from Debt Office of SEK2bn bi-weekly in nominal bonds and SEK0.5bn in linkers. According to the press release, the Riksbank will primarily sell longer maturities. The natural market reaction has been a steepening of the SGB curve and cheapening on ASW. See more in our Flash Comment Riksbank – a U-turn for SEK, 9 February.
German CPI: German January inflation figures showed headline CPI inflation broadly flat at 8.7% (from 8.6% in December). The press release did not contain any details on sub-components, but it seems Destatis decided to already take into account the German gas and electricity prices from January, which probably limited the uptick in energy inflation otherwise expected. With German HICP arriving at 9.2%, that leaves upside risks for the final January euro area HICP figures released on 23 February (Eurostat had initially assumed a German figure closer to 8.6% for their calculations in the flash HICP).
EU summit: Yesterday, EU summit kicked off in Brussels, where EU leaders will discuss how to respond to the subsidies and buy-America provisions of the IRA. The Commission has suggested a reform of state-aid rules, but some countries worry that would distort the EU single market, while Germany, the Netherlands and other fiscally conservative states oppose yet another round of joint borrowing for a new EU green subsidy fund. A breakthrough therefore seems unlikely, although Italy seems open to a “quid pro quo”, agreeing to a relaxing of state-aid rules in exchange for more time/flexibility on spending NGEU funds.
FI: European yields staged a strong rally from the start coinciding with the release of the delayed German CPI. The release leaves around 0.2pp upside risks to the final January euro area release in 2w. It was otherwise a relatively quiet day, which ended with a complete reversal of the sell-off following the change to the remuneration of government deposits at ECB from 1 May. Bunds are therefore back around 2.3%. Bund ASW spreads were broadly unchanged on the day. Intra euro area spreads performed amid flatter curves from the long end. The next key event for bond markets is the US CPI on Tuesday.
Today, we also get voluntary TLTRO repayment for February. After the EUR63bn repayment in January, we expect a relatively low repayment, around EUR10bn, but as per usual, these estimates are difficult to make.
FX: SEK and NOK rebound sharply yesterday ending a period of sustained weakness. EUR/SEK fell to around 11.10 after the Riksbank hiked rates and announced its decision to start selling bonds. EUR/NOK followed EUR/SEK lower and dropped below 11.00.
Credit: Mirroring the overall positive sentiment yesterday, the credit markets saw tightening in CDS indices. iTraxx Main closed the day 0.9bp lower at 75.3bp, while iTraxx Xover was 6.4bp lower at 393.5bp. The primary market continued the high pace with new notable deals from Nokia OYJ, Ineos Finance Plc, Nykredit Realkredit A/S and Banco De Sabadell SA.
Nordic macro
We have seen the underlying trend (monthly change) in Norwegian core inflation peak during the autumn and slow at the end of the year. Prices for food and imported goods such as furniture, as well as hotel and restaurant services, have clearly been decelerating. We expect much of this picture to have continued into 2023, driven by a combination of lower cost increases and weaker demand. On the other hand, we know some segments are struggling with lower margins and need to raise prices, and January is often a month when firms take the opportunity to adjust their pricing. We also have to expect rents to rise more than normal, as these are linked to inflation. There is therefore considerable uncertainty, but we expect core inflation to rise to 5.9% y/y in January, where consensus expects 6.1 %.
