Market movers today
Today, we get the final January CPI data from Germany and IFO index for February. FOMC minutes will be released tonight but considering the upside surprises in US data lately and the hawkish remarks by several FOMC members, the message from the minutes may well be outdated by now.
The 60 second overview
Geopolitics: In his speech yesterday, Russian President Putin announced his country would suspend its observation of the new START nuclear weapons treaty with the US. US Secretary of State Blinken called this move irresponsible, while President Biden vowed his support for Ukraine sending a clear message to Putin that Russia will not win the war. A top US Treasury Department official Wally Adeyemo warned yesterday that companies around the world, including in China, could be sanctioned if they continue to violate US sanctions against Russia. Meanwhile, China’s top diplomat Wang Yi, after his meeting with Russian Security Council Secretary Nikolai Patrushev, said the ties between the two countries were “solid as a rock and will stand the trials of the changing international situation”.
RBNZ: As widely expected, the Reserve Bank of New Zealand hiked rates by 50bp to 4.75%. The RBNZ still sees the peak rate at 5.5% but now thinks they will reach it in the fourth quarter of 2023 instead of the third. The central bank is yet to fully assess the impacts from Cyclone Gabrielle that hit the island state last week. While its impact on economic growth near term will be negative, it may also cause supply side bottlenecks and add to capacity constraints in the construction sector, which would be inflationary. For now, the markets are pricing in a 40% probability of a 50bp hike in April.
US data: US February Flash PMIs continued the streak of upside macro data surprises, as the manufacturing index edged higher to 47.8 (Jan. 46.9) and the services index rebounded back to growth territory at 50.5 (Jan 46.8). Notably, output price and employment indices ticked higher, although input price pressures eased. Even though the January NFP figures were most likely supported by positive seasonality, overall labour market conditions appear to have remained strong in February as well. January home sales disappointed by declining modestly, but the strong PMIs were enough to support another leg higher in US yields, while the S&P500 had the worst day of the year so far (-2.0%). Market fully prices in 3x25bp Fed hikes by summer, and around 15-20% probability of Fed moving back to 50bp hikes in March. We think the latter still appears unlikely, but keep a close eye on inflation expectations for further signs of more persistent inflation risks.
Euro area data: French flash PMI beat expectations in February driven by growth in the service sector. The French economy seems to be a tale of two stories: strong services PMI at 52.8 (exp. 49.8.) while manufacturing returned to contractionary territory with index at 47.9 vs. exp. 51. New orders fell in both services and manufacturing, while price components signalled a further weakening of cost pressures across the country. German PMIs painted a similar picture as in France, but with smaller changes to the prints. Services was slightly higher than consensus at 51.3 vs. 51.0 while manufacturing suffered again to 46.5 vs. 48.1 consensus. German manufacturers maintained a preference for higher output charges despite seeing purchasing costs fall. On employment, the private sector saw a further rise, although the job creation was the joint-weakest over the past two years. The German ZEW index also came in stronger than expected with both current (-45.1 vs. -50.5) and expectations (28.1 vs. 23) components beating estimates. The slew of better than expected data certainly puts a 50bp rate hike in play for ECB in May. While a 50bp hike in March is fully priced in, markets are now also pricing in a roughly 50% chance of a similar hike in May.
FI: The sell-off in the US Treasury market continued yesterday with 10Y US Treasuries close to breaking through 4% on the back of a robust US economy and the expectations for more rate hikes from the Federal Reserve. European bond yields also continue to rise given the expectations for ECB to do more and we have seen the terminal rate for both the Federal Reserve and the ECB rise. Furthermore, the risk is that policy rates will remain “high for long” rather than seeing rates cuts already late in 2023/early 2024.
FX: The sell-off in the US Treasury market continued yesterday with 10Y US Treasuries close to breaking through 4% on the back of a robust US economy and the expectations for more rate hikes from the Federal Reserve. European bond yields also continue to rise given the expectations for ECB to do more, and we have seen the terminal rate for both the Federal Reserve and the ECB rise.
Credit: The soft sentiment yesterday was also reflected in the credit market as CDS indices widened. iTraxx Main was wider by 3bp to 81bp, while Xover widened by 16bp to 425bp. Even so, primary issuance continued with especially FIG issuers being active in euros, bringing a total of EUR2.2bn to the market in unsecured format comprising both senior and subordinated deals. That being said, the softer sentiment is also visible in the primary market where new issue concessions have been creeping higher again.
Nordic macro
New Riksbank Governor Erik Thedèen talks about the economic outlook and current monetary policy at 09.00 CET at a seminar on the residential property market arranged by Fastighetsvärlden. He will be available for media comments after the speech so look out for any flashes afterwards.
