Market movers today
The main event today is the ECB meeting, where we still expect a 50bp rate hike but probably very little guidance, given the financial uncertainty, see below.
The 60 second overview
Fear and flight to safety dominated the trading session yesterday on concerns of the US banking turmoil spreading to Europe where specifically Credit Suisse was in focus. While the flight to safety was dominated on concern of Credit Suisse, rate markets saw widespread repercussions, led by the front end. The 2y German Schatz broke the record rally of 41bp on Monday by going down by 48bp to 2.37%, but also the 5y point ended massively lower at -37bp on the day to 2.12%. Italian-German bond spreads widened 13bp and approaching 200bp. Today, markets focus on the ECB meeting, where we continue to expect ECB to deliver a 50bp rate hike, although only 29bp was priced at the close of business yesterday. The ECB peak policy has have repriced more than 1pp lower to 3.12% in just one week.
Last night, the SNB and the Swiss regulator issued a joint statement on Credit Suisse. They say that Credit Suisse meets all capital and liquidity requirements. The statement also said that they would provide a liquidity line if it is needed. Overnight, a Credit Suisse statement said that they have tapped the SNB for a CHF50bn loan and offered to buy back CHF3bn of its debt.
New Riksbank call: February inflation numbers came in higher than expected with CPIF ex energy reaching a new high of 9.3% y/y, way above the Riksbank’s forecast of 8.0%. The gap between the Riksbank forecast and actual outcome therefore has widened from 0.6% in January to an enormous 1.3% in February and is likely to increase further in March. The Riksbank will therefore be forced to deviate from their most recent rate path forecast (indicating 25bp or 50bp hike in April) and deliver a 75bp hike. Especially after Board members already yesterday during the parliamentary hearing delivered a hawkish message, emphasizing the willingness to act accordingly on the back of incoming data. We also lift our June call from 25bp to 50bp as our inflation forecast does not indicate that the Riksbank will have enough positive data to lower the pace to 25bp increments.
Equities: Global equities in renewed turmoil yesterday. This time triggered from Europe with investors losing faith in Credit Suisse. With fear of yet another bank failure, this time a systemically important bank, not surprising to see banks being sold off across the board and cyclicals underperforming defensives. Fast forward to late last night and early this morning, European futures are higher on the SNB news with Eurostoxx 50 future being up more than 2% at time of writing.
FI: German ASW widened markedly, led by the shorter end with 12bp wider Schnatz-ASW spread to 88bp. The key events today are both how the fear evolves after the SNB ensured a liquidity line to Credit Suisse last night but clearly also the ECB meeting. Yesterday markets took out more than 2x25bp rate hikes to the peak policy rate, now just above 3%. For the meeting today, ECB is priced for 29bp. That said, given that we are yet to see the macroeconomic implications of the recent turmoil, we stick to our 50bp rate hike – and still see significant upside risks to the peak ECB policy rate priced at 3.12% current.
FX: Fears of systemic risks spread to European banks and the EUR paid the price yesterday, with EUR/USD falling a massive 2% during the European session, before recovering some ground late in the US session. CHF and NOK also underperformed sharply against the greenback, the former as focus turned towards the risks surrounding Credit Suisse, whereas the latter suffered in generally poor risk sentiment and falling oil prices. The SEK had a volatile session, initially strengthening on the back of yesterday’s inflation data, later somewhat moderated by poor risk sentiment.
Credit: Itraxx main widened 10.6bp to close at 100.9bp, while Itraxx Xover widened 41.5bp to close at 500.2bp. The Itraxx CDS indices closed at their widest levels since early December 2022, effectively cancelling the massive rally seen at the start of this year. The primary market was effectively closed, with not even the strongest investment grade issuers being able to tap the market.
Nordic macro
The previous round of Norges Bank’s regional survey pointed to a clear slowdown in the economy. Capacity utilisation was on the way down, expected profitability was clearly negative, and expectations for employment and investment were around neutral. The growth outlook will probably be somewhat brighter than in the previous round, but still point to deterioration. The most important information this time around, however, will be for capacity utilisation, because this is the most important driver of domestic inflation in the medium term in the central bank’s models. If capacity utilisation falls further, the upside risk to inflation will be smaller, and it will be easier for Norges Bank to look through today’s high inflation, especially with inflation expectations being well anchored and prevailing interest rates being considered contractionary. In this case, Norges Bank will be better able to stick to its strategy of gradual rate hikes.
Sweden: The Prospera quarterly inflation expectations survey will be out today and especially the 5Y horizon is important to keep an eye one which so far have been stable. Note that yesterday we changed our call on the Riksbank due to inflation figures once again surprising on the upside. We now expect 75bp in April and 50bp in June. This means that we see the peak policy rate at 4.25% from earlier 3.75%.
