Market movers today
The main event today is of course the ECB meeting. A 25bp rate hike is widely expected, so interest should centre on new staff projections and any signals about the future rate path, ECB preview: Looking beyond next meeting, 8 June.
We should get a rate decision from the Bank of Japan early Friday morning CET, although at the last meeting it dragged out. We expect that yield control will be relaxed at some point this year, but not already at this meeting.
There is a string of US data coming out – Philly Fed, retail sales, jobless claims, import prices, Empire PMI, industrial production and TICS capital flow data. Even though the median FOMC member now expects to do 50bp more hikes, the actual decision still depends on what the data will be telling us about the inflation picture ahead of the next meeting.
In the Nordics, both the Swedish Prospera inflation survey (large version) and the Norwegian regional network survey are key releases for the local markets.
The 60 second overview
Hawkish Fed surprise: The Federal Reserve paused its rate hiking cycle last night as widely anticipated. However, the updated median rate projection signaled two more 25bp rate hikes by the end of 2023, which was clearly more hawkish than anticipated. The initial market reaction faded somewhat during the press conference, when Powell suggested that the hikes might not be that certain after all, as ‘the things we need for disinflation are coming into play’. The 2023 GDP forecast was lifted to 1.1% (from 0.4%), suggesting that the outlook for more rate hikes relies on a fairly optimistic growth assumption. As we remain more pessimistic on the macro outlook for H2, we also think that the projected rate hikes will not end up materializing, and stick to our previous forecast of no rate changes by the Fed for the remainder of the year. Read more from our Fed review: Powell’s hawkish bluff, 14 June, and see also our thoughts on the latest inflation data and outlook from Global Inflation Watch – Euro area inflation pressures remain sticky, 14 June.
Weak Chinese data for May: Overnight China released its monthly batch of data for most sectors of the economy. As indicated by PMI’s and other signals, the economy was struggling to keep momentum in May. Home sales dropped a bit further from April to May (chart) and property investments were weaker than expected at -7.2% y/y year-to-date (consensus -6.7%). Retail sales dropped from 18.4% y/y to 12.7% y/y (consensus 13.7%). However, the decline is due to base effects and looking at the m/m developments retail sales is still on a rising trend (chart), which rhymes with still strong service PMI’s. Industrial production dropped to 3.5% y/y in May from 5.6% in April. It was in line with expectations but is weak growth rates for China and fits with the lower PMI for manufacturing lately. Overall the data confirms the image of a sputtering recovery due to manufacturing and housing, while consumption and services are holding up relatively well. The youth unemployment rate ticked higher yet again to 20.6% from 20.4% (chart), a key concern for policy makers. As expected the People’s Bank of China lowered the policy rate the, 1-year Medium-Lending-Facility rate, from 2.75% to 2.65% as signalled by the cut in the reverse repo rate on Tuesday. More stimulus measures are likely in coming months.
Equities: Global equities mostly higher yesterday and remarkably resilient following the Federal Reserve’s hawkish pause. Despite the Fed signalling two additional rate hikes, cyclical growth stocks managed to outperform while health care and energy were the only two sectors lower. In the US, Dow -0.7%, S&P 500 +0.1%, Nasdaq by 0.4% and Russell 2000 -1.2%. Asian markets are mostly higher this morning including Japanese markets (Nikkei 225 is up 8% in June alone and 30% YTD). European futures a tad lower while US futures are mixed this morning.
FI: Short end USD rates ended 8bp higher on a hawkish pause from the Fed. Although it was anticipated the extent of the hawkish communication surprised markets. While the short USD rates rose markedly, the 10y US treasuries were virtually unchanged seen through the day. After the meeting, markets now price an additional 20bp of rate hikes from the Fed to the peak policy rate. Regarding rate cuts, Powell said that we are ‘talking about a couple of years out’. European rates were marginally higher in a flatter curve move amid stable intra-euro area spreads while waiting for the FOMC last night and ECB today.
FX: EUR/USD price action post the Fed announcement was V-like with the initial drop partly reversed later in the evening with EUR/USD settling around 1.0830 when the dust had settled. SEK, NOK and other cyclically sensitive currencies weakened on the Fed announcement while USD/JPY rebounded to the 140 mark on higher US yields.
Credit: Credit markets will use today to further digest the message from Fed and also have eyes on the ECB meeting. Overall, the interest in the asset class has been solid lately as underlying yields as well as credit spreads are at elevated levels compared to the levels seen in recent years. Overall, the secondary markets were calm with iTraxx Main unchanged at 77bp while iTraxx Xover tightened 2bp to 404bp.
Nordic macro
In Norges Bank’s Q2 regional survey, growth is likely expected to remain moderate, but with big variations between sectors. Oil services and parts of the service sector are doing very well, but both retail and construction will probably report weak growth prospects. We nevertheless expect overall capacity utilisation to fall further, which will be key for Norges Bank as it is the main driver of domestic inflation in the medium term in the bank’s models. Other leading indicators suggest that employment expectations may actually have improved slightly, but we are more interested to see what firms have to say about investment next year.
In Sweden we get the large version of Prospera’s Inflation Expectations survey.
