No Surprises in FOMC Minutes

In focus today

The key events today will be the February flash PMIs from the euro area, US, and UK. Lately, we have seen the manufacturing PMIs improve while the service PMIs have stabilised around the 48 level in the euro area. Leading indicators from Asia suggest that the global manufacturing cycle is about to turn, which we expect to lift manufacturing PMIs higher together with the increasing order-inventory balance. We will also pay close attention to the service price index that has risen lately and still suggest a significant service price pressure due to recent wage increases.

In the euro area, we also get the final January HICP figures. It will be interesting to investigate to what extent one-offs affected the January print where especially the monthly increase in service inflation was to the high side.

This morning the Swedish National Debt Office presents an updated Central Government Borrowing Report (9.30). Since the last report in October, the government budget outcome has been SEK13bn worse than expected, but we do not anticipate any adjustments to the full year 2024 budget balance due to less grim economic developments than expected. For 2025 we believe the negative budget balance will be adjusted to -30bn amid uncertainties in defense spending and unfunded reforms. The recapitalization of the Riksbank will likely still not be included in the forecast due to uncertainties around timing and amount. Expectations are for roughly SEK4bn in recapitalization.

In Norway, the Q1 Expectations survey from Norges Bank, due for release today, will be important in a situation when core inflation is well above the 2 %-target and the NOK remains weak, but medium-term inflation drivers have turned significantly. In the previous round, there were lower inflation expectations across the board. Lower inflation and a stronger NOK have probably dampened inflation expectations, especially on the 12-month and 2-year horizons. Also, keep an eye on the wage expectations, especially from the labour unions.

The Central Bank of Turkey is set to make their rate decision today. We expect them to hold the rate at 45.0%, in line with consensus.

Chinese home prices for January are due overnight. The price declines have increased in recent months highlighting that there is still no end in sight for China’s housing crisis. Home prices are one of the key indicators to watch for signs of any turning point in the crisis.

Economic and market news

What happened overnight

Overnight, the Japanese Nikkei index (finally) breached its previous record level set in 1989 during the height of the asset price bubble. Japanese companies have benefitted from a weak yen which has boosted exports. In other equity news, Nvidia, the leading maker of high-end AI-computing chips, beat market expectations (which were already stratospheric) in their quarterly report, posting a 265% increase in quarterly earnings. This led to a surge in AI- and semiconductor related stock prices. Nvidia has become the third most valuable listed US company, beating Alphabet in recent weeks.

Also in Japan, February PMIs weakened a bit with Manufacturing extending losses from 48.0 to 47.2 and service PMI declining from 53.1 to 52.5.
What happened yesterday

Japan: The yen took a(nother) tumble against major currencies, with the EUR/JPY at a 3-month high of 162.70 as of yesterday’s session. This came after US 10-year yields traded above 4.3%. Markets also assessed a government report that lowered growth prospects, especially on consumer spending. Domestic demand has been weak in Japan, with data last week showing the country slipped into a technical recession in Q4. Weak demand could prove a challenge for the BoJ’s hopes of exiting the negative-rate environment. Their stated focus is sustained, demand-driven wage growth, for which we will have more information after the major labour union wage negotiations conclude in March.

US: The FOMC minutes of the January meeting were in line with other recent commentary, with the bulk of the committee noting the “risks of moving too quickly to ease the stance of policy”, emphasizing the risk of more persistent inflation. The initial market reaction was muted, as recent upside surprises in macro data have already prompted markets to reduce the pricing of rate cuts.

China: China took another step to stabilize the domestic equity market as it introduced new rules for short selling, Bloomberg reports. Specifically, the rules prevent affected firms from selling more shares than they buy during the first and last 30 minutes of the trading day. It is not clear how wide across the financial industry it is hitting, but it seems mainly aimed at big hedge funds.

Geopolitics: Finally, on geopolitics, the EU member states agreed on a new package of sanctions on Russia, which for the first time also included sanctions on Chinese and Indian companies deemed to support the Russian war effort. For now, this includes three Chinese companies and one Indian company.

Equities: Global equities ended marginally higher yesterday as US stocks rallied the last half hour of trading. There was unusually high focus on just one company, Nvidia, reporting after the bell. Some investors lowered their allocation to tech stocks ahead of the long-awaited earnings. That changed after the earnings where Nvidia once again delivered eye-popping result and guidance. In US yesterday Dow +0.1%, S&P 500 +0.1%, Nasdaq -0.3% and Russell 2000 -0.5%. This is a very special morning in Asia. Nikkei 225 continues the strong run and has this morning reached a new all-time high for the first time since 1989! Futures in Europe and US are higher this morning with tech futures leading the advances.

FI: Global yields drifted higher in yesterday’s session, extending the rising tendency seen over the past week. The market reaction to FOMC minutes released in the evening was subdued, as the somewhat cautious stance on rate cuts was well-known. The German curve ended up by 7-8bp in line with the rest of the Eurozone, with the rise not attributable to a single factor. However, the substantial bond supplies these days obviously put upward pressure on yields. The bid-to-cover ratio at yesterday’s USD16bn 20Y UST auction fell to 2.4, the lowest since September, while the EUR3.7bn 10Y German auction was better received in a historic context with a bid-to-cover at 2.1. The pricing of rate cuts in 2024 fell by 8bp for the ECB and Fed, now trading at 102bp and 82bp, respectively.

FX: On another quiet day in the FX market CHF recovered a bit, while SEK, GBP and JPY lost a bit of ground. FOMC minutes failed to move the market including EUR/USD, which held steady just above the 1.08 level.