Market movers today
It is set to be a very quiet day in terms of data releases. Worth keeping an eye on is German industrial production in March, which we expect declined modestly after two strong monthly increases. Note that German factory orders released yesterday surprised on the upside compared with our expectations and point to a strong end to Q1 for German business activity.
In the US, we get the NFIB small business optimism indicator for April. Business optimism soared after the election of Donald Trump as president . However, given the increased uncertainty about how much of his policies he will actually be able to carry out in practice, business optimism seems to have peaked and we expect it to fall further given the fall observed in, for example, ISM and PMI. This should not be a significant turn for the worse in the overall economy, but a correction in soft indicators to be more in line with the actual economic development .
Again today there are a few speeches by FOMC members including Rosengren (non -voter, hawkish) and Kaplan (voter, dovish). The focus remains on getting more insight about how the members’ views differ after the less informative FOMC statement released last week.
Selected market news
Market reaction was quite muted yesterday after Macron’s win but volatility (VIX index) fell to its lowest level since 1993, as European political uncertainty has diminished significantly. EUR/DKK spiked yesterday and we look for the cross spot to stay close to 7.4400 on 12M on strong DKK fundamentals not fully mitigated by the spread between DK and eurozone policy rates. With political risks fading, focus will now likely shift back to the business cycle, see also Strategy: With fading EU political risks, global business cycle back in focus, 5 May. China in part icular may soon come back into the spot light , as financial stress is on the rise again.
Yesterday, a couple of Fed speeches suggested that while the Fed’s Mester (non-voter, hawk) supports a June hike, Bullard (non-voter, dovish) thinks the current policy rate is appropriate. Mester argues that the US labour market is strong and the Fed risks falling behind the curve if it does not tighten monetary policy. Markets have priced in around an 80% probability of a Fed hike at the meet ing next week, which is also the consensus among most analysts. We are more sceptical, as we think the Fed will take the opportunity to announce what will trigger a change in its reinvestment strategy ("quantitative tightening"), see also FOMC review: Fed thinks weak GDP growth in Q1 was ‘transitory’, 3 May. A total of three Fed hikes is priced in from now until year-end 2018.
