Market movers today
The main event of today in Europe is the EU leaders’ virtual meeting, where they will discuss the recovery fund and EU budget proposal for the first time. The latest noises make an agreement already there seem unlikely (we think a deal may be struck as late as end-July), but it will still give some clues whether the market EURphoria of recent weeks was warranted or whether the initiative is on course to be meaningfully watered down. We still think the frugal four (five) will eventually bend in compromise, but with some compromises with budget rebates etc.
In the US, we have three Fed speakers lined up: Rosengren (non-voter, hawk), Mester (voter, hawkish) and Fed chair Powell (voter, neutral). It will be interesting to hear what they indicate in terms of next steps from the Fed, including if yield curve control or revisiting the inflation target are on the cards (for a discussion of the issues, see Fed Monitor: A primer on the Fed’s discussions on changing its forward guidance, 17 June).
In Russia, the central bank is expected to cut its benchmark rate by a one percentage point to 4.5% with forward guidance possibly showing further cuts are in the making.
Selected market news
It has been quiet overnight and in the absence of a new catalyst over the last sessions trading volumes have been thin on the big exchanges. Oil has moved a little higher supporting oil-exporting currencies but otherwise most asset classes have moved sideways. Market focus remains on policy reactions to news of COVID-19 spreading in countries reopening like the US, China and Europe more broadly. Since the Fed message last week the value rotation has lost steam, US stocks have outperformed European equivalents and EUR/USD has moved lower.
Yesterday Norges Bank (NB) kept policy rates unchanged and maintained its neutral bias. Meanwhile, the central bank revised higher its economic projections including its view on the output gap, which is now expected to close towards the end of 2023, see chart. As a result NB also presented a new rate path in which rates are expected to gradually rise from 2022 and on. Specifically, NB indicated a hiking pace of one 25bp hike in 2022, another by Q2 23 and roughly a 50% probability of yet a third hike by September 2023. This was more hawkish than priced in markets and consequently the short end of the NOK rates curve steepened and NOK FX strengthened. We share most of the views presented by NB, but we are little more optimistic on the global outlook. Hence, we expect NB to stay on hold in the near future but to deliver the first 25bp rate hike in Q4 21 as explained in Nordic Outlook, 16 June. If we are right in our views, this will likely mean NB will move forward its expected time for the first hike in September when the central bank presents its next monetary policy report.
In the UK Bank of England (BoE) unanimously decided to leave the bank rate unchanged whilst voting 8-1 on increasing QE by GBP 100bn. While this was in line with expectations the rhetoric was slightly to the hawkish side, not least as BoE announced it will slow down the purchase pace. Also the minutes revealed that there had been no discussion of lowering the bank rate into negative territory. We think it is likely that the BoE needs to expand the QE programme by GBP50-100bn in the autumn.
