Market movers today
- This morning we get Q4 GDP details from both Sweden and Denmark. We know what growth was based on the indicator but not what drove it.
- In Norway, we expect the unemployment rate was unchanged at 4.0% in February.
- In the US, monthly private consumption as well as PCE core inflation are due out. Goods consumption likely rose significantly in January due to the second stimulus payment but service consumption remains subdued. PCE core inflation is expected to remain around the current level still below 2%.
- We have a few central bank speeches today. ECB’s Schnabel speaks at 09:30 CET, BoE’s Haldane speaks at 12:00 CET and BoE’s Ramsden speaks at 13:30 CET. We will listen closely to any comments on rising yields, in particular.
The 60 second overview
Rising real rates: Yesterday, yields started to move significantly higher late during the European session with US 10yr Treasury yields moving 12bp higher to now above 1.50%, mainly driven by higher real rates. The higher real rates are partly driven by lower inflation expectations, which have hit reflation sensitive assets (both equities and cyclically-sensitive currencies) along the way. It was interesting that especially US 5yr Treasury yields moved higher (18bp) caused by a Fed repricing. The development in the US continued overnight in Asia and will probably also weigh on European markets this morning.
Fed not worried about rising yields – yet: Yesterday, we heard from a lot of FOMC members. Bullard, Bostic and George all said that they are not overly concerned about rising yields suggesting that the Fed will not react to it immediately. George argued that rising yields are driven by better growth expectations supported by vaccines. That said, we think there is a limit to how much the Fed will allow real rates to rise if it is partly driven by lower inflation expectations. If the Fed’s limit is reached, the Fed will probably intervene verbally but, if necessary, “twist” its QE programme by buying more bonds with longer maturities. It will be interesting to hear what the FOMC members think about markets now pencilling in the first rate hike in Q1 23, as “patience” seems to be the most used word by FOMC members at the moment.
COVID-19 – The Great Gradual Reopening (… in April): The improvement in Europe has stalled and many countries see higher cases again (not least in Eastern Europe). The pace of vaccination is gradually increasing in the EU but is still much below the level of the US and the UK. Also in the US there are early signs that the decline in new cases is at best slowing but perhaps on hold for now. We think March can go either way (depending on e.g. the weather) but our best guess is that April will mark the real turning point in the COVID-19 crisis when it comes to infections and deaths. This also means that the gradual easing of restrictions can start especially in April and since the positive vaccine news continue ticking in we do not expect restrictions will be re-imposed in the autumn. For more details see COVID-19 Update: The Great Gradual Reopening (… in April),.
Equities: Big shift taking place in equities yesterday as the tantrum in bond yields hit a level where equities could not cope with it any more. The classic correlation between bond yields, equities and sectors broke down, rising risk aversion took over, and it turned into a full blow risk off session. One thing still intact, value outperformed growth with more than 1% in its ninth consecutive day of outperformance. VIX up 35% to the level of 28.9. Bonds yields creeping higher most of the day but volatility rose in the US session and hence US equities worst off yesterday. Dow -1.8%, S&P 500 -2.5%, Nasdaq -3.5% and Russell 2000 -3.7%. US development feeding into the Asian session this morning with equities sharply lower. Tech/growth in significant losses and driving underperformance of Nikkei, Kospi and Taiwan. European and US futures lower this morning also driven by tech/growth stocks.
FI: Yesterday was a turbulent day in rates markets with a strong EGB sell-off also continuing through Lane’s comments which did not providing support to counterweigh the sell-off. While initially a US fiscal stimuli and prospects better economy story, the sell-off has changed narrative to mirror increased uncertainty with no apparent stop. The belly of the curve suffered massive yesterday, not least by the horrible 7y US auction with stats not seen since the GFC. The 7y bond is up almost 20bp at the time of writing. As regards the euro area, the Bunds sold off by 7bp with intra-euro area spreads widening led by Italy by around 4bp. 10Y Bund ASW spread tightened just above 1bp yesterday.
FX: NOK and many other crosses are caught between the market narratives of A) continued reflation/new commodity super cycle and B) sharp rise in real rates hitting reflation sensitive assets. Yesterday, the latter was the dominating factor.
Credit: Credit had another rough session yesterday where iTraxx Xover ended in 263bp (+11bp) and Main in 50½bp (+2bp).
Nordic macro and markets
In Norway, unemployment began to climb again at New Year due to new coronavirus restrictions closing some services and parts of the retail sector. Now that the restrictions have been relaxed somewhat we do not expect the jobless rate to rise further. We therefore anticipate unchanged registered unemployment of 4.0% (seasonally adjusted) in February.
