Market movers today
- Central banks continue to set the tone with the BOE and Norges Bank due to meet today.
- On BOE, the markets are pricing in a 50-60% probability of a rate hike this year. Economists are divided, but we expect them to hold back from rate hikes until next year.
- For Norges Bank, it is an interim meeting so we expect them to leave the policy rate unchanged and repeat the message from September that another hike can be expected in December.
- It’s a fairly quiet day on the data front, only German factory orders and US weekly jobless claims are due.
The 60 second overview
Fed starts tapering: In line with our base case, the Fed announced it will reduce the monthly QE buying pace by USD15bn per month starting from mid-November. This means that QE is concluded in June. As expected, the Fed introduced some flexibility by saying the tapering pace could be adjusted if needed. We think balance of risk is tilted towards a higher tapering pace, although it is not our base case. Fed Chair Powell linked future rate hikes to labour market outcomes unless the Fed fundamentally changes its view on high inflation being transitory. We believe yesterday’s announcement marks the beginning of a tightening cycle still expecting two rate hikes next year (25bp both in September and December 2022). For more details see Fed Research – Review: Tapering marks the beginning of a tightening cycle, 3 November.
Strong US data: October ISM non-manufacturing surged to the highest level on record at 66.7 up from 61.9 in the previous month. As another sign the service sector is booming, private employment increased by 571,000 jobs in October according to the ADP report, both beating expectations significantly.
Poland: The National Bank of Poland hiked rates by 75bp yesterday as markets had also priced in. Poland is currently facing the highest inflation rates in 20 years and after the meeting, the governor committed to bringing inflation back to the 2.5% target but not to further hikes.
Equities: Equity markets were higher in Wednesday trading, finishing near best levels as investors bought into the message from Fed. No clear direction among sectors or styles though, with cyclical vs defensives and value vs growth tightly bunched. S&P 500 closed up 0.7%, Nasdaq 1%, Dow 0.3% and Russell 2000 1.8% in another small-cap rally. What is more, VIX ticked even lower, down to 15 which is a year-low. Asian markets are joining the sigh of relief this morning, with most markets up around 0.5-1%. US futures are broadly unchanged.
FI: This week is indeed in hands of central banks with FED (and Lagarde speach) yesterday and BoE today. First, yesterday, the 30Y EUR yields dropped 2-3bp with 10Y mainly unchanged to 1bp lower in Italy/Spain.
FX: We doubt the market will be fooled twice by OPEC+. For EUR/USD, the Fed announcement was appropriately smacked in the middle of market and analyst’s expectations. We expect EUR/GBP to move higher on dovish BoE. There will likely be the limited effect of the 75bp hike in Poland for PLN FX. Today’s interim Norges Bank meeting is unlikely to do much for NOK.
Credit: Credit markets barely moved yesterday. iTraxx Xover tightened 1.5bp (closing in 258.4bp) and Main widened 0.1bp (in 50.6bp). HY bonds tightened 0.5bp and IG was unchanged.
Nordic macro
At today’s interim meeting Norges Bank is widely expected to leave policy rates unchanged, reiterate the prospects for a December rate hike and otherwise deliver little news to markets.
