Market movers today
- Today, we get the flash PMIs from the US, UK and euro area. In the euro area, given the downtrend in new orders and rising Covid-19 headwinds we should continue to see weaker momentum, but there have also been some rays of light lately from the ZEW expectations and the Bundesbank activity indicator ticking up that could point in the other direction. Also in the UK, consensus foresees slight moderation in both manufacturing and service sector activity. Optimism prevails in the US, where analysts expect an improvement in conditions for both sectors.
- The Reserve Bank of New Zealand will meet early Wednesday morning. Consensus is looking for a 25bp hike as RBNZ has already initiated a tightening cycle, and inflation expectations have continued rising. Markets are pricing in at least a 25bp hike, but also around 40% risk of a 50bp hike.
The 60 second overview
Powell re-nominated: Yesterday, President Joe Biden announced he re-nominates Jerome Powell as Fed chair (and nominating Lael Brainard as Fed Vice Chair). This was our base case and also consensus. Powell’s approval for another four years is a formality, as he enjoys backing from most Democrats and Republicans (despite criticism from the left wing of the Democratic Party). Near-term, it does not change how the Fed sees the world, but 2022 looks like a difficult year from a central bank perspective. Inflation is set to moderate next year but remain above target and hence the Fed cannot afford being as patient as it would like to be based on people not returning back to the labour force yet. Most recently, Fed policymakers have started discussing whether to increase the tapering pace or not, supporting our view that risk is tilted towards the Fed tightening sooner and faster than what we have pencilled in right now (and much more than what the Fed is signalling at the moment). Our base case is an unchanged tapering pace of USD15bn per month (i.e. QE ends in June) and two rate hikes in H2 2022.
Fed pricing: After Powell’s re-nomination, the markets are now pricing in a 25bp hike by June next year, another 25bp by September and a third hike by December 2022. Expected monetary policy divergence between the Fed and the ECB is increasingly starting to weigh on EUR/USD with the pair approaching 1.12 level, while the stock market also seems to be taking a breather after a series of new record highs.
The EU flash consumer confidence indicator yesterday fell below its pre-pandemic levels for the first time since April, as new COVID-19 containment measures and concerns over economic growth and accelerating inflation are starting to weigh on the European consumer. We look for more signals on the health of the global consumer in tomorrow’s US PCE release and the German consumer confidence indicator on Thursday.
Equities: Equities were weaker yesterday as bond yield volatility is picking up again. The slow but steady grind in yields Monday trigger a reversal of the rotations we saw Friday. Banks and value stocks came back into favour just as energy stocks. Long duration tech stocks underperformed. VIX index move higher for the fourth day in a row closing north of 19 yesterday. In US Dow +0.1%, S&P 500 -0.3%, Nasdaq -1.3% and Russell 2000 -0.5%. Asian markets are mostly red this morning with Hang Seng once again leading the market lower. European and US futures down as well this morning.
FI: Yesterday, there was a solid rebound in the global bond markets with rising yields and wider spreads between Germany and Italy on the back of slightly hawkish comments from the Banque de France governor Villeroy.
FX: Yesterday was overall a quiet day in FX space although EUR/USD drifted further down, trading closer to 1.12 at the time of writing. EUR/GBP, EUR/NOK and EUR/SEK all moved sideways trading just below 0.84, slightly above 10.00 and above 10.11, respectively.
Credit: Credit finished Monday in red, with iTraxx Xover widening 2.6bp and Main 0.9bp. HY bonds were marked 1bp wider and IG 0.5bp wider.
Nordic macro
The temperature is rising in Swedish politics. Social Democrats failed to reach an agreement with the Left Party yesterday. Despite that failure, there is going to be a parliamentary vote on PM candidate Magdalena Andersson tomorrow (09:00). The background is that she needs support from both the Left and the Centre party. The Centre party has said they will tolerate her as PM, but they will not support the government’s budget if is negotiated with the Left party. The Left party on their side demands a lift of pension for the poorest to be included in the budget for next year to give their support for Andersson. How can this possibly be solved? If the government yields to the Left party, a scenario could be that she is accepted, but that the Centre party then says no to the government budget, which is also voted upon tomorrow (16:00). If so, Social Democrats will – again – be forced to govern on a Moderate/Christ Democrat/Sweden Democrat budget – one year ahead of next year’s election. That said, politics is the art of the possible, so nothing can be ruled out. Unless we end up in a real government crisis, with snap election (not likely), we deem market impact from this will be muted.
