Market movers today
Monday’s data calendar is light with only German industrial production data for December due. Consensus expects stabilisation in monthly figures after a contraction in November.
Today’s EP hearing with ECB president Lagarde starting at 16:45 CET will attract more than the usual attention in light of ECB hawkish turnaround last week.
Later in the week, we get the US CPI data from January on Thursday, which is extremely important for what the Fed will do at the March meeting. UK Q4 GDP data is out on Friday.
We are looking forward to hearing from the Riksbank on Thursday, not least now that other central banks are turning more hawkish.
We will have ECB Villeroy on the wires on Tuesday and Thursday, while Fed’s Bowman and Mester will speak on Wednesday. In the context of aggressive market repricing, we will pay close attention to any clues regarding the pace of monetary policy tightening.
Any headlines regarding the Russia-Ukraine stand-off will also remain in focus. French President Macron is heading to Moscow to discuss a de-escalation with President Putin.
The 60 second overview
Strong US jobs report: Non-farm payrolls were quite strong in January taking into account the high number of sick days due to omicron (also highlighted by the difference between employment growth in the establishment and household surveys). There were also very large revisions to employment. Wage sum growth remains higher than before COVID-19 and the wage sum level is now above the old pre-COVID trend path, suggesting very strong demand in the US. As a result, the implied probability of a 50bp rate hike in March rose from ~20% to ~40% (a total of 5.3 rate hikes this year), which seems fair given the current economic condition, see Fed Update: Different economy, different hiking cycle – a comparison with December 2015, 3 February.
ECB market pricing: In Europe, markets eye the end of negative rates in the euro area with 2yr €STR now in positive territory. ECB’s Klaas Knot expects the first rate hike as early as Q4 2022 and the second one in spring 2023, in line with our new ECB call, as we call for 25bp rate hikes in December 2022 and March 2023, see ECB Review: New call – ECB to hike in December 2022 and March 2023, 3 February.
Oil: Oil prices continue to move higher and are now close to 94 USD/barrel, the highest level since 2014. The upward trend in oil prices is also putting more pressure on central banks around the world.
Emerging markets: This morning we published our new Emerging Markets Monthly – Will Fed tightening trigger an EM crisis?, 7 February, where we argue that EM FX could be up for broad-based weakness if and when US financial conditions tighten. Historically, US rate hikes alone have not led to a sustained tightening in financial conditions, but EM weakness has been more pronounced during times of market stress, i.e. when wider credit spreads and weaker equity valuations imply tighter financial conditions.
Equities: Very mixed performance on global equity markets Friday. Some markets in Asia lifted by the post New Year holiday reopening, Europe hit by a negative catch-up to the Thursday US session and finally yet importantly US lifted by some very strong earnings by few giants. To put it into perspective, cyclicals outperforming in the US while underperforming in Europe. Growth outperformed although bond yields were higher, but earnings reports were sufficient to off-set the macro drivers Friday. Asian stocks are mostly lower this morning with mainland China going against the tide as it reopens after Lunar New Year. Futures in Europe are higher while US futures are close to unchanged this morning.
FI: A continuation of Thursday’s blood bath in rates markets continued on Friday after the hawkish turnaround from the ECB (the pace was accelerated on the strong US jobs report). European bonds yields took another leg higher in yields (by 6-7bp) in core countries, while peripheral bond yields rose an additional 3bp in the 10y area. However, the 5y point suffered the most with 5y Germany turning positive for the first time since 2018. The Friday close of BTPs-Bund spread at 154bp is the widest since the summer 2020, in the aftermath of the PEPP announcement. 10s30s part of the curve flattened yet again, with the EUR swap flattening 3.5bp to -7.5bp, while the cash curve flattened 4bp to 14.9bp. Inflation forward curves flattened again with the 5y5y down 3bp to 1.75%.
FX: On Friday, EUR/USD rose closer to 1.15 but erased some of the gains after the strong US jobs report. Both EUR/NOK and EUR/SEK moved higher. EUR/GBP moved higher and is now closer to 0.85 than 0.84.
Credit: Friday, the very bad risk sentiment we saw post the hawkish CB announcements continued. The hawkish expectations got further fuel during the day after the strong US NFP. Main widened by 2.7bp to 64.8bp while Xover widened 14.3bp to 314.5bp. The latter marks some 29bp widening during last week. The liquidity in cash space is very thin currently, but the few trades that got done pointed to markedly wider spreads during Friday.
