Market movers today
The highlight for markets today will be the FOMC meeting. We expect the Federal Reserve to hike the target range by 50bp, a view shared by consensus and market pricing, and signal that further 50bp rate hikes are looming this year. We also look for the Fed to announce that the balance sheet run-off will start in mid-May, with a cap set at USD95bn as outlined in the minutes (read more in Fed Preview, 28 April).
Services PMIs are released in the morning in a range of European countries, with the US ISM services index following in the afternoon. Rebounding services activity following the pandemic is an important economic driver at the moment.
The US ADP employment report for April will give some insights into the state of the US jobs market, ahead of non-farm payrolls on Friday.
The 60 second overview
Market sentiment: Markets are tuning in for an FOMC meeting later today with a 50bp hike, the largest since 2000, fully priced in and all eyes on the post-meeting press conference and Powell’s comments and tone. Ahead of the meeting, risk sentiment seems sour in thin trading in Asia as the Chinese and Japanese markets are closed. US 10y yields have reversed a bit after breaking 3% yesterday with EUR/USD has retreated back close to 1.05 levels.
New sanctions against Russia: The EU is expected to announce its sixth round of sanctions against Russia today. According to diplomatic sources, new sanctions will target oil imports, Russian banks and disinformation campaigns. The EU countries are expected to agree on a ban for Russian oil imports to be phased in by the end of this year. For an EU-wide decision, unanimity is needed, and hence, the deal is expected to offer exemptions for at least Slovakia and Hungary – the two countries that heavily rely on Russian oil. There are also speculations that Bulgaria and the Czech Republic could join Slovakia and Hungary in demands for exemptions. Meanwhile, according to FT, independent refiners in China, which is the third largest buyer of Russian oil, have been discreetly purchasing Russian oil at steep discounts.
Victory Day looms: With May 9 approaching, we believe Russia is in a hurry to achieve some concrete results in the war in Ukraine to celebrate with the domestic public on next Monday. Last week, we highlighted that the risk of escalation may be growing as the Victory Day is raising the sense of urgency, see Research Russia- Ukraine – Several signals point to an escalation in the war in Ukraine as Victory Day looms, 26 April. According to anonymous sources close to Kremlin, Russia is planning to install occupation governments, order locals to pay with roubles and to set up referendums in some areas to open way for full annexation. Despite the disappointing performance of the Russian army, Kremlin officials remain confident that Russia will secure control over the Donetsk and Luhansk regions. Moscow is also seeking a tighter grip over the southern Kherson and Zaporizhzhia – regions already to some extent controlled by Russians. Securing control of these four regions would leave about fifth of Ukraine’s territory and most of its coast under Russian control.
FI: The main event today is the FOMC meeting, where the Federal Reserve is expected to hike rates by 50bp as well as releasing more detail regarding QT. The 50bp hike is fully priced in but the risk of a 75bp rate hike is expected to be small even though it has been called for by Fed governor Bullard. The market reaction will very much depend on the communication from the Federal Reserve and whether the Federal Reserve will increase the front-loading of the rate hikes as well as stepping up the pace on the QT.
FX: EUR/USD is likely to go even lower from here and downside risk to our 12M target at 1.05 seems very relevant to consider. Today, the FOMC meeting will be the key event.
Credit: Credit markets benefitted from the bettering of risk sentiment, which caused iTraxx Xover to tighten 8bp and Main almost 2bp. This took the indices to 419.6bp and 88.3bp, respectively.
Nordic macro
Finnish and Swedish Prime Ministers Sanna Marin and Magdalena Andersson met for a second day of talks with the German Chancellor Olaf Scholz on Tuesday (see Yle news). After the meeting, Finnish PM Marin praised the quality of the talks and said the timing was perfect. She also said Finland and Sweden share the same security environment with their choices being interdependent. Marin hopes the two countries share the same direction and can move in tandem. The Finnish Social Democratic Party, led by PM Marin, is expected to officially announce their NATO stance on May 14, and Finland is expected to proceed in applying for a NATO membership before summer.
