Market movers today
This week starts with a fairly quiet data calendar although we have several ECB speakers out. US markets are closed today for the Juneteenth holiday.
After a very eventful last week with several notable central bank decisions, this week on paper looks quieter. On Wednesday we get UK CPI and Fed Chair Jerome Powell testifies to Congress. On Thursday, Norges Bank’s rate decision marks the highlight alongside preliminary PMIs for the euro area (including country-specific indices for Germany and France), the UK, Japan and the US. On Friday, German IFO expectations and US new home sales are due.
We are closing in to the 30 June Riksbank June meeting which means that the blackout-period starts later this (7 days before). Today, Ingves will attend a seminar today with the headline “The new world of payments – the central bank’s role” where markets will look for any policy signals.
The 60 second overview
Markets: Elevated inflation and rising recession risks remain the key themes in markets following a week where several central banks announced more monetary tightening. Fed comments over the last sessions including the weekend remarks from Fed Governor Waller in our view support the call for yet another 75bp US rate hike at the next monetary policy meeting in July. Tighter US monetary conditions is one of the key reasons behind the sharp tightening in global financial conditions this year including the sell-off in equities, higher bond yields, a stronger USD and wider credit spreads.
French politics: President Emmanuel Macron and his group of parties ‘Ensembe’ looks set to lose their absolute majority in the National Assembly following a surprise late surge from Marine Le Pen’s the far right in yesterday’s legislative elections. Initial results and projections leave Ensemble winning 245 seats – well short of the 289 seats needed for an absolute majority. If confirmed by final results it would mark the first time since 2002 that an elected French President will only have a relative parliamentary majority.
While Macron will probably be spared a ‘cohabitation’ government with a hostile prime minister, as his group remains the largest faction, he will still face difficulties in implementing his ambitious reform agenda to modernize public services and the pension system. Weeks of negotiations will now follow, as Macron has to seek allies from rival parties on the centre-right and -left.
The election result clearly points towards an increasingly divided France, and political uncertainty is just returning at a time when the economy has also lost steam, as high living costs are weighing on consumers and fiscal vulnerabilities have resurfaced with rising public borrowing costs. While he retains significant powers over foreign and defence policy, a challenging second term awaits Macron on the domestic front.
Change of Riksbank governor: On Friday it was announced that Governor Stefan Ingves, who leaves the Riksbank by the end of the year (after 17 years) will be succeeded by the current head of the Swedish FSA, Erik Thedéen. Speculations as to whether Thedéen is a monetary policy hawk or a dove have now started. Meanwhile, either way with inflation at 7.2% the consensus view clearly is to hike the repo rate to bring down inflation.
Equities: Equities closed higher on Friday measured by the MSCI world index. However, there was big regional, style and sector differences. Most notable the energy sector in another massive underperformance, losing almost 5%. Looking at the performance last week, the energy sector fell 15% and hence not as good a stagflation hedge as some would argue. One of the key takeaways in dreadful last week for equities was the drop in oil price and underperformance of the energy sector. This is a big change from what we have seen so far this year where higher oil price has been one of the major reasons for weak equity performance due to the link into inflation scare.
Also worth nothing last week, MSCI cyclicals outperformed MSCI defensives despite the massive sell-off in equities. For us, this just underscores one need to be careful in being to defensive and current stage. In US on Friday, Dow -0.1%, S&P 500 +0.2%, Nasdaq +1.4% and Russell 2000 +1.0%. The positive tone from Wall Street on Friday has not carried over to Asia this morning where most indices are lower, dragged down by South Korea and Japan. US futures are slightly higher this morning while European once are flat.
FI: One of the Federal Reserve members Christopher Waller has during the week-end been calling for another 75bp in July. The call for more front-loading of Fed hikes will support the flattening bias and increase the risk of a recession. In Europe, Olli Rehn said the ECB is committed to containing bond-market panic. We have a string of ECB speeches today including Lagarde.
FX: NOK led losses among majors last week and we do not expect Norges Bank this week to add any support to the heavily battered NOK. Inflation data remains top of everyone’s mind as the key market topic. The Riksbank will be forced to act more aggressively after new serious inflation misses.
Credit: The European credit markets ended a historic bad week on a slightly positive footing, with iTraxx main tightening by 0.7bp to 112.1bp and Xover tightening by 6.9bp to 562.4bp. There were no clear drivers for the pause in bearishness and we mostly see it as temporary breather in an otherwise very sour market that is pricing in a rising recession risk.
Nordic macro
We have now reached the week of the long-awaited Norges Bank meeting (on Thursday). In short, we expect NB to hike policy rates for the fourth time in this cycle by 25bp. We expect NB to stick to its ‘gradual’ strategy but also open the door for an August hike. We expect a forward guidance signal of close to a 50/50 split between August and September as the timing for the next 25bp hike but still with a verbal guidance towards September. We expect the top point of the rate path to fall in the 2.50-2.75% range by end-2023 and that the subsequent inversion will prove steeper than in the March Monetary Policy Report leaving a close to unchanged end-point of around 2.3% in Q4 2025. The steeper inversion reflects a much worse employment-inflation trade-off than expected in the last monetary policy report. If this calls proves right it would be a disappointment to markets and lead to lower short-end rates. Admittedly, the balance of risk to our call is skewed towards a more aggressive NB.
