Market movers today
The main release today will be ISM manufacturing for November this afternoon. It is expected to drop below 50 from 50.2 to 49.7. Focus will also be on the price and employment components. US also releases personal spending and PCE inflation.
German retail sales will be out this morning. It has been trending lower since February but is quite volatile on a monthly basis.
Euro unemployment is expected to be unchanged at 6.6%, which is low in a historical perspective and illustrating a still tight labour market despite a slowing economy.
In the Nordics we get manufacturing PMIs in both Sweden and Norway where the details will be scrutinised. For Sweden we expect to see continued weak orders, improvement in supply chains and receding price pressures. The Norwegian PMI surprised by climbing to 53.1 in October after trending down since before the summer. Further weak global growth but a solid upturn in oil-related industries suggest a mixed picture, but the PMI is most likely to drop back towards 50. For both the Swedish and Norwegian releases the employment components have held up well so far and it will be important to look for signs if this is changing.
The 60 second overview
Fed chair Powell-speech: following four consecutive hikes in the Fed fund’s target rate this year Fed Chair Jerome Powell yesterday indicated that the forthcoming December hike will be of a smaller size of 50bp. Powell once again referred to the importance of risk management in setting Fed policy. Meanwhile, while this rhetoric previously has been used in the context of the risk of not tightening enough it was now used in the context of the risk of overtightening. Fed’s confidence in bringing inflation down seems to have risen and Powell expressed guarded optimism on the prospects for a soft landing of the US economy.
Markets rally: Financial conditions eased considerably on the speech with equities rallying, yields declining, real rates falling sharply, credit spreads tightening and the USD weakening. Also commodities took the news positively with oil, industrial metals and precious metals all moving higher Overnight the big Asian equity indices have also followed their US counterparts into green territory – albeit not quite as much as the duration sensitive US indices.
Our take: Powell’s speech clearly challenges our near-term call for a 75bp hike to the Fed funds target in December. Meanwhile, we also highlight that Powell expressed that policy rates are likely to be higher than assumed in September when the median Fed dot showed 4.6% for next year. In our view, that supports the narrative that it is still far too early to speculate in an actual Fed pivot – understood as the timing of Fed rate cuts. Instead a slower pace of rate hikes now only extends the hiking cycle further into 2023.
Powell emphasised that the length of time that monetary policy will be kept at restrictive territory is far more important than the near-term incremental pace of hikes. We share the same view. In that light we think the sharp rally in risk only lengthens this period and shows that it is still too early to declare victory in the fight against high inflation which also historically has proven a quite persistent phenomenon.
Equities: Bad news is bad news but investors do not get it yet. US equities rallied yesterday, as Powell guided for a 50bp hike instead of 75bp, a moment after dreadful macro data. A 50bp hike was already consensus but nonetheless S&P shot up 3% and Nasdaq 5%. Risk on with all sectors higher (including industrials despite the plunging PMI!) but tech, communications and consumer discretionary up 4-5%. Now, we expect this equity rally to reverse soon. Remember, we recommend to add more growth/quality stocks to leverage on rallies like yesterday without taking earnings risk.
FI: Powell’s remarks were well received by the US Treasury market. 10Y Treasuries rallied some 15bp, while 5Y Treasuries rallied 18bp. The US curve 2-10Y steepened a few bps, but it is still significantly inverted as seemingly the risk of recession is seen to be much higher than expected by the Federal Reserve.
FX: The impact in FX markets of Powell’s speech was clear with the USD weakening and risk sensitive currencies rallying. EUR/USD moved back above the 1.04 level while USD/JPY has hit new lows close to 136.
Credit: European credit markets had a relatively calm day prior to Powell with iTraxx main widening 1bp to 92bp while Xover was unchanged at 459bp. As we approach end of year we expect activity levels to decline somewhat in the coming weeks.
