Market movers today
Market focus reverts to the ECB meeting today. The stabilization in euro area core inflation in November, paired with the weakening growth outlook probably gives ECB enough arguments to slow the hiking pace to 50bp (broadly in line with market pricing). However, we expect it to continue guiding for further rate hikes ahead, paired with a reduction of the balance sheet (QT), as ‘stickily’ high core inflation could remain a concern for ECB for some time yet, as the new economic projection will likely also confirm (read more in ECB Preview – A hawkish 50bp, 8 December).
We also expect Bank of England to revert to a more dovish stance, as recession risks are becoming more pronounced (see also Bank of England Preview – Back to 50bp as BoE nears end of hiking cycle, 12 December), while Swiss National Bank (SNB) will likely also join the club of 50bp hikes.
Amid clear signs of peaking inflation and a deteriorating growth outlook, we expect Norges Bank to deliver its last 25bp rate hike, but with the updated policy path showing a roughly 50% chance of a further rate hike in H1 23 (read more in Reading the Markets Norway – “The last hike” and three new trade recommendations, 12 December).
US retail sales for November are also on the agenda this afternoon and will give more clues about the health of consumer spending after confidence rebounded a bit recently.
EU leaders will gather in Brussels to discuss a ninth Russian sanction package, the contentious gas price cap and European competitiveness in light of the US IRA.
The 60 second overview
Fed: Fed delivered the widely anticipated 50bp hike last night. The updated ‘dot plot’ signalled more hawkish rate path than what market has been pricing in lately, with 17 out of the 19 individual forecasts seeing Fed Funds Rate above 5% in 2023. While Powell did not sound particularly dovish on the outlook, he did still leave the door open for moderating the pace of hiking further in February if warranted by weaker data. EUR/USD reversed the initial downtick during the press conference before edging back lower overnight, while S&P500 ended the day lower. Fed Funds pricing was relatively little affected, the terminal rate is seen 5-6bp higher than before the meeting around 4.87%, while markets still see the February meeting as a coin-toss between 25 and 50bp. While the economy is cooling, and inflation prints will continue to decline in 2023, Powell emphasized that underlying wage-sensitive components of inflation are still at clearly too high levels, which we also flagged yesterday in Global Inflation Watch – Mixed inflation signals in November, 14 December. As such, we keep our Fed call unchanged, and still look for 50bp in February and 25bp in March, with a terminal rate of 5.00-5.25% prevailing through the rest of 2023, in line with Fed’s projections. See the full Fed review: FOMC signals Fed Funds above 5% in 2023, 14 December.
China: Overnight, the November retail sales and industrial production data showed even steeper slowdown than consensus had expected, as the rising Covid-cases are weighing on the activity. The situation has become even worse in December, as China is now gradually moving away from the zero-Covid policies, and we expect the surge to continue through winter. In this short paper released this morning (Research China – COVID surge has begun – it should peak in early February, 15 December) we look at how the Covid wave could evolve using the experience from other Asian regions that opened up while Omicron was the dominant variant. It suggests that China could see 10 million cases per day at the peak, which is likely to be at the beginning of February. Cases may be significantly lower by early April if China follows a similar pattern. Hence after 2-3 tough months China should be on the other side and recover gradually starting in Q2.
FI: It was a rather choppy rates session yesterday ahead of the FOMC decision, where focus was on the record-high Germany issuance outlook for 2023. This led to an intraday peak of 10y Bunds 11bp higher just shy of the 2% level. The German Bund asset swap collapsed almost 5bp on the DFA issuance statement. On the day European rates were slightly higher, with peripheral spreads wider leaving the Italian-German yield spread above 190bp again, which is more or less the widest level this month. Rates markets curve flattened on the FOMC meeting as Powell kept the door open for more modest rate hikes. 2y UST rose 3bp, while 10y UST declined 4bp to 3.47%.
FX: The Fed did as widely expected and hiked by 50bp, and the updated ‘dots’ signal policy rates above 5% in 2023. Despite the relatively hawkish rate projections, EUR/USD remains at pre-meeting levels as Powell left the door open for less hikes if warranted by data. G10 FX in general is relatively unchanged following the meeting, and we probably need another session or two to fully digest the outcome. Today, we see no less than four G10 central banks, with ECB, BoE, SNB and Norges Bank (also Danmarks Nationalbank).
Credit: Credit markets continued the cautious sentiment ahead of FOMC rate decision, leaving iTraxx Main slightly wider by 1.2bp at 83.4bp, while iTraxx Crossover widened 1.7bp, closing at 437.4bp.
Nordic macro
Sweden: Prospera’s quarterly “big” survey is released this morning (08.00 CET). Beside inflation expectations market will focus on Social Partners’ wage expectations as we are approaching the start of wage negotiations in Q1.
