Market movers today
Markets will continue to digest the flurry of central bank meetings yesterday and we look out for ECB ‘sources’ stories, after the ‘hawkish’ rates guidance yesterday (see below).
December flash PMI figures are on the agenda for the euro area, UK and US today and we expect them to bring further evidence of the rising recession risks ahead, while focus will also be on the strength of the labour market and further signs of easing input cost pressures.
The 60 second overview
Macro: US retail sales declined in November, while consensus had expected a small increase. Private consumption in the US looks like it has started to give in to higher interest rates.
ECB: The 50bp policy interest rate increase was widely expected by us and the market and even though we expected hawkish signals on top on that, we had not foreseen such a sharp increase in interest rates further out the curve as ECB prepared the market for more large rate hikes next year.
Russia: EU approved a ninth package of sanctions against Russia yesterday that targeted Russia’s access to drones and more banks. US sanctioned Vladimir Potanin – the owner of Norilsk Nickel.
FI: It was all about the central bank meetings yesterday and most came broadly in line with expectations, except for the ECB. ECB surprised yesterday which led to a massive bearish flattening of the curves. While the 50bp rate hike was well anticipated the communication about the coming rate hikes left a significant impact on markets. 2y Germany sold off by 25bp on the day which compares to a 5bp sell-off in the 30y segment. The aggressive ECB communication is in contrast to other major central banks what communicate being closer ending its tightening bias. ECB gave absolutely no indication of that.
FX: FX markets will continue to digest this week’s central bank decisions. The biggest drama yesterday was in a EUR/USD on the back of super-hawkish comments from Lagarde where the cross spiked temporarily above 1.07 and then came back down to square one as sour equities weighed in. NOK first strengthened when Norges Bank struck a slightly hawkish tone, while GBP dropped when two BOE dissenters favoured to keep the policy rate unchanged. The sell-off in equities however meant that both NOK and SEK dropped against EUR and USD, although EUR/SEK still remains in the familiar range of 10.80-11.00.
Credit: Yesterday, credit markets had a weak session following BOE and ECB announcements. Both CDS indices were wider with iTraxx Main 6.5bp higher at 89.9bp, while iTraxx Crossover jumped 32bp to close at 469.5bp.
Nordic macro
Danmarks Nationalbank (DN) hiked its key policy rate 50bp to 1.75%. DKK4bn in FX intervention in November was not enough to justify a further widening of the spread to ECB even as the market was about priced for another widening of c. 10bp. The decision to mirror ECB 1:1 should send EUR/DKK back down to 7.4365 near-term and trigger more FX intervention selling. We stick to our call that a 10bp widening will come in February when ECB is expected to hike again and for DN to follow ECB after that and hike to 2.90% in May. As expected, Norges Bank yesterday hiked policy rates by 25bp. In a slight hawkish surprise NB clearly guided towards another 25bp hike in March with the executive board concluding: ‘Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in 2023 Q1’. The firm guidance does put in question our call that yesterday’s hike marked the last hike in the cycle. That said, we are still not convinced that NB will get to deliver on the final 25bp hike in March even if we acknowledge that it has become a close call – also when taking into account yesterday’s ECB message. Markets are now pricing an additional 22bp worth of hikes for 2023 of which 18bp are priced for Q1.
