Market movers today
The main event today will be the FOMC meeting. Anything but a 25bp hike would be a major surprise, and the focus will be on guidance about the terminal rate level. We expect the communication to be on the hawkish side, markets price in cumulative 58bp worth of hikes by next June while we look for three consecutive 25bp hikes, which would take the Fed Funds rate to 5.00-5.25% by May. See our Fed preview (24 January).
Ahead of the FOMC meeting, we also have a range of tier-1 data releases coming up. The preliminary Spanish and French inflation figures supported our call for an upside surprise in the euro area flash HICP, we expect headline to print at 9.6% (from 9.2%) and core at 5.4% (from 5.2%).
The regional Fed manufacturing surveys point towards a small decline in the ISM manufacturing index, but with the PMI recovering and financial conditions easing, we could be near the bottom for most US leading indicators already in Q1. Fed will focus especially on the December JOLTs survey, where the elevated number of job openings has so far pointed towards persistent high wage inflation. The ADP private sector employment report is also due for release.
This morning, we will also get the manufacturing PMIs for Sweden and Norway.
The 60 second overview
Market limbo amid a lot of data: Financial markets traded mostly in a limbo yesterday ahead of the major central bank events this week starting with the FOMC tonight, followed by BoE and ECB tomorrow. Yesterday, French inflation rose to 7.0%, in line with consensus while its GDP recorded +0.1% qoq growth (consensus expected unchanged), German retail sales was weak for December and declined 5.5% mom while the unemployment still fell in Germany (unemployment rate at 5.5%). The euro area economy weathered the shocks of 2022 better than feared, avoiding a GDP contraction in Q4 22 (+0.1% q/q), despite bleak consumer and business sentiment. However, the economy’s seeming resilience again stemmed partly from Irish distortions (where GDP rose 3.5% q/q in Q4), while some tailwinds are also a leftover from the past (high order backlog/easing supply bottlenecks). ECB staff projected -0.2% qoq in their December round).
US: The Q4 employment cost was slightly lower than expected at 1.0%, but still on the high side for Fed to feel comfortable. The Chicago PMI was a bit weaker than expected, but still above the November lows. US Conference Board’s consumer confidence index dropped to 107.1 (from revised 109.0) driven by weaker expectations, while current situation estimate continued improving. Inflation expectations ticked higher, which is likely linked to the somewhat higher gasoline prices. Interestingly and in contrast to past months’ trend, employment indicators point towards improving labour market conditions, which could hint that the Friday NFP has remained at healthy levels.
China: Overnight, we got the private version of manufacturing PMI from Caixin. The release of 49.2 was marginally better than the December version, however it fell short of market expectations at 49.8. Yesterday, NBS PMI’s saw a strong frontloaded rebound of activity in both services and manufacturing due to the reopening. Especially the service sector saw a sharp turn higher with service PMI rising from a 41.6 to 54.4 (consensus 52.0) and the expectations index rose to the highest level in 10 years at 64.9.
FI: Intra-euro area spreads were broadly unchanged on the day, except Ireland that saw strong performance, tightening 2.5bp in the 10y point. The Irish GDP is notoriously known for its volatility, but the quarterly growth of 3.5% was surprisingly strong. The solid Irish fundamentals (and relatively low financing needs) is supportive for the Irish bonds.
FX: FX mostly in waiting mode in anticipation of tonight’s FOMC. EUR/USD firmly within its trading range, whereas Scandies have seen a slight rebound over the night following yesterday’s underperformance. Within CEE, CZK continues to outperform peers whereas HUF and PLN are broadly unchanged.
Credit: Yesterday marked a relatively quiet end to a busy month in EUR credit markets, with only two EUR benchmarks priced (one green senior non-preferred deal from BayernLB and an inaugural sustainability linked bond from Spanish toll-road operator Abertis). Overall, however, January has been very busy this year particularly for FIG issuers, who have raised some EUR64bn in unsecured format compared with EUR28bn in January 2022 according to our figures, while corporate issuance has been somewhat more modest (at EUR40bn vs EUR33bn in January last year). Even so, credit spreads have tightened overall though CDS indices were broadly flat yesterday (iTraxx Main unchanged at 79bp, Xover tighter by 1bp to 414bp).
Nordic macro
In Norway, the quarterly manufacturing survey from SSB indicated that the outlook for the manufacturing sector is deteriorating further into 2023. Hence, we expect that the PMI dropped to 49.5 in January despite some improvement in Euro PMIs and a significant recovery in oil-related industries.
