Market movers today
An eventful week comes to a close with some inflation expectations data. In Sweden, Prospera’s quarterly survey should generally show declining inflation expectations, while in the US, rising gasoline prices could have lifted consumers’ inflation expectations in the University of Michigan’s flash September survey.
US August industrial production data as well as NY Fed’s Empire Manufacturing index for September are also due for release.
Markets will naturally pay close attention to any upcoming ECB speeches following the yesterday’s meeting, and Lagarde is scheduled to take part in a press conference after Eurogroup meeting today.
The 60 second overview
The ECB meeting was the main event yesterday. We see the 25bp hike as a compromise in the Governing Council – a balancing act in a stagflationary environment. We were quite surprised by the limited optionality for further hikes in the statement, although Lagarde naturally refused to write off the possibility. We see the ECB’s monetary policy-setting approach now focusing much more on the time horizon for rates being in restrictive territory. As the new staff projections kept the forecast for headline and core inflation in 2025 above 2%, the road to neutral rates could end up being a long one. Our baseline is for the ECB not to hike further, and we see the next move being gradual cuts starting in the summer 2024. Read our review of the meeting outcome here: Flash ECB Review Confirmed: A final rate hike, but restrictive policies are not over, September 14.
As expected, Danmarks Nationalbank (DN) hiked its key policy rate 25bp to 3.6% following the ECB decision. We expect EUR/DKK to continue trading close to the central rate and that DN will continue follow future ECB rate changes 1-to-1: Flash Comment Denmark – End of the hiking cycle, September 14.
Yesterday’s US August Retail sales figures were a mixed bag for the markets, as headline sales grew stronger than expected (0.6% m/m; consensus 0.2%), but the growth was largely attributable to higher gasoline prices and it came with hefty negative revisions to June and July data. Control group sales, which strip away the most volatile categories, grew by a more modest 0.1% m/m, which together with 0.3% core inflation would suggest that real consumption volume took a turn lower in August. While recent macro data releases have generally been stronger than anticipated, we expect to see further signs of cooling consumption towards the fall. And while the Fed is priced to stay on hold next week, we do not anticipate hikes later in the year either, especially when taking into account that US financial conditions have already tightened over the summer. Read our full preview for the next week’s meeting at Research US – Fed preview: Plotting the way forward, 15 September.
This morning, United Auto Workers (UAW) started a strike against the three large Detroit car makers, Ford, GM and Stellantis. UAW, representing some 146.000 workers, has pushed for 40% wage increases over the next four and a half years, as well as improved benefits including shorter work weeks and better job protection. The companies have reportedly offered around 20% wage increases, and dismissed improved benefits. 12.700 workers are part of the initial strike, but new strike locations could be added depending on the negotiations. If the issue is resolved over the span of days or few weeks, the negative impact on growth as well as the potential uptick in car prices should remain limited, but a strike lasting several months could meaningfully weaken US economic growth.
Chinese growth data out this morning show some signs of growth stabilization. Industrial production rose 4.5% y/y (consensus: 3.9% y/y) after 3.7% y/y in July, while retail sales was up 4.6% y/y (consensus: 3% y/y) after 2.5% y/y in July. Property investment was in line with consensus down by 8.8% y/y in the first 8 months of 2023. The People’s Bank of China (PBoC) decided yesterday to cut the reserve requirement ratio by 25bp for most banks. Overnight, the central bank has additionally injected a net CNY191bn into the financial system through 1-year policy loans. We see room for much further policy support if needed, to counter uncertainty relating to the real estate sector or the financial system.
Equities: Global equities were higher yesterday as investors celebrated a stagflation message from the ECB. It sounds odd and it is odd in our opinion based on what we learned from ECB yesterday. Not so much the interest rate hike but the combination of high headline inflation expectations and lowering of GDP growth expectations for 23, 24, and 25. However, equities markedly higher driven by cyclical value. That being said, it was not an overwhelming risk-on when glancing through the sector and style rotations. VIX ticked lower to 13 and implicitly signalling the world economy being in good shape. In US yesterday, +0.96%, S&P 500 +0.8%, Nasdaq +0.8% and Russell 2000 +1.4%. Stocks in Asia are higher this morning from what could be called a three-way tailwind. In addition, a 25bp cut too RRR in China and a better-than-expected outcome of retail sales and industrial production numbers in China. European and US futures higher this morning.
FI: European bond yields drifted lower following yesterday’s ECB decision to hike the key interest rates by 25bp, while also signaling that the peak is likely to have been reached. 10Y Bund yields were down 6bp throughout the day, while the 2s10s curve flattened 3bp. Markets are now pricing in further policy tightening of just 4bp until the turn of the year. The absence of news on the PEPP portfolio roll-down was supportive to peripheral bonds, causing a spread tightening to core peers. The 5y5y EUR inflation swap rate was down 3bp to 2.60% following the ECB meeting.
FX: EUR/USD resumed its downtrend, breaking below 1.0650 on dovish ECB hike and strong US data. USD/JPY remains around 147.5. EUR/GBP declined well below 0.86. EUR/NOK moved to the low 11.40s on the back of the broad-based setback to the EUR, while EUR/SEK edged slightly lower to around 11.90.
Credit: Yesterday, credit spreads were supported towards the end of the trading day by improving risk sentiment following the ECB rate decision and briefing, sending iTraxx Main 1.6bp tighter to close at 68.7bp, while Xover was tighter by 7bp to close at 386.7bp.
Nordic macro
In Sweden, Prospera’s quarterly inflation expectations survey is released at 08:00. Inflation expectations should retreat in the 1-2Y segment, whereas 5Y will probably remain close to 2.2%. The long-term expectations is most important for the Riksbank, who likes to take credit for the fact that they have remained relatively anchored throughout the high-inflation/tightening period.
