Market movers today
It is time for inflation in Norway today. Core inflation has surprised on the downside in recent months, due largely to unexpectedly low food prices on the back of fierce competition between supermarkets. The depreciat ion in the NOK last winter is beginning to have an impact on import prices at the border. In our view, this will gradually serve to push up imported inflation – and so also core inflation – but October might st ill be a little too early. On balance, we estimate that core inflation climbed to 1.1% y/y in October.
In the US, the University of Michigan is due to release preliminary consumer confidence for November. This rose to the highest level since 2004 in October, underlining the very upbeat sent imentamong US consumers. Consensus is for a further small increase but there may be some downside risk as rising gasoline prices may weigh a little on optimism.
The ECB’s Yves Mersch is set to speak at the European Policy Forum in Windsor, England, at 13:30 CET.
Selected market news
Following last month’s ECB decision to extend QE purchases for another nine months, financial markets have been remarkably calm. Volatility has been low and falling and investors have been looking towards carry st rategies in most markets. We wrote about this last week in Strategy – Low volatility favours ‘hunt for yield’ but warning from IMF, 3 November. We argue that the ECB, Fed and Bank of Japan have created an environment where markets see a high central bank predictability in a situation where the macroeconomic out look looks increasingly stable. It creates a low volatility environment , which again pushes investors towards carry strategies and ‘risk’ in all markets.
However, yesterday was a day of profit taking or second thoughts. In the European fixed income market we saw both Bund yields and periphery yields pushed higher. It is difficult to say what triggered the fixed income sell-off. A weak bond auct ion in Ireland could be one reason, in a situation where markets have rallied strongly since the latest ECB meeting but probably more important ly we saw a st ring of ECB speeches and comments. ECB member Benoît Coeuré said it is important that the eurozone states do not find t hemselves ‘unarmed’ when t he next crisis hits and t hat loose monetary policy ‘won’t last forever’. Also not eworthy was a Reuters ‘ interview last night with ECB member Philip R. Lane that argued that ECB could leave its ‘gradualist ‘ approach and act more ‘decisively’ once inflat ion is on a clear path towards its goal.
Lane has a point but we doubt the market will suddenly change its expectations of eurozone monetary policy, simply because there are very few signs inflation and wage growth is picking up. In our view, inflation will not be ‘on a clear path towards it s goal’ in 2018, so t he ‘hunt for carry’ will soon return – volatility is st ill low and central bank predictability is st ill very high. What we saw yesterday was simply a hiccup or profit taking. In our view, it is st ill too early to position for the big ‘ECB sell-off’.
Global equity markets also came under pressure yesterday, probably for some of the same reasons as the fixed income market. Adding to the negative sentiment in the US markets was news regarding US tax reform, as the Senate revealed that its tax plan would delay lowering the corporate tax rate until 2019.
