Danske Daily

Today's Key Points

• Focus on inflation pushes up rate expectations further. Bernanke delivered a hawkish speech last night and 2yr US-notes now trade at 2.93%, which is more than 50bp higher than two days ago.
• US equities were virtually flat, Asian stocks tumbled overnight, and Europe is expected to open in negative territory this morning.
• CPI numbers will be released in the Nordic region today. A few Fed speeches could create some volatility in the markets.

Markets Overnight

Federal Reserve Chairman Ben S. Bernanke delivered a very interesting speech last night at a Boston Fed conference. He noted that the economic outlook has improved from a month ago, and central bankers will combat any increase in inflation expectations. Rates and yields were markedly up ahead of Bernanke's speech, and the US yield curve had flattened further. Bernanke's speech did nothing to change this trend, and 2yr notes jumped more than 20bp as the Asian trading session opened this morning. As we speak 2yr notes are at 2.93%, more than 50bp higher than two days ago. 10yr yields have risen to 4.06%, from roughly 3.93% two days ago.

US equities were under pressure yesterday as inflation fears weighed on the sentiment, and most US stocks fell, led by banks and technology shares. Nasdaq thus dropped 0.6%, while S&P500 was virtually flat (+0.1%), and Dow Jones added 0.6% on a fairly volatile day.

A rise in relative rates between US and Euroland was positive for the dollar, and EUR/USD has moved significantly lower since one day ago. At yesterday's peak around noon, EUR/USD was trading around 1.583. Currently it trades around 1.56. The dollar also rebounded against the yen and USD/JPY has moved higher, and it currently trades around 106.7 coming from 105 just one day ago. Most Emerging Markets currencies had a very volatile trading session yesterday.

Crude oil prices came under pressure and dropped more than USD 4 yesterday to USD 134.35 a barrel before rebounding a little this morning.

In Asian trading this morning, most equity markets have been under heavy pressure fuelled by inflation fears. Nikkei225 has lost roughly 1.2%, while Hang Seng (which was closed on Monday) thus far has dropped more than 3.5%. We expect a nervous opening of the European stocks markets.

Global Daily

We will have more Fed speak today with Fisher talking on monetary policy and Mishkin moderating a panel at a Boston Fed conference. There will be increasing focus on any comments on inflation and potential rate hikes to fight inflation. Fisher dissented at the last meeting so he will probably strike a hawkish tone. Over the last month focus has moved towards inflation as oil prices continue to rise and there are signs that inflation expectations are starting to increase. The change in focus from growth to inflation has facilitated a substantial flattening of yield curves worldwide. Yesterday we saw another day of significant flattening - a move which got kick-started by ECB's warning of a rate hike last week. The stagflation scenario is creeping into the market underpinning the flattening move. In addition there has been a lot of hedging of steepener structures exacerbating the flattening.

With the recent move the market is now pricing in 125bp of hikes from Fed over the next year with the first hike priced in September - only three months from now. The market is pricing in close to 100bp of hikes from ECB over the next year and 60bp hike from Bank of England over the same time period. This seems overdone but caution is needed. If oil prices rise further and inflation pressures spread central banks may feel they have to respond by raising rates - and pay the price in terms of lower growth. In the UK we saw PPI data yesterday showing a very strong increase. Core PPI has risen from 4.6% y/y to 5.8% y/y and has shown a strong upward trend recently.

There are no big movers in terms of data. We will have industrial production in France and UK, but these will not have much impact with inflation being in the spotlight.

Despite few data releases yesterday, EUR/USD still managed to make big moves. A range of speeches from ECB and Fed members are scheduled for today. We would not be surprised to see yet another volatile trading session, given the heightened uncertainty and the resulting absence of clear direction in EUR/USD.

In Canada, the June monetary policy meeting will take centre stage. In line with consensus we expect that the policy rate will be cut by 25bp to 2.75%. The economy shrank in Q1 according to recently published GDP figures, while inflation is less of a problem than elsewhere, and there is thus a strong case for lower rates. Inflation has been rising, though, and if BoC decides to express concern about the rise in prices, this could curb some of the downward pressure on the CAD. Nonetheless, we would still expect USD/CAD to move higher if rates are lowered.

Scandi Daily

Today May CPI figures will be released in Norway. We expect core CPI to move upwards to 2.5% y/y from 2.4% in April. There are no signs of cost inflation dampening, and food and clothing prices should add to higher inflation. This implies that core inflation has overshot Norges Bank's March projections for the third month in a row. As a result, Norges Bank will probably deliver another rate hike this year. Based on the latest revision to our ECB-call, the risk has risen that NB will hike rates on 25 June.

Inflation fear has a firm grip on the Riksbank as well, which was confirmed by vice governor Barbro Wicknam Parak yesterday. If high inflation becomes a permanent feature the Riksbank has no alternative but to hike rates. Therefore next week's inflation expectations survey (18 June) will be key ahead of the July meeting and given the risk for a continued rise we now view a 25bp hike as the most likely scenario. Today the May inflation figures (09.30 as usual) will set the tone for rates and the SEK. Focus will be on headline inflation as CPIX will be phased out as an operative variable. We forecast a 0.3% rise month-on-month, the same as consensus. As before the positive drivers are food and energy while the electricity component stands out as a negative driver. Also at 09.30 we get orders and production data but they will probably be secondary to the market. EUR/SEK edged higher on negative stock markets yesterday despite a rather hawkish speech by Wickman Parak. High inflation readings might support a correction today but equity markets will be crucial as well.

Danske Bank
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