Market movers today
Markets will continue to digest the ECB news yesterday. Note that the ECB’s Nowotny is speaking this morning at 09.00 am CET.
The key focus today will be the US labour market report at 14.30 CET. We think average hourly earnings rose +0.25% m/m in February, which means an increase in the annual growth rate to 3.3% y/y, up from 3.2%, while we expect the change in nonfarm payrolls to come in at 190k. Regarding nonfarm payrolls, it seems employment growth has reached its high and has stabilised around its current level of 1.7% y/y. At the moment, the labour market is still strong, but in our view it is important to keep an eye on deceleration in employment.
German factory orders are also worth keeping an eye on at 08.00 CET. The numbers should give an indication of whether the euro area is close to the bottom or not.
A range of data is due in the Scandi region today including Norwegian GDP, see pg 2.
Selected market news
The ECB admittedly surprised us yesterday by delivering an all-round dovish message – and last night this was topped by ECB sources saying that some ECB officials still see the growth forecasts as too optimistic. First of all, contrary to our call but in line with market expectations, the ECB announced a liquidity injection with a new 2Y TLTRO3 starting in September 2019. Second, the ECB surprised markets by also extending the forward guidance on rates and now expects these to remain at current levels ‘at least through the end of 2019′ (vs ‘through the summer’ previously). Third, growth and inflation forecasts were taken down across horizons, and it is clear that the Governing Council is much less convinced by its previous narrative and has opened the door for further easing. As highlighted in our ECB review, 7 March 2019, on the back of this we have changed our ECB rate expectations: we now forecast no interest rate changes to either of the ECB’s key interest rates over our forecast horizon for the next 12M (vs a first hike in Dec-19 previously).
The markets responded sharply as the ECB has effectively opened the door for further easing. The German 10Y bund yield fell to 2016 lows, standing at only 0.067%, and not least the Italian 10Y yield fell by some 12bp as the soft ECB alleviates the funding pressure for Italian banks. Equities fell in Europe, as the downward revision to the outlook and the prospect of lower rates for longer weighing on banks dominated any positive impact from the ECB on an extended hold. The negative sentiment has continued in both the US and Asian sessions, where data overnight showed notably Chinese export orders faltering in February. EUR/USD fell markedly during the day, and the follow-through as technical resistance levels were broken continued last night. Separately, EU trade commissioner Malmstrom said the EU is preparing a list of US-manufactured products worth EUR22bn on which to retaliate should Trump move on with tariffs. Indeed, the ECB-induced EUR depreciation could be an eyesore for Trump as it is weighing on US competitiveness towards Europe, and increases the risk the US administration will lash out after the EU on trade next.
Scandi markets
Norway. Mainland GDP growth accelerated to 0.9% in Q4 after slowing temporarily in Q3, and today brings data for January. The monthly numbers have proved somewhat volatile and we do not yet have much information about January beyond unemployment, retail sales and the PMI. It is therefore only on a very uncertain basis that we predict mainland GDP growth of 0.2% m/m (consensus: +0.3 %) in January. Sweden. The January household consumption indicator should rebound on the back of retail sales, noting that last year’s data has been revised lower (release at 09:30 CET). Already at 08:00 CET, Riksbank vice governor Martin Flodén will give a speech on the state of the economy. On that note, we think the negative response in the krona to the ECB news was fair since a more dovish ECB will, all else being equal, affect the Riksbank.
Fixed income markets
The new TLTROs combined with the new extended forward guidance and the press conference message from Draghi that that ECB now has an easing bias and is ready to do more has reignited the hunt for yield. Italy is of course the main beneficiary of the new TLTRO. But also, the new outright lower yield levels that have pushed 10Y Spain towards 1% and 10Y France below 0.50% are forcing carry investors towards Italy. We believe the carry-game will continue for the next couple of months and even though the 5Y segment in periphery rallied strongly yesterday, this is still our favourite segment of both the BTP and SPGB curves. Among the semi-cores, 10Y Finland looks interesting vs core. There is now little to price out of the money market curve, as the first 10bp hike is priced autumn 2020. Hence, we believe that the German curve both 2s10s and 5s10s will continue to flatten. We also think that we are heading for a sub-zero level for 10Y bund yields, and our expected trading range for the next two months is -15 to 10bp. After the ECB sources story from last night stating that ECB officials still see the growth forecasts as too optimistic, there should be room to rally today as the race towards the bottom continues.
FX markets
The ECB clearly took us by surprise today and as the expectation of a 2019 hike was a pillar of our bullish EUR/USD view this year we have changed our EUR/USD call, see FX Strategy – ECB introduces ‘easing risk premium’ on EUR. Near term, we now expect EUR/USD to drift somewhat below the 1.12 mark. With the risk of pockets of USDstrength from renewed pricing of Fed hikes and a trade deal that will not provide much imminent support, this opens the possibility for a EUR/USD move towards 1.10 out to a 3M horizon. In the medium term (beyond 3M), we expect EUR/USD to stabilise and move back into the 1.12-1.16 range and stress that any drift higher will be limited, with upside mainly deriving from positive spillover to the euro area from a turn in the global (China) cycle. Our new forecast profile for EUR/USD thus reads 1.11 in 1M, 1.13 in 3M (previously 1.15), 1.15 in 6M (previously 1.20) and 1.17 in 12M (previously 1.25).
A surprisingly dovish ECB spilled over to the SEK, USD/SEK once again broke through 9.40 and EUR/SEK drifted upwards as well. We think a weaker SEK is warranted on the back of the ECB’s dovish shift, as this has direct consequences for the Riksbank’s forward guidance and subsequent hiking ambitions. As emphasised by Ingves, the correlation between the KIX-weighted (of which the Eurozone weighs approximately 50%) policy rate and the Riksbank’s repo rate is very high (0.92). This means that as the ECB policy rates are set to be kept unchanged this year, it is a severe blow to the Riksbank’s own hiking expectations. Indeed, Stibor curves shifted down and EUR/SEK traded higher post ECB.
Also, the NOK suffered from especially USD/Scandi buying yesterday. However, we do think that Norges Bank’s monetary policy is less sensitive to the shift of tone from the ECB as the domestic growth and inflation case is much different from that of Sweden and the Eurozone. That is also why the Nibor curve flattened less than the Stibor curve, with the Norges Bank March hike probability virtually unchanged (roughly 19 bp priced). The next three sessions should confirm this pricing with GDP today, inflation on Monday and finally, but not least, the Regional Network Survey on Tuesday.
EUR/DKK dropped to around the 7.46038 central rate on the ECB meeting yesterday. We attribute this move to the rally in the EUR fixed income market and the drop in EUR/USD, which are both important factors in driving DKK buying via FX hedging rebalancing. The dividend season in Denmark is coming up (the bulk of flows will take place between 14- 22 March), which could entail some temporary EUR/DKK positive flows;hence, we see limited further downside for EUR/DKK in the very near term.
