Market movers today
Today’s key event is the Norges Bank meeting, where we do not expect any changes to the current policy rate and hence attention will centre on whether the central bank puts out any new signals about rates further ahead. We believe that Norges Bank will now signal an earlier first rate hike, probably ‘before summer 2022’ (versus Q4 2022 at the last meeting).
We also get German Ifo survey and US jobless claims today.
Besides that we have several FOMC members out speaking today including NY Fed President Williams. We continue to listen closely to what the different members say, as we suspect they disagree on the way forward.
ECB will announce the result of its flagship liquidity operation tltro3.5 today. It will certainly not be as big as in June where banks took EUR1.3trl. We expect a EUR50-100bn figure, but a reading outside this range cant be ruled out as banks will balance two main drivers being the TLTRO discount and the maturity of the operations.
The 60 second overview
US politics: Mitt Romney announced yesterday that he supports the decision to have a vote on the next Supreme Court judge (Trump’s nomination is expected over the weekend). With the fight over the nomination, it seems very difficult for the Republicans and the Democrats to agree on another relief package, which is not positive for either the recovery or markets.
Fed: Several FOMC members spoke yesterday, but they were not able to inject more momentum into the reflation theme. While the FOMC members continue to highlight that they will remain on hold for a long time, they are still unwilling to go the extra mile and do more. 10yr breakeven inflation is now trading at 1.60% versus 1.80% after Powell’s announcement of the new average inflation targeting.
Overall: Unfortunately, we have a bad mix of increasing Covid-19 cases in Europe implying stricter restrictions, Covid-19 cases in the US are not declining as fast as hoped, the Fed is (at least at the moment) unwilling to ease monetary policy further and now it also seems difficult to get support from the fiscal side in the US due to the fight over the Supreme Court judge nomination. The mix may continue to weigh on markets near-term.
Equities: Wednesday saw a mixed session for equities with Europe outperforming, again underlined by the rotation out of US tech. US equities started the day in green, only to close the session sharply. The sell-off was broad-based, but most pronounced in Energy and IT amid a broad FAANG pullback while defensives like Health care and Utilities held up the best. Financials was also a relative outperformer. Asian equities are also down this morning.
FI: The downward pressure on global yields continue given the uncertainty in the equity markets, the need for keeping the monetary and fiscal stimulus given an uncertain growth outlook according to comments the Federal Reserve, more liquidity from ECB through the TLTROs. On top of this we also have the “micro-factors” such as a significant index extension in the EUR sovereign bond market at the end of this month as described in our EUR index publication: October 2020 EGB index extension from yesterday. Hence, there is plenty of factors that can push yields lower in the short-term.
FX: EUR/USD continues to be weighed down heavily by the resurging uncertainty related to lockdowns/corona in Europe. Shaky risk sentiment, lower commodities and heavy inflation expectations continue to weigh on NOK. Sentiment in Emerging Markets is quite shaky and this goes particularly for TRY, RUB and Eastern Europe (PLN, HUF, CZK).
Credit: The soft tone remained in credit markets yesterday where iTraxx Xover widened 3bp and Main went 1bp North, despite an improved sentiment in European equity markets.
Nordic macro and markets
In Norway, we expect Norges Bank to stay on hold at 0.0 %. The inflation outlook should be more or less unchanged since June, but the strong rise in housing prices has increased the risk of financial instability. Hence, we expect NB to signal a first rate hike by Q2 2022, i.e. two quarters earlier than assumed in June. The risk to our view is that NB considers downside risks to have increased as well, as new infections have been rising in several countries, including Norway.