Fri, Dec 04, 2020 @ 23:18 GMT
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Will ECB Really Ease More?

Market movers today

Today’s release of the UK CPI inflation data for September is the most interesting data.

We have many central bank speeches from the Federal Reserve, the ECB and the Bank of England. Although they are not expected to rock the boat, ECB is sending an increasingly mixed message and some would say the message is starting to lean slightly dovish. Among others, the question of if and how the ECB can do more is starting to appear.

Besides that we are following the Brexit headlines and whether talks are about to resume or not.

The 60 second overview

Danish spending monitor: We are still seeing the effects of the pay-out of holiday back-pay, with spending last week as a whole up by 10% compared to last year. However, towards the end of the week we saw signs of normalisation, indicating that the initial boost is tapering off. However, we are likely to continue to see strong levels in retail in the coming months, with Christmas shopping expected to break records. This is both due to the holiday money, but also since a lot of the more traditional spending categories for the holiday season, such as social events, and travel spending over the Christmas break are likely to take up much less than normal of the budget. See more in Spending Monitor – Strong spending, but signs of normalisation, 20 October.

Will ECB ease more? ECB President Christine Lagarde is being quoted for saying there are “clear risks” to the outlook. Several reports by media and some ECB members have increasingly put forth the view that ECB may indeed need to add or extend accommodation as we move into the latter parts of 2020. Exactly how such could pan out remains fluid, but European interest rates have generally been moving in a direction which would be consistent with more liquidity and/or a cut in the deposit rate (currently at -50bp). This observation, and several others mean EUR/USD is likely to remain largely range bound until we much see more upbeat tones on Brexit, US fiscal expansion and corona – maybe by the end of the year.

Brexit: We think the hawkish comments are mostly a play to the gallery and behind the scenes we know from anonymous sources that the UK and the EU are getting closer to each other. Also very noteworthy that PM Boris Johnson fell short of saying he would abandon talks altogether despite saying that the UK will now prepare for no deal.

Equities: US ended mildly in green, arguably supported by some notion of progress in US fiscal talks – though such remains vague. Do note that among the top performing sectors, solar companies have put out a good year and also rose 2.5% yesterday, on average.

Fixed Income: Yesterday, we saw a modest rise in yields on the back of the significant issuance. However, given the comments from ECB’s Largarde regarding the risk to the economic outlook we should be prepared for a rebound today. Furthermore, if volatility is rising and the spread between Italy and Germany rises, the ECB can easily step up the PEPP programme as we saw in April and May. On top of this, the Italian Debt Office has accumulated a significant amount of cash more than double the amount of last year, and are signalling that they are likely to scale down the regular issuance of Italian government bonds, but do a USD-denominated deal instead. This should also be supportive for the spread contraction between Italy and Germany. Today, the Danish Debt Office will tap in the 2Y and 30Y benchmarks. The Swedish Debt Office will present budget deficits for 2020-2022. We expect to see a significant downward revision of the 2020 budget deficit.

FX: EUR/USD rose above 1.18 as the market has started to eye a US fiscal deal. The boost to risk sentiment did not bite on NOK though. Meanwhile, EUR/GBP continues to grind higher on Brexit woes.

Credit: Credit markets opened somewhat wider, but recovered during the day. iTraxx Xover thus ended the day 2bp wider and Main ½bp wider. Cash bonds generally did better, with both IG and HY cash ending the day tighter. Swedbank kicked off the Nordic bank reporting season with a strong report that did not indicate signs of asset quality deterioration.

Nordic macro and markets

The Swedish Debt Office presents a new borrowing forecast for 2020-2020 (fist forecast for 2022). The previous forecast was released in May and based on an assumption of a very steep economic slump the debt office then projected a very large budget deficit forecast for 2020 of 402bn SEK (and another 76bn in 2021). Hence announced borrowing plans in all debt classes, especially short-term borrowing, was raised significantly. Since then, the situation has changed, the economic decline will be less pronounced than though and demand for several of the government fiscal support programs to businesses has proven to be quite small. The projected budget deficit for 2020 is therefore likely to be reduced by (at least) half. We expect revisions to the 2021 budget balance to be considerably smaller considering that the government has announced new debt financed fiscal stimulus of 105bn for next year.


Danske Bank
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