Market movers today
- Norwegian inflation is in focus in the Nordics. We expect core inflation to have climbed back up to 3.2% in December, mainly on base effects.
- Geopolitics. The US turmoil will continue to attract headlines ahead of next week’s inauguration of President-elect Biden. In Europe, the CDU party convention kicks off on Friday to elect a new leader, as Merkel steps down later this year.
- Later this week we get ECB minutes, US retail sales, Swedish CPI and UK GDP.
The 60 second overview
Fiscal policy: On Friday Biden called for further fiscal easing in the size of “trillions of dollars”. He promised to present his proposal on Thursday. Among his proposals is to boost the stimulus checks from USD600 to USD2,000. The promise came after the labour market report showed a drop in pay-rolls of 140,000 people in December. Despite the Democratic Party being in control of both houses after Biden takes charge, political analysts question whether he can convince all Democratic lawmakers to support his proposal. According to Bloomberg, US banks expect that a new fiscal package will be roughly USD1trn.
Rising yields: Financial markets are increasingly putting their attention on rising US yields. The 10Y US treasury yields rose above 1.10% on Friday, the highest level since March last year. So far the steepening and rise in long-dated US yields has been fuelled by the expected step-up in fiscal policy after the Biden win and by rising inflation expectations (break-evens). The latter has been faster than the rise in nominal yields and 10Y implied real rates have stayed below -1.0%.
Fed repricing: Low real yields and expansive fiscal policy is supportive for risk assets and negative for the US dollar. However, recently, the picture has changed a little. On Friday, break-evens dropped despite higher oil prices, while nominal yields rose. Hence, real rates rose. Furthermore, the market has now started to price in an earlier first rate hike from the Fed. It has cautiously been moved from early 2024 to early Q3 23, and the 5y US swap is now up some 12bp this year. On Friday, the change in Fed pricing added support to USD and EUR/USD fell below 1.22 for the first time this year. US stocks continued to perform on Friday despite the higher yields. We note, though, that US equity futures point down this morning and performance in Asian markets has been mixed. We are keeping an eye on the Fed pricing. If markets continue to move forward the first rate hike, it could be a potential headwind for risk assets in 2021 and a support for the US dollar. There is a significant difference in whether higher yields are fuelled by fiscal policy, higher break-evens or as we have seen recently, a change in Fed expectations.
Trump impeachment: House speaker Pelosi said overnight that the Democratic leaders will take up a resolution to impeach President Trump if Vice-president Pence does not invoke the 25th amendment this week to remove Trump from office. Both outcomes could divide the political landscape further in the US, but from a market perspective Trump is already a person of the past.
Equities: Equities continued higher on Friday despite some macro data taking a turn for the worse. The first week after New Year saw equities secure many new all-time highs with the bullish narrative from 2020 continuing. Value and cyclicals generally took the leaderships with some significant differences between sectors. This week will mark the start of Q4 earnings in the US. All models suggest this will be another strong season, with results beating analyst estimates by a large margin.
FI: Long-dated US government bond yields have risen steadily since the start of the year and the 2-10Y US Treasury curve has steepened given the expected fiscal expansion as Biden now has control over both the Senate and the House. However, the impact on the European fixed income markets has been modest. Bunds continue to range-trade between -60bp and -40bp, and we do not expect this pattern to change in the short term given QE from the ECB and the large amount of excess liquidity that needs to find a place.
FX: The broad USD ended last week on a strong footing and EUR/USD is below 1.2200 this morning for the first time since Christmas. SEK followed EUR lower while NOK and RUB were among the top performers, with oil still trading bid. EUR/GBP continues to trade just above the 0.9000 threshold.
Credit: Credit risk was in strong demand on Friday, with iTraxx Xover and Main tightening 3bp and ½bp, respectively. HY cash bonds tightened around 4bp on average (while the lower-rated segment tightened somewhat more) and IG finished around ½bp tighter.
Nordic macro and markets
Denmark: We expect CPI inflation to increase to 0.6% in December from 0.5% in November. With tobacco prices fully adjusted to the April tax increase, some uncertainty has been removed. We expect increasing fuel prices to have been the key contributor to higher inflation in December. Hotel prices have corrected somewhat after big declines over the summer, and we do not expect more comeback here. Package holidays and international air fares remain imputed. The December print is the last one before new weights will be introduced, which will likely cause more inflation volatility.
Norway: Core inflation slowed towards the end of the year and fell to 2.9% in November. Due to base effects and lower Christmas trading than normal, we expect it to have climbed back up to 3.2% in December. Given the krone’s appreciation towards the end of 2020 and decelerating wage growth, we nevertheless expect core inflation to fall over the course of this year, helped by negative base effects.
Sweden: Nothing today. Tomorrow the Debt Office is due to report December borrowing requirements and on Friday December inflation is set for release.
