Mon, Jun 21, 2021 @ 21:45 GMT
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Norges Bank To Lift The Rate Path

Market movers today

  • It is a busy day today with the highlight being the Norges Bank meeting. We expect Norges Bank to raise the rate path significantly and signal the first rate hike already in September, see more in Nordic section.
  • We also have a number of ECB speakers on the agenda today. Christine Lagarde will give a speech at the Committee on Economic and Monetary Affairs of the European Parliament, while de Guindos and Schnabel will follow later. We also have the TLTRO liquidity operation release at 11:30 CET. No new signals are expected from Bank of England’s interim meeting.
  • The EMA meets today to discuss the results of the AstraZeneca analysis on the blood clot events. We still assume that AstraZenca vaccinations will resume (perhaps with a few changes to who is allowed to receive it) but we are more concerned about the future uptake of the vaccine, as AstraZeneca’s already bad reputation within the EU has become even worse due to the events. We do however still expect that the EU can vaccinate enough people to avoid new restrictions and lockdowns in the autumn even without AstraZeneca.
  • Tonight the first meeting between the Biden administration and China will take place. Since the meeting is at the foreign minister level, we expect the issues to mainly centre on security and human rights issues with trade and tech playing a small role. The meeting will likely highlight the big difficulties in the US-China relationship that will likely be with us in many years to come.
  • Early Friday morning, Bank of Japan presents its policy review. Neither negative rates nor yield curve control is up for review and thus we expect no revolutions, only adjustments. A possible widening of the tolerance band on the 0% 10yr rate target has been discussed, which would be negative for USD/JPY. We do not think the Bank of Japan will run the risk of a stronger yen hampering the economic recovery and thus we expect no such changes for now.

The 60 second overview

FOMC: Yesterday evening, the Fed sent a dovish signal, as the median ‘dot’ continues to signal no rate hike through 2023. That said, we expect it is a matter of months before the Fed starts to move in a more hawkish direction, as the Fed, in our view, seems too pessimistic on the economic outlook and the labour market recovery. Such a shift may already come in June but no later than September when the post-COVID recovery is on its way. We have changed our Fed call on the back of the Fed meeting and our updated macro outlook released last week. We expect the Fed to start discussing tapering in Q4 21 and actual tapering in Q1 22. We expect a tapering pace of USD20bn per meeting so that QE ends in September 2022. We now expect the first rate hike in H1 23, ahead of their current ‘dots’. For more details. Also notice that Fed Chair Powell said a decision on SLR will be announced “in coming days”, which we also discuss in the piece.

Dutch parliament election: According to exit polls, the current PM Rutte’s centre-right WD won the Dutch parliament election, setting the scene for another Rutte term. The pro-EU D66 party came in second, making way for a more EU friendly tone on the EU front compared to currently.

Equities: Equity markets started in a muted setting yesterday as market participants nerved themselves for the FOMC-meeting. It turned out to be relatively little news though and once again a very solid performance from Powell. This took US markets higher, with S&P500 up 0.3%, Nasdaq 0.4%, Russell 0.7% and Dow 0.6%. Cyclicals beat defensives, with consumer discretionary (homebuilders, hotels), industrials (machinery, airlines) and materials outperforming. On the other end, utilities, real estate, health care and tech lagged. This upbeat sentiment continues this morning, with US futures all higher, and Asian markets rising around 1%.

FI: Heading into the FOMC meeting yesterday night, the EGB curve bear steepened with wider spreads yesterday as the Greek 30y supply weighed on the long-end in periphery. The 10y German Bund yields rose 4.6bp to -0.29%, while the intra-euro area spread widening bear steepened. Powell’s ‘dovish’ signals, while waiting for the SLR decision ‘in coming days’ sent yields slightly lower. Today at 11:30 CET the TLTRO take up will be released. We expect a relatively low number around EUR50bn, however market expectations are very different in these notoriously difficult to predict liquidity operations. For front end pricing to be impact a net take-up at least in excess of EUR300bn is required, see more in RtM EUR: more PEPP buying within the package, TLTRO allotment next week, 12 March.

FX: Yesterday’s dovish Fed signal sent EUR/USD higher to 1.1980 from 1.1990. We expect the dip in dollar to be transitory and still expect EUR/USD will move lower to 1.16 in 12M. Also EUR/NOK moved lower ending the day below 10.07 from 10.13 before the announcement. The reactions in EUR/GBP and EUR/SEK were fairly muted trading at 10.13 and still below 0.86, respectively.

Credit: There were only minor movements in EUR credit yesterday where iTraxx Xover closed in 244bp (+2bp) and Main in 48bp (+½bp). HY ended 1bp wider and IG was more or less unchanged.

Nordic macro and markets

In Norway, we expect Norges Bank (NB) to keep rates on hold at 0 % today, so all focus will be on the new rate path. For once there is little doubt that the policy rate path will be revised up, the question is whether NB is going to signal the first hike in September or December. Positive vaccine news, stronger wage growth, higher oil prices and stronger global growth (US fiscal policy) means the risk assessment of the medium-term outlook for inflation has shifted completely. In addition to the strong growth in house prices, this speaks in favour of NB signaling a hike most likely in September. Keep in mind, NB has on several occasions stated that ‘the sharp economic downturn and considerable uncertainty surrounding the outlook suggests keeping the policy rate on hold until there are clear signs that economic conditions are ‘normalising’ (our underscore). We also expect the new rate path to show slightly more than two hikes next year, and almost two more in 2023 and again in 2024, leaving the policy rate close to 1.5% at the end of 2024.

Riksbank vice governor Martin Flodén participates in a panel arranged by SNS (Center for Business and Policy Studies) where he will discuss the Riksbank’s QE program. The meeting starts at 13:00. Remember that Flodén entered a reservation against extending/ increasing the program back in November, accepted it at the last meeting while he remained sceptic of the extra benefit it provides for the economy.

 

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