Wed, Feb 08, 2023 @ 16:10 GMT
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Riksbank’s Repo Rate Path Will Stay Put

Market movers today

  • The highlight of the day is the Riksbank meeting. The key questions are will the Riksbank provide new signals about the policy rate and will the central bank specify QE volumes in Q3? Since the February meeting, the pandemic has turned dramatically worse, which in conjunction with a depressed longer-term inflation outlook, leads us to believe that the repo rate path will stay put and the RB will remain more open to a cut if needed rather than tighten policy.
  • From the US we find out about house prices and we get the Richmond Fed Manufacturing Index for April. US manufacturing growth has been dwarfed by explosive retail sales growth.

The 60 second overview

Bank of Japan: This morning, the Bank of Japan kept its QQE with yield curve control unchanged with the target for the short-term interest rate at -0.1% and for 10-year bond yields around 0%, widely expected after last months’ policy tweaks. The BoJ also published a new outlook report, where the fiscal year 2023 (FY2023) now marks another year of not reaching the 2% inflation target and the FY2021 forecast has been trimmed following new lockdowns in Japan. Inflation is expected to be 0.1%, 0.8% and 1.0% in FY2021, FY2022 and FY2023, respectively. FX reaction on the decision was muted but overall USD/JPY has retraced some of the recent declines overnight and is now trading around 108.3, highest in a week.

Agricultural commodities prices on the rise: Agricultural commodities prices for wheat, corn and soybeans have risen to their highest level since 2013 due to a combination of more buying and weaker supply, meaning upward pressure on headline inflation. This may lead to higher underlying inflation pressure if continuing (inflation already seems on the rise with increasing energy and commodity prices, higher input prices etc.) and hence be another factor supporting the case for central bank policy tightening sooner rather than later. Inflation remains one of the key things to watch out for in the developed world when the normalisation is on its way.

US turns global on vaccines: The US has come a long way with its mass vaccination and demand can no longer follow supply with the US on track to reach its ambition having vaccinated all Americans with at least the first shot by end of May (although hesitancy is a concern). This also means that the US is turning more global with the US now accepting to export more raw materials and vaccines going forward. Concretely, the US has decided to export its 60 million AstraZeneca doses. It is not a total game-changer but given the global nature of pandemics, it seems like a good idea.

Equities: The week kicked off on a positive note, with most markets higher. Cyclicals beat defensives, small caps outperformed large caps and despite yields trailing, positive macro surprises was enough to keep the value streak going. In the US, S&P500 closed 0.2% higher, Dow -0.2%, Nasdaq 0.8% and Russell 2000 the winner of the day, up 1.2%. Energy, financials, and materials were among the best performing sectors while health care and industrials ranked among the laggards. Risk willingness is retreating in Asia this morning though with most markets slightly lower while US futures indicate another green session.

FI: Global yields markets were marginally higher on a day with little action. Intra-euro area spreads were stable and curves broadly unchanged. Weighting the sizeable US supply this week while also waiting for the FOMC decision on Wednesday have made markets take a more cautious approach. The ECB’s weekly PEPP net purchases rose by 22.4bn last week, which is the highest since June last year. The ‘significant’ volume now roughly corresponds to 34% compared to the start of the year.

FX: Commodity currencies, GBP and SEK rose vis-à-vis EUR and JPY yesterday. EUR/NOK traded close to the 10.00 level and EUR/GBP dropped back below the 0.87 level again.

Credit: Credit markets sold slightly off yesterday with iTraxx Xover widening 2bp (to 250bp) and Main closing marginally wider (in 50½bp). HY bonds widened 2bp and IG was unchanged.

Nordic macro and markets

Sweden: There are two things to look out for in the Riksbank policy announcement today; any new signals about the policy rate and will the Riksbank specify QE volumes in Q3? Since the pandemic broke out and the Riksbank slashed the rate path to zero, new forecasts have simply shown an extension by another at zero, currently until Q1 2024. Surely, at some point it is reasonable to expect Riksbank to give a signal that it is time to leave zero. One could argue that given pricing such a signal would not be a shock. However, there are also reasons to wait further. Since the February meeting, the pandemic has turned dramatically worse, hospitals are under intense pressure and vaccine deliveries remain uncertain. Under these circumstances, restrictions are unlikely to be lifted any time soon. This in combination with depressed longer-term inflation outlook, we tend to believe that the repo rate path will stay put and the RB remaining more open to a cut if needed than to policy tightening. Separately, also at 09:30, SCB releases PPI, trade balance, and labour market statistics.


Danske Bank
Danske Bank
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