Market movers today
- We expect Norges Bank (NB) to stay on hold at 0.00% today. However, we expect NB to lift the rate path and signal a high (80%) probability of a September hike, and a significant probability (35-40%) of another hike in December.
- In the euro area, final HICP figures for May are released and will give more clues about the drivers of the uptick in core inflation to 0.9%. Overall, we are sceptic that core inflation is about to return to the highs prior to the Global Financial Crisis on a sustained basis. However, we have recently lifted our core inflation forecast for 2022 to 1.2%, mostly on the back of higher goods price inflation (see also Research Euro Area – Mind the inflation gap, 8 June).
- In the US, markets will continue to digest yesterday’s message form the Fed, while the Philly Fed manufacturing survey for June is also due out in the afternoon.
- At its meeting overnight, Bank of Japan is likely to keep policy rates and its QQE programme on hold, but in light of the service sector still struggling with a state of emergency in big parts of the country, the BoJ will likely extend its special programme aimed at channelling money to cash-strapped firms.
The 60 second overview
FOMC: Fed surprised the markets hawkishly, as the updated ‘dot plot’ now signals two hikes already in 2023 (from zero previously). Powell highlighted that the economy had recovered towards Fed’s goals faster than expected. While the current inflation was still seen as transitory, he acknowledged that upside risks had increased, and expected a strong labour market recovery in the near-term. Despite the rate projections, Fed’s focus remains on the upcoming tapering of QE. We now expect Fed to turn more hawkish in the coming meetings, and begin actual tapering in Q4 2021, with the first rate hike in H2 2022. Read more in Fed Research: Review – Slowly taking the foot off the gas, 16 June.
China: Both retail sales (12.4% y/y; prev. 17.7%) and industrial production (8.8% y/y; prev. 9.8%) fell short of consensus expectations in May. The decline in annual growth rates is partly caused by fading base effects, but gauging the size of the effect is difficult as China does not release the underlying sales and production figures. Nevertheless, the growth of the Chinese economy continues to moderate after the strong stimulus-supported recovery last year.
Covid vaccines: The efficacy of a new mRNA vaccine produced by German CureVac fell short of expectations at only 47 % in a late-stage trial with 40 000 volunteers. The efficacy is markedly worse compared to the other current mRNA vaccines by Pfizer-BioNTech and Moderna (+90% after two shots). The near-term impact for EU’s vaccination outlook remains limited though, as EMA had been expecting to approve the CureVac vaccine as late as August this year.
Equities: Global equities finished mostly lower, pulled down by US after hawkish tones from the Fed. Outcome so far was most sectors lower, but defensives leading the losses without a clear discrepancy between value and growth. Consumer discretionary the only sector higher in the US, and financials also on the strong side but consumer staples leading the losses. Implied volatility ticked up slightly. S&P 500 -0.5%, Nasdaq -0.2%, Dow -0.8% and Russell 2000 -0.2%. Sentiment in Asia is mixed this morning, with China rebounding but elsewhere lower. US futures point to a red opening.
FI: Yesterday’s European trading session was mostly waiting-for-Fed, with slightly lower rates and wider spreads. The FOMC meeting yesterday, with dots now pointing to two hikes in 2023 (and some members suggesting a 2022 hike), sent yields markedly higher on an expectation of a more imminent start to the tapering process. The release of the statement initiated an 8bp sell-off in 10y UST. Unsurprisingly, the 5y segment saw the biggest underperformance, by rising almost 11bp. While the inflation was still seen as transitory, 10y US real rates rose 18bp.
FX: We expected Powell to be hawkish at yesterday’s FOMC meeting but he overdid our expectations. EUR/USD declined to around 1.20 and Scandinavian currencies weakened. The message from FOMC clearly is in line with our expected path for EUR/USD spot towards 1.15 in 12M.
Credit: iTraxx Xover tightened 1½bp (to 234bp) and Main closed unchanged in 47½bp. HY bonds widened 3bp and IG was unchanged.
