Market movers today
- Markets will look out for comments from ‘ECB sources’, giving more insights into the debates of the ECB Governing Council and yesterday’s decision.
- The UK monthly GDP indicator will likely show that GDP recovered further ground during July, but at a slowing pace.
- In Denmark, we get CPI inflation figures for August and we expect an increase to 1.9% from 1.6% in July.
- In Norway, we expect core inflation to drop further to 1.0% y/y in August, but recognise that the krone’s stabilisation and slightly higher wage growth mean that inflation will push up again before too long.
The 60 second overview
Mandatory vaccinations or tests in US: The Biden administrations wants to force US companies to be vaccinated against COVID-19 or submit to weekly testing. The only option for federal workers will be to get vaccinated and just being tested will no longer be sufficient. Naturally, republicans are quoted to be giving some pushback.
ECB: As we expected, both the growth and inflation outlook were revised up in the new staff projections. Output is expected to exceed its pre-pandemic level by the end of the year and the labour market is also improving rapidly. That said, the global spread of the Delta variant could yet slow the recovery in global trade and delay the full reopening of the economy. The number of workers in job retention schemes also remains substantial and risks to the growth outlook are still seen as broadly balanced, she said. ECB decided to slow its PEPP bond purchases and this was largely as expected. See more in Flash: ECB Research – Saving the battle for December, 9 September.
Poland: The Polish Zloty weakened yesterday as the currency were hit twofold by 1) concerns about Poland’s future in the EU after a member of the governing PIS party suggested that Poland should leave the EU if the commission slaps a daily fine on Poland for its judicial reform initiatives and 2) quite dovish comments by the central bank governor. On the spat with EU, more senior members were quick to defy the PEXIT speculations but the discussion nevertheless kept market on its toes. On the central bank rates outlook, governor Glapinski yesterday re-iterated his long-held view that current inflation pressures are temporary and not something the central bank can do anything about as it is driven by energy and hiking of administrative prices (we think it is only part of the story of higher inflation). In that vein he also played down the need for rate hikes as they think inflation will fall significantly in 2022. Rate hikes in his view will only come into play if demand continues to be strong, which consensus and ourselves actually see materialising. However, financial markets are already pricing in quite a lot of rate hikes and hence the impact of tighter monetary policy may be less.
Equities: Equities were mostly lower yesterday, though off worst levels. S&P 500 logged its fourth-straight decline with most sectors lower. Peculiar sector preference though, as value and cyclicals beat growth and defensives in a very atypical risk off trading. Financials, energy and materials were the only sectors higher, and health care trailed. Meanwhile, VIX edging higher for a second day, now nearing the 20-level. S&P 500 closed down -0.5%, Dow -0.4%, Nasdaq -0.3% and Russell unchanged. Asian markets are rebounding this morning, especially on tech shares. US futures also slightly higher.
FI: European bond yields declined and spreads between the periphery and core-EU tightened after the ECB meeting as ECB’s Largarde stressed that ECB does not taper but “recalibrate”. Hence, the monthly PEPP purchase will be moderate lower than the current EUR 80bn. Sources from ECB indicates a range of EUR 60bn to 70bn.
FX: CHF, JPY, GBP and NOK rose vis-à-vis EUR and USD yesterday. EUR/GBP dropped firmly below 0.86 and USD/JPY fell back below 110. The ECB meeting failed to move EUR/USD, which traded in the 1.18-1.1850 range yesterday.
Credit: Credit markets saw good performance yesterday where iTraxx Xover tightened 3.7bp (to 225.7bp) and Main 0.5bp (to 44.5bp). HY bonds were unchanged while IG tightened almost 0.5bp.
Nordic macro
In Norway, core inflation fell somewhat further than expected in the first months of summer, driven by smaller price rises for domestic goods and services. This was particularly surprising given all the stories of soaring prices in the media during the same period. We expect core inflation to drop further to 1.0% y/y in August but recognise that the krone’s stabilisation and slightly higher wage growth mean that inflation will push up again before too long. This, along with inflation expectations being well anchored, probably also means Norges Bank will once again ignore lower inflation and announce its first rate hike in two weeks’ time.
