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Will Fed Eattle The Markets?

Market movers today

  • The main event of today is the Fed decision tonight. We expect the Fed to increase the tapering pace to USD25bn per month starting from January, which would imply an end to QE bond buying from April. It seems, however, that since our updated Fed call consensus has emerged around a double of the tapering pace to USD30bn per month. We expect the Fed to signal two rate hikes next year (up from fifty-fifty chance of a rate hike in 2022 in the September projections), which, however, is below our call for three rate hikes. We expect the Fed will continue to turn gradually more hawkish in 2022.
  • In the US, we also get numbers for retail sales in November, which are expected to lose momentum compared with October amid eroding purchasing power due to higher inflation.
  • In Sweden, Prospera publishes its final, quarterly inflation survey.

The 60 second overview

Chinese activity data point to slowing economy: Retail sales and investment in November were somewhat weaker than expected, growing 3.9% and 5.2%, respectively compared with a year earlier. Stripping out inflation, retail sales grew only 0.2% compared with October. The slowing economic activity reflects headwinds from COVID-19 outbreaks and spill-over effects from troubles in the property sector (where a faster drop in new home prices in November signals further trouble). We expect the Chinese authorities to step up stimulus in early parts of 2022, which should support the economy.

High inflation challenges central banks: This morning we published our Global Inflation Watch – US inflation at 39-year high, euro inflation boosted by electricity and gas prices, 15 December. Labour shortages, new highs in inflation and continued bottle necks keep challenging central banks. A few bright spots, though, are stabilisation in oil, metal and foods stuff prices and freight rates also seem to have peaked. This should drive inflation somewhat lower in 2022 but wage pressures are likely to remain high, especially in the US. We look for core inflation in the euro area to peak now, while we project US core inflation to peak in February 2022 above 5%.

Equities: Tuesday continued on the risk-off theme, with equities lower and defensives outperforming. Although yields were roughly unchanged the value-vs-growth trade remerged. Probably as a reflection of investors positioning themselves for tonight’s FOMC meeting. Financials, staples and materials ranked among the best sectors, while rate sensitive tech and real estate sold off. US equities lower with Dow -0.3%, S&P 500 -0.8%, Nasdaq -1.1% and Russell 2000 -0.1%. Asian markets are roughly unchanged this morning, and the same goes for US futures.

FI: Inflation markets underperforming nominals, leading to the rise in global real yields are probably the most characteristic moves of yesterday’s trading session, which was otherwise mainly a waiting game for the coming central bank showdown in the coming days. 10y German Bunds rose 1bp to -0.37%.

FX: It was a fairly quiet session in FX markets yesterday which was primarily characterised by a rise in global real yields, a drop in gold and ZAR trading heavy. Most G10 pairs range traded albeit commodity FX in NOK, RUB and AUD were modest underperformers.

Credit: Credit markets sold slightly off yesterday with iTraxx Xover widening 2.6bp and Main 0.5bp. HY bonds tightened 1bp while IG widened 0.5bp.

Nordic macro

In Sweden, Prospera publishes its final, quarterly inflation survey (08:00). Since expectations tend to be adaptive and since headline inflation has continued to rise on the back of surging energy prices, it would not be a surprise if especially 1-2 years pick up slightly. However, in the Q3 survey expectations dropped 0.1 p.p. on all horizons leaving 1- and 2-year at 1.8% and 5-year at 1.9% and, notably, energy-adjusted inflation still runs below target at 1.9%. Hence, if they would pick up 1-2 tenths they would still be described as well-anchored and support a cautious stance from the Riksbank. Also keep an eye on employers and employees wage growth expectations, which so far run close to actual wage growth around or just above 2.5% – the Riksbank expects wage growth to pick up to 2.9% in 2023.


Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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