Market movers today
- After the frenzy of central bank meetings, focus turns today back to economic releases.
- In Germany the IFO business climate survey for December is expected to fall back a bit as the Covid-19 weigh on sentiment.
- We also get the final HICP inflation number for November, where in particular the core part will be in focus.
- Russia’s central bank rounds off this intense central bank week, where expectations are for a full percentage point hike (to 8.50%) to tame inflation running well-above the bank’s target.
The 60 second overview
Norges Bank delivered a 25bp rate hike yesterday and maintained a firm tightening bias. They maintained guidance of a continued normalisation of monetary policy and signalled the next hike in the cycle in March 2022 with the executive board concluding. The rate path and forward guidance on policy rates was very close to our expectations and we expect three hikes next year (March, June while September/December is roughly equal probability).
ECB highlighted its data dependent means flexibility and optionality. ECB ended its PEPP as expected in March 2022 and an extended PEPP reinvestment guidance by one year to ‘at least until’ December 2024. Specifically for Greece, the reinvestment can be moved across time, jurisdictions, asset class. On APP, ECB kept the APP still being open ended, and pre-committed to a gradual purchase pace through 2022. The inflation outlook was revised up significantly in 2022 and 2023, and combined with the progress on economic recovery it was an important factor behind the decision to slow asset purchases. Especially the forecasts for headline inflation (3.2%) and core inflation (1.9%) during 2022 stand out.
Bank of England (BoE) unexpectedly hiked rates 15bp to 0.25% in an 8-1 vote, and a complete shift from November (where it was a 2-7 vote for a hike). A rate hike was expected in February, but BoE seems more concerned about persistent inflation. We also saw the latest print surprised to the upside. We still believe markets are pricing in too many rate hikes from the BoE, and the hiking cycle will be more gradual.
Bank of Japan decided to taper its purchases of commercial papers and corporate bonds to pre-pandemic levels in March 2022 as planned. It extended the part of its emergency funding scheme towards small and medium sized businesses another six months beyond the March 2022 deadline and lefts its QQE with yield curve policy unchanged, confirming its dovish position among major centrals banks.
Geopolitics: The EU leaders met yesterday to discuss the escalating conflict in Ukraine against Russia. For now, the EU leaders rattled with the sables by threatening Russia with sanctions, severe costs etc., but fell short of actually delivering measures.
Equities: Equity performance flipped on Thursday, with US reversing the Fed rally and growth/tech under renewed scrutiny. Rotation was massive, with best performing financials beating worst performing tech by 4 percentage points. This spread was also evident between US indexes; S&P500 closed down -0.9%, Nasdaq a massive -2.5%, Russell 2000 -2% while Dow closed unchanged. Asian markets are following the move lower this morning and US futures point lower.
FI: Markets were in a 2bp range from the morning digesting the FOMC messages from Wednesday night. The unexpected BoE hike and the ECB’s leaning hawkish change in keeping optionality and flexibility resulted in a strong bear steepening of the curves coming from the long end. The less than expected QE volume next year led to underperformance of peripheral spreads and especially BTPs (BTPs-Bund spread 4bp wider on the day). However, Greece was the exception and a main performer as PEPP reinvestment can be moved across jurisdictions. The GGB-Bund spread tightened 3bp. After the ‘super Thursday’, markets needs to find its footing as year-end approach, which may result in erratic moves.
FX: In a very eventful day across markets, the lesson in FX markets was clear: rate hikes are on balance positive for a currency but the global investment environment is ultimately a more important driver. For instance both EUR/NOK and EUR/GBP ended the session virtually unchanged despite a sharp widening of rates spreads on Bank of England and Norges Bank as the souring of the global environment dominated price action.
Credit: Sentiment remained upbeat in credit yesterday with iTraxx Xover tightening 7.6bp and Main 1.7bp. Cash bond were less strong and HY bonds tightened 1.5bp and IG 0.5bp.
Nordic macro
Last night, the Danish Ministry of Finance published a revised estimate for the borrowing requirement in 2022. The revision is due to the budget act being passed this week. The revision for both 2021 and 2022 relative to the estimate made in August shows a significant improvement in the public finances as the deficit in 2021 at DKK 28bn is turned into a surplus of DKK 77bn. In 2022, there was a surplus of DKK 18bn, this is now a surplus of DKK 46bn.
