Sun, May 22, 2022 @ 10:39 GMT
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Monetary Policy Tightening Focus

Market movers today

Today is the last day that the Fed can send any signals ahead of the January meeting, as the blackout period starts tomorrow. With the Fed signalling increasing support for a March rate hike and the beginning of quantitative tightening later this year, we are not sure we will hear any significant new signals from the Fed today.

This morning, we receive UK monthly GDP for November. We expect the indicator to show that the recovery continued.

In Sweden, we expect December headline CPIF and core CPIF excl. Energy to print 1.3 % mom/4.2 % yoy and 0.5 % mom/1.8 % yoy respectively. This is in line with market consensus. While the former is way above Riksbank’s forecast (due to soaring electricity prices) the latter is just slightly higher. The Riksbank Governor Ingves will also speak about the economy, however, we don’t expect any new signals.

In the US, retail sales, industrial production and preliminary consumer confidence from the University of Michigan are due out in the afternoon.

The next steps in the conflict between Russia and the West will be in focus after the two sides ended talks this week without a breakthrough. This morning we published a note outlining the economic and financial market implications of the different outcomes of the conflict, see Research Russia – Expect serious market disruptions if a war breaks out.

The 60 second overview

Markets: The clear theme in markets remains the adjustment to higher global yields as monetary policy makers begin tightening liquidity conditions. In equity markets duration sensitive growth stocks have taken a hit and yesterday the technology heavy Nasdaq lost 2.5%. So far this year the rotation into value-sectors has kept overall risk appetite afloat, yet this morning we also see some of the value-outperforming indices and futures trading in red. The rise in commodity prices is also taking a breather and the USD continues to trade on the back foot.

Fed: FOMC board members continue to talk up expectations for monetary policy tightening as we head into the blackout period that starts tomorrow. Over the last 24 hours we have heard calls for policy normalisation likely starting in March from Brainard, Harker, Evans and Waller. Interestingly, Waller – who has been one of the first to verbally guide markets in a more hawkish direction – even mentioned the potential for five hikes this year albeit he stated that three hikes this year is still a “good baseline”. Waller also stated that he does not favour a 50bp hike at the meeting in March and that quantitative tightening could start this summer.

Bank of Korea: Tighter global monetary conditions remain a key theme for 2022 and this morning Bank of Korea hiked policy rates for the third time since August. That brings the key policy rate to 1.25% – the same levels as prior to the COVID-19 crisis. At the press conference Governor Lee reiterated that policy remains accommodative and that policy like has to be tightened further in 2022.

Bank of Japan: This morning a news story from Reuters get attention as its sources from the Japanese central bank report that the central bank is brainstorming how to signal interest rate hikes to markets before inflation hits 2% – albeit likely not before 2023. The story report that the swift move from the Fed, the weakening the pressure on the JPY and general public discontent with rising living costs are the primary drivers behind talks of an exit plan.

Russia-West talks: Diplomatic optimism has faded fast after the Russian foreign minister said that Russia and the West remain far apart in talks about Ukraine and NATO’s role in Eastern European countries. The Russian side went as long as saying that if they don’t hear a constructive response from the West within a reasonable timeframe then Russia will have to act to eliminate threats to its national security. White House national security advisor Sullivan says that the threat of a Russian invasion of Ukraine is “high” and there are no dates set for any more talks. Recent events has left RUB as the clear underperformer in FX space with USD/RUB rising 2.5% in yesterday’s session.

Equities: Sector performance reversed again on Thursday. Growth lagged value, with tech and health care among the losers. Valuation was key, fundamentals secondary; most evident in the semi space that sold off despite Q4 earnings beats. S&P 500 -1.4%, Nasdaq -2.5%, Dow -0.5%, and Russell 2000 -0.8%. Asian markets are following the move lower this morning, while US futures have stabilized.

FX: FX markets calmed down yesterday after big moves seen on Wednesday. JPY and CHF gained vis-à-vis CAD and NOK, but overall no moves stuck out. EUR/USD still trades above 1.14, while EUR/NOK rebounded towards 10.00.

Credit: Synthetic indices continued their widening trend yesterday. The negative mood was due to a combination of higher focus on geopolitical risks in relation to Russia and still high primary activity. This was partly balanced by slightly lower rates. Overall iTraxx Main widened 1.1bp to 51.2bp while Xover drifted some 4.9bp to 253.9bp. The secondary liquidity in cash space was very low, but on screen indications IG cash widened 0.9bp while HY widened 0.2bp.

Nordic macro

In Sweden, December inflation figures will be relased. We expect headline CPIF and core CPIF excl. Energy to print 1.3 % mom/4.2 % yoy and 0.5 % mom/1.8 % yoy respectively. This is in line with market consensus. While the former is way above Riksbank’s forecast (due to soaring electricity prices) the latter is just slightly higher. Looking forward, January electricity prices have so far dropped some 30 %, hence, there will most likely be a partial correction at the start of this year.

Danske Bank
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