Market movers today
Focus remains on Russia-Ukraine after multiple shelling incidents were reported in Eastern Ukraine in the early hours of Thursday with both sides (separatists and Ukrainian army) reportedly active. Markets have remained relatively calm though despite growing uncertainty. Yesterday’s headlines were only in the direction of escalation of the conflict. Overnight, the US confirmed that Blinkin and Lavrov are to meet next week in an attempt to reach a diplomatic solution. This supported the risk sentiment overnight.
Friday’s data calendar is pretty empty, with UK retail sales, EA consumer confidence and US existing home sales due.
Several Fed speakers on the wires as well: Evans, Waller, Williams and Brainard. We now expect Fed to hike rates by 200bps this year and continue to look for any hints from the policymakers regarding the pace of tightening or even the possibility of an emergency rate hike before the March meeting.
The 60 second overview
FOMC comments: Bullard was again on the wires yesterday repeating his hawkish views of 100bp hike by July and start a balance sheet reduction in Q2. Furthermore, he said that there may be a need to increase the policy rate above the neutral rate (2%). Markets did not react much to the signals. Mester also supported a more aggressive Fed tightening to get inflation lower.
Fed hiking cycle: This morning we published a short paper on how the Fed hiking cycle differs from previous cycles, see Research US: How the coming Fed hiking cycle will differ – and why it matters, 18 February. A key difference is that the Fed is much more behind the curve this time which points to a more front loaded hiking cycle. Another difference is that the 2-10 yield curve is flatter this time at rate take-off. We believe the Fed will aim to counter an inversion (or at least postpone it) by doing ‘active QT’ starting in May; hence sell bonds outright rather than only allowing them to run off. All else equal, this will add upward pressure on long bond yields. ‘Active QT’ also puts us in unchartered territory when it comes to Fed tightening, which warrants higher risk premium in risk assets compared to previous cycles.
Equities: The zig-zag market continued, with equities lower – and sharply lower in the US session. Ukraine continued to dominate the narrative, along with weakish macro and monetary policy. Investors continued to shift into defensives and out of cyclicals (especially growth cyclicals). Tech and consumer discretionary underperformed consumer staples by 3p.p. This summarized to S&P500 -2.1%, Dow -1.8%, Nasdaq -2.9% and Russell -2.5%. According to US futures we are in for another zig-zag today, with futures pointing higher.
FI: Geopolitical headlines and EUR rates market catching up with the late-night rally on Wednesday after the FOMC minutes resulted in 4-5bp lower yields in the 10y point across most jurisdictions. Yields declined across the entire maturity spectrum, but mostly in the front end, with Schatz 6.7bp lower. 10s30s were broadly unchanged while Bund spreads yet again widened (by 2bp yesterday). With the weekend approaching and sensitivity to the geopolitical headlines, we expect a choppy session with the balance of risks skewed for lower rates, although the outlook for a meeting between Blinkin and Lavrov supported risk sentiment overnight.
FX: Geopolitics continue to take centre stage as headlines in terms of Russia/Ukraine continue to drive choppy price action – not least in commodity and risk sensitive currencies. EUR/USD trades just north of 1.1350 while both EUR/SEK and EUR/NOK have moved above 10.60 and 10.10, respectively.
Credit: Due to the skirmishes in the Eastern Ukrainian border-land and due to less benign rhetoric from Russian and US officials, the geopolitically driven risk-off sentiment resumed yesterday. Main widened 1.3bp to 67.7bp and Xover widened 8.2bp to 331.1bp. Even so, the primary markets appear to be open, as exemplified by prints from both Sagax and Vasakronan.
Nordic macro
In Sweden, January inflation numbers due out today at 08:00. We expect core to pick up to 1.9% yoy such that our estimate is slightly higher than the Riksbank estimate and consensus. That said, January is notoriously hard to predict due to re-weightings and this time the uncertainty is larger than normal due to flagged price hikes on goods from various businesses.
