Market movers today
The highlight for markets today will be the FOMC meeting, where we expect the Fed to hike policy rates by 25bp given the strong inflation pressures, which are likely to be further fuelled by the rise in commodity prices. We had previously expected a 50bp hike, but the uncertainty from the war in Ukraine will make the Fed a tad more cautious in our view.
Earlier today, US retail sales figures for February are also released and higher energy prices could start to have a negative impact on spending.
Ukraine war developments will remain in focus for markets and we look out for headlines from the NATO defence ministers meeting today.
Germany is due to present his 2022 budget and finance planning through 2026. The clouding economic outlook and accelerated expenditure on energy, defence and climate could bring net borrowing above EUR 200bn in 2022.
Two Riksbank speeches (Ingves and Ohlsson) are also on the agenda, which will be interesting in light of the recent inflation upside surprises.
The 60 second overview
Risk sentiment: Overall risk sentiment was positive yesterday, and Asian markets are also clearly up overnight. Ukrainian officials continue to signal cautiously positive progress in the negotiations with Russia, although we still have little concrete information about the topics being discussed. While oil prices have rebounded slightly overnight, with Brent now trading just above USD100/bbl, energy prices have clearly declined over the past days as EU has not signalled joining US and UK with an import ban on Russian energy. Despite EU’s ambitions to quickly reduce dependency on Russian natural gas, Germany’s largest power supplier warned that a sudden stop to the imports would have dire consequences.
Fed: The key event today will naturally be the FOMC meeting, where consensus and markets are looking for a 25bp hike. Fed will also release its updated economic and rate projections. With oil prices declining from the recent highs, the direct war impact on US economy could be lighter than perhaps initially feared, and markets are now back to pricing in a cumulative 96bp worth of hikes over the next three meetings, which would mean also one 50bp hike either in May or June. Given that US financial conditions overall still remain expansionary, we expect that Fed will have to tighten monetary policy significantly this year to bring down the increasingly broad-based inflation pressure.
Macro: First economic indicators capturing the initial war effect are now starting to get released, yesterday the German ZEW economic sentiment index plunged to -39.3 from 54.3, as 58.9% of respondents now see Germany’s economic conditions weakening over the next 6M. While the steep drop indicates a risk of clear downturn in economic activity, the ZEW is still based on analyst assessments, and we will look for the March Flash PMIs next week for a clearer gauge of the impact. In the US, the New York Fed Manufacturing index declined to -11.8 (from 3.1), which is the lowest level since May 2020. Among Nordic countries, especially the Finnish economy stands out as exposed to the crisis, and yesterday we updated our economic forecasts for Finland now calling for 1.7% GDP growth in 2022 (from 2.8%) (see more in Finland Outlook – Eastern headwinds take the speed out of the economy, 15 March).
Equities: Equities were higher yesterday despite the big drop in Chinese tech stocks. With a strong US session yesterday, US outperformed China by 5% in just one day. The optimism was building through day although no big news arrived from Ukraine and macro data were outright weak. However, oil price dropped another 5%, down 20% the last five trading days and hence one of biggest fears from financial markets abating. Just one week ago headlines about oil in 200 and 300 dollars got a lot of attentions and very few were talking about the other side of this, that oil price could drop just like it has been the case with both commodities, agriculture products and the gas price. The move higher in US equities supported by lower oil price and stabilizing yields resulted in tech outperforming energy and hence growth outperforming value. In US Dow +1.8%, S&P 500 +2.1%, Nasdaq +2.9% and Russell 2000 +1.4%. Relief in Asia this morning with all markets higher and Hang Seng leading the advances. However, even with the relief in tech stocks this morning leaves them 65% below the peak a year ago. US futures are flat this morning while European futures in the ballpark of 0.5% higher.
FI: Yesterday, European yields declined as the commodity prices eased. The main event today is the FOMC meeting this evening. We expect a 25bp rate hike rather than a 50bp rate hike given the uncertainty surrounding the war in Ukraine. This has also been indicated by Fed Chairman Powell. We will be looking for comments on the rate path relative to the market pricing and thus how hawkish the Federal Reserve will be relative to market pricing.
FX: After weeks characterised by big inter-day moves in FX the latest sessions have been characterised by more modest close-to-close price action. This is except for offshore USD/RUB, which has completed a 30 figure move lower.
Credit: Yesterday we saw a modest positive risk sentiment in the credit markets. iTraxx main tightened 0.8bp to 79.3bp while Xover tightened 3.2bp to 278.7bp. We saw similar moves in the IG cash space tightening 1bp, whereas the HY market widened slightly.
Nordic macro
Sweden: Two Riksbank speeches on the agenda. First Governor Ingves at 12:00 (local time) and at 14:00 Deputy Governor Ohlsson, both addressing their views on the current economic situation. So far, the Riksbank has taken a relatively relaxed attitude to the run-up in inflation stressing that higher inflation is mainly a matter of energy prices. However with Monday’s inflation data that is no longer true, CPIF ex energy jumped to 3.4% in February. The Riksbank usually does not hint about policy shifts in speeches but maybe this time around will be different.
