Market movers today
Finland and Sweden are due to submit their official applications to join NATO in Brussels at 8:00 CET today. The accession process will kick off with consultations between NATO experts and Finnish and Swedish delegations to ensure both countries are able to meet the obligations and commitments of a NATO membership. Assuming no obstacles there, NATO then prepares accession protocol to the Washington Treaty for each invitee country. These amendments will then need to be verified and signed in each member state. We expect the whole process to take at least weeks but depending on opposition from current member states, such as Turkey, it could also take longer.
Another quiet day on data front, but Euro Area final HICP data from April is out. Details should give a more accurate picture of how the core price pressures are developing. UK CPI is also out.
Also, ECB’s Müller and Fed’s Evans and Harker on the wires.
The 60 second overview
Fed chair Jerome Powell: Powell did not say anything new yesterday, at least not of significance, although the tone remained hawkish. Powell mentioned that the Fed will continue to hike interest rates until inflation is under control (probably the most hawkish comment yet) and that 50bp is on the table at the next meetings. Powell also mentioned that the Fed will not hesitate moving rates beyond neutral if needed. A new thing was that Powell said that markets are processing Fed policy thinking pretty well. Overall, forward guidance seems to be clear and so far the Fed is not talking up expectations of an even larger 75bp rate hike. Other FOMC members also spoke yesterday and there seems to be broad-based support for this approach.
US data: US retail sales for April were decent and March was revised significantly higher as well. Retail sales are nominal but the increases were overall larger than price increases based on CPI and hence real private consumption seemingly had a strong start to Q2. Industrial and manufacturing production in April were strong as well. This supports the case for further Fed tightening despite rising recession risks associated with rapid tightening of financial conditions.
Positive risk sentiment: Yesterday was a good day for risky assets (equities up, USD lower and a steeping of the US yield curve) but signals are more mixed this morning. This more volatile investment environment is likely to continue, in our view.
Russian default?: The Biden administration is likely to block Russia’s ability to pay US bondholders starting from next week, increasing the risk of a (technical) default. The default is technical in nature, as it would not be because of lack of money.
Equities: Risk on yesterday, with equities generally higher and cyclicals beating the tape. In the new equity strategy we argued that equities will move higher on peak monetary repricing and overdone recession fears. Yesterday was an example of both, with macro data and an uneventful interview with Powell boosting sentiment. Implied volatility moved lower too, yet still close to 30 which opens up for a long relief rebound in equities. Dow 1.3%, S&P 500 2%, Nasdaq 2.8%, Russell 2000 3.2% but futures lower this morning.
FI: The hawkish statements from central bankers continue and rates are being pushed higher again. Yesterday, Fed Chairman Powell stated that the Federal Reserve will raise rates until there is “clear and convincing signs” that inflation is coming down and if they need to go to neutral rate then that was acceptable. This is seen as the Federal Reserve being ready to move in terms of 50bp steps rather than just one 50bp hike followed by 25bp steps. This was probably the most hawkish statement from Powell so far. Furthermore, ECB’s Knot was opening the possibility of a 50bp move even though the base case was still a 25bp.
FX: EUR/USD rallied yesterday rising from 1.045 to 1.055. EUR/GBP briefly declined back below 0.84 on a strong jobs report but moved back to the mid 0.84’s, as EUR appreciated and negative Brexit headlines hit the wires. GBP/USD is trading closer to 1.25. NOK price action remains volatile although importantly spot seems to have settled over the last week.
Credit: Credit indices went into slight risk on mode yesterday following some relief to equities as well. Itrax main tightened by 1.3 Bp to close at 90.5bp while Xover tightened 5.7bp to close at 445bp.
Nordic macro
In Sweden, the agenda today is very thin awaiting Riksbank’s Flodén’s speech tomorrow. Riksbank buys SEK 270 mln corporate bonds in 2023-2027 maturities. Kommuninvest potentially issues muni bonds in 2024-2027 maturities.
