Market movers today
Today’s highlight is the ECB meeting where we expect a formal end to the APP programme. Discussion will focus on the possibility of ECB could move by 50bp at a later stage. Markets are pricing in around 40% of a 50bp hike in July. We also focus on potential fragmentation tools. ECB’s new staff projections is expected to see upward revision of inflation and downward revision on growth.
In Sweden, we get the household consumption and April GDP-indicator and Riksbank’s Breman will attend a seminar to discuss inflation, monetary policy and sustainability (for more details, see the Nordic section).
The 60 second overview
ECB today: The main event today is the ECB meeting and the expected wind-down of the QE as well as preparing for rate hikes. The inflation outlook is expected to be revised upwards and the growth outlook downwards. The discussion on the policy path centres around a 50bp rate hike already in July. Markets are pricing in around 40% of a 50bp hike in July. Hence, even though there is a lot priced in, the risk is still on the upside for rates and spreads between Italy and Germany. Lagarde will most likely be asked about market fragmentation, but we do not expect much action on this from the ECB at this meeting. Hence, the risk is more pressure on the periphery and especially Italy after the meeting despite the widespread BTPS-Bund spread.
OECD revise growth forecasts lower: Yesterday, OECD published its new global forecast, downgrading significantly their growth forecast for the global economy in 2022 by 1.5pp to 3% compared to their last update in December 2021. They expect economic growth to remain subdued in 2023. The reason for the meagre growth outlook is the war in Ukraine and the impact of higher oil and other commodity prices along with the COVID-related lockdowns in China. In general their forecast for 2022 squares well with ours, also seeing near-term economic growth holding up fairly well. However, in 2023, we are significantly more downbeat on the growth prospects in the US, fearing a mild recession, while OECD expects positive growth. On the other hand, we see a bigger rebound in China than OECD as we think the policy stimulus will support domestic demand. Our forecasts for the euro area in 2023 are fairly identical expecting about 1.6%-1.8% in real GDP growth. Market reactions to the release of the OECD forecasts were muted.
Equities: Equities were lower yesterday as the stagflation fear dominated and slowly but steadily took risk appetite lower during the day. No single event or data point behind the move yesterday but yields across the curve and on both sides of the Atlantic moved higher. This could sound like the stagflation trade coming back but that was not the case. With higher yields, one could have expected value to outperform growth but that was not the case yesterday. Hence, investors are struggling to find out whether to fear stagflation or central bank tightening led recession. Moves in US more less the reverse of Tuesday with Dow -0.81%, S&P 500 -1.1%, Nasdaq -0.7% and Russell 2000 -1.5%. Asian markets are mostly lower this morning with Japan going against the trend as the yen keeps weakening against most other currencies. Futures in Europe and US are lower this morning.
FI: Global yields once again rose after the decline on Tuesday. 10Y Treasuries is back above 3%, while 10Y Germany is again above 1.30%. The curve steepened from the long end. The rise in yields also lead to a modestly wider Bund ASW-spread despite the solid activity in the primary market with plenty of new bond deals. The rise in yields comes despite the focus on risk of a recession and negative sentiment in the bond market.
FX: JPY weakness continues to be the dominant theme as we head into the ECB meeting. USD/JPY has now broken above 134. EUR/USD continues to trade around 1.07 while the Scandies did little in yesterday’s session.
Credit: Sentiment in the secondary market remained downbeat yesterday where iTraxx Xover widened more than 8bp and Main 1.5bp. However, recent days’ widening should also be seen in light of the string of new issues that have come to the market ahead of tomorrow’s ECB meeting.
Riksbank’s Breman will attend a seminar to discuss inflation, monetary policy and sustainability. Published on the website at 09.15. Any hints about coming hikes (50bps?) will be in focus. Our call is for 50bp hike at the next meeting but inflation and inflation expectations released next week will be more or less crucial.
We expect that the weak demand shown in GDP for Q1 released last week will also be reflected in the monthly indicator out today (household consumption and April GDP-indicator). Non-essential consumption is usually the first one to decrease which we also expect to see in today’s figures. Especially clothing and restaurants and hotels have had a tough time since the start of the pandemic so far. However, we see no rise in bankruptcies.
Also, production data is out today. During March, production numbers came out flat compared to February while the order inflow came out strong in contrast to the order inflow in PMI. If PMI is correct, new orders in hard data should decrease from here, which seems reasonable given the weaker global demand.