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Hikes from BoE and SNB While BoJ Sticks to Dovish Stance

Market movers today

The final Eurozone inflation data for May will provide more details as we get more sub components in this release.

In the US we get data on industrial production as well as the leading indicator from Conference Board. Industrial production has been robust but the leading indicator dropped 0.3% m/m in April warning of weaker activity ahead.

Fed chairman Jerome Powell will give welcoming remarks at a conference on the international role of the dollar hosted by the Fed. There is not Q&A, though, and we doubt it will provide much news compared to the press conference Wednesday.

The 60 second overview

Bank of Japan holds steady this morning and reaffirms its commitment to unlimited purchases of 10-year JGBs at 0.25% to defend its yield curve control. 10-year rates went below the 0.25% cap today after testing levels way above yesterday. With also FX markets pricing in some risk of action from the BoJ, USD/JPY has increased back to 134 levels following some relief yesterday. We continue to believe in BoJ’s commitment to reflate the economy. In the end, it is Tokyo’s call whether to counter the BoJ’s efforts by stepping in to support the yen.

More rate hikes: Yesterday, the Swiss National Bank hiked by 50 bp to curtail increasing global inflation pressures. It came as a big surprise to both markets and analysts. Bank of England stuck to a 25 bp hike but toughened its forward guidance and stands ready to act forcefully in case of indications of more persistent inflation pressures.

Equities: Alike the last Fed meeting, markets collapsed the day after. Markets were in deep sell-off for another day, with S&P 500 -3.3%, Nasdaq -4.1% and small caps plunging with Russell 2000 -4.7%. Sector performance reversed, but only mildly so as weakness was broad-based. Cyclicals underperforming defensives by 1.5p.p. and growth selling off 1p.p. to defensives. Futures are rebounding somewhat this morning.

FI: It was an unusually busy and volatile session yesterday. First, markets digesting the FOMC decision to hike 75bp on Wednesday night, then SNB’s decision to surprise with a 50bp rate hike as well as market speculation that SNB might sell some of its FX reserves to intervene in the FX markets (FX reserve WAM at 4.9y, 37% in EUR, 64% in government bonds) and finally an ECB sources story suggesting that ECB’s anti-fragmentation tool ‘would probably involve selling other securities’ sent core yields markedly higher. The 5y point suffered the most and ended only 11bp wider after being almost 20bp higher during the day. The move was a general bearish flattening move, except for Italy that rallied on the day. The markets were generally very volatile with for example the 10s30s EUR swap trading in the 10y intraday.

FX: Yesterday was a very volatile session across all asset classes, also in FX space, as risk took a major hit the day after the FOMC meeting. EUR/USD rose from just below 1.04 to now nearly 1.06 at the time of writing. EUR/GBP ended the day slightly lower after the BoE meeting but still traded above 0.85 at the time of writing. EUR/CHF fell below 1.02 after the SNB took everyone by surprise by hiking 50bp. EUR/NOK rose significantly during the day and was at one point approaching 10.55 but at the time of writing the cross is below 10.47.

Credit: Central bank hawkishness and focus on recession risks once again took centre-stage in the credit markets yesterday. Spreads landed at new record wide levels post the corona-crisis with iTraxx main widening 7.6bp and Xover widening 30.8bp. These indices are now at 112.8bp and 600bp, respectively. Both the primary and secondary cash market sees very little activity.

Nordic macro

With less than one week to the long awaited Norges Bank (NB) meeting on 23 June we have decided on our baseline expectation. In short, we expect NB to hike policy rates for the fourth time in this cycle by 25bp. We expect NB to stick to its ‘gradual’ strategy but also open the door to an August hike. We expect a forward guidance signal of close to a 50/50 split between August and September as the timing for the next 25bp hike but still with verbal guidance towards September. We expect the top point of the rate path to fall in the 2.50-2.75% range by end-2023 and that the subsequent inversion will prove steeper than in the March Monetary Policy Report leaving a close to unchanged end-point of around 2.3% in Q4 2025. The steeper inversion reflects a much worse employment-inflation trade off than expected in the last monetary policy report. If this calls proves right it would be a disappointment to markets and lead to lower short-end rates. Admittedly, the balance of risk to our call is skewed towards a more aggressive NB.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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