Sun, Dec 04, 2022 @ 07:43 GMT
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Rise and Fall of Inflation

Market movers today

Markets will continue digesting yesterday’s US CPI figures, which will be followed by July PPI this afternoon. Consensus is looking for moderating producer price growth in line with the CPI.

Money market players’ inflation expectations will be released for Sweden ahead of the actual inflation data tomorrow.

The 60 second overview

Inflation: Inflation was the economic focus point yesterday. In Denmark and Norway, inflation was much higher than expected in July, while in US inflation was lower than expected. For the first time since 2015, inflation in Denmark is now higher than in the US.

Taiwan crisis: Tensions are running high with rising fears of a Chinese invasion of Taiwan. This morning we published a paper where we look closer at the risk of war, see Research China: The risk of a Taiwan war and what it implies – part 1. While risks are rising we still see a rather small probability of a Chinese invasion of Taiwan in the next couple of years (20%) as the costs for China are too high. However, with US and Taiwan having moved closer to China’s ‘red line’ the risk of miscalculations or human error that leads to an unintended war has increased. Also, the risk of a war in the medium to longer term is quite high, in our view. In a coming paper, we will look at what the risk of war means for China and the global economy – and for companies’ investment strategies in China.

Equities: Equities notably higher after the US inflation relief. Risk on, with equities higher and cyclical growth stocks outperforming value and defensives by more than 1p.p. globally. What is more, implied volatility dropped below 20 for the first time since April. In other words, the support from bearish positioning that we have seen over summer is closing in. S&P500 jumped 2.1%, Nasdaq 2.9%, small caps outperforming with Russell 2000 3% but Dow 1.6%. US futures are pointing even higher this morning.

FI: Rates markets were all focused on the US CPI figure yesterday. The weaker than expected flat mom figure and 0.3pp in core sent yields sharply lower in a bullish steeper move as repricing the expectations of Fed tightening took place. At one point the 2y UST was 18bp lower and 10y UST 13bp lower. That also took euro rates lower but only by about 8bp in 10y bunds. However, by the end of the day, 10y UST were broadly back to its level pre-inflation release, as after all, inflation still printed at 8.5% yoy and way above the Fed’s target while the labour market is very tight. The FOMC will get another inflation and labour market report before its September meeting, which naturally will be important for the size of the next rate hike. We expect the European rates session to start the day with yields up given the UST sold off about 4bp after European close yesterday.

FX: The odd group of NOK, AUD, NZD and JPY rose yesterday vis-à-vis EUR and USD. NOK found support from higher than expected Norwegian inflation in July, while USD lost on lower than expected US inflation.

Credit: Yesterday’s data showing cooling inflation in the US also helped propel credit spreads tighter. iTraxx Main tightened by 6bp to 97bp, while Crossover was tighter by a massive 34bp to 485bp.

Nordic macro

Sweden: This week’s main number is of course inflation out tomorrow but the inflation expectations survey out today is also of large importance. Despite just the monthly survey i.e. money market players. The 5Y horizon is key for the Riksbank. Last month this one took a surprisingly large jump up to 2.5% from earlier 2.3%, probably starts to be at really uncomfortable levels for the Riksbank. However, lately we have seen a divergence between the mean and the median so despite a large rise in the mean figure, the median continues to be steady at 2% – explained by the large respond spread, with the lowest 5Y forecast at 1.5% and the highest 5Y forecast at 6%. Hence, it is also important to look at the median figure. A larger increase will of course add pressure on the Riksbank. Market is pricing a probability for an interim meeting hike, but we deem the probability for this low as there is only five weeks left until the ordinary September meeting. That said, a high reading today and a high CPIF print on Friday adds pressure on the Riksbank to deliver more at the September meeting than the 50bp implied in the July rate path.

Danske Bank
Danske Bank
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