Thu, Dec 01, 2022 @ 13:47 GMT
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Coordinated Tightening Adds to USD Upside

Market movers today

Markets are focusing on discussing the message of ‘coordinated tightening’ from Jackson Hole. ECB and Fed appear to have re-committed to creating price stability, yields are shooting higher and risk assets are quite a bit lower since last week.

Focus also remains on European energy price developments, with gas and electricity prices continuing to see steep increases and no peak yet in sight as another maintenance shutdown of the North Stream 1 pipeline is due later this week.

German Chancellor Scholz will give a speech on the Future of Europe in Prague, while the Czech EU presidency is also calling for an emergency meeting of energy ministers.

ECB Chief Economist Lane, Riskbank’s Flodén and Fed’s Brainard are also on the wires. Tomorrow, the ECB Governing council member, Klaas Knot speaks at a Danske Talks at a hybrid event where we will discuss the monetary policy outlook.

In Sweden, Q2 GDP figures and retail sales are on the agenda.

The key releases later this week will be the euro area inflation figures (Wednesday), Chinese PMI manufacturing (Wednesday) and US labour market report (Friday).

The 60 second overview

US yields at new highs: Powell struck a fairly hawkish tone in his widely anticipated speech at Jackson Hole last Friday, signaling that Fed is committed to bringing inflation down even if it requires an extended period of below-trend growth and some weakening in labour market conditions. While Powell provided little new signals on the hiking pace of the coming meetings, he reinforced the view that financial conditions will need to be tightened further, and that rates will be held at moderately restrictive levels for some time – a message which was also echoed by Mester and Bostic later after the speech. The bottom line of Powell’s statement, “We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply”, summarizes our broad view which we wrote about earlier in Research US – Higher for longer, 19 August. Even though headline inflation will continue to ease further over the coming months, the aggregate demand has recovered above its potential, and a period of stagnant growth is required to bring the US economy back into equilibrium.

ECB officials warn of ‘sacrifice’ needed: ECB seems to follow in the footsteps of the Fed. On Friday, Reuters reported that ECB were to discuss a 75bp rate hike at the December meeting, while a Bloomberg sources story during the weekend said that QT may be discussed towards the end of the year. Also Schnabel, Holzmann, Kazaks and Knot were all very hawkish, where notably Schnabel’s presentation at the Jackson Hole shows her clear view that a recession and higher unemployment rates in the euro area may be needed to bring inflation lower (and also less relevance where the inflation pressure is emanating). Rehn and Villeroy mentioned a ‘significant’ rate move was to be expected in September. ECB is set to meet next week.

Reversal in asset markets: Markets are focusing on discussing the message of ‘coordinated tightening’ from Jackson Hole as ECB and Fed appear to have re-committed to creating price stability: yields are shooting higher and risk assets are quite a bit lower since last week. This stands in stark contrast to the rally we have seen since June. Equally, the levels of risk assets does contribute to explaining how e.g. equities are down some 6% from recent highs. We continue to see EUR/USD as declining further, targeting some 0.95 in 12m as dollar strength will likely pick up pace in this environment.

Equities: Equities fell Friday, as Powell did not hint at signs of pivoting. It makes sense based on the inflation and job market outlooks but it obviously disappointed equity investors. Please note that according to surveys the biggest tail risk for investors are inflation and with central bank tightening coming in at third place. In that perspective the sell-off on Friday makes sense. Recession risk is in our opinion the biggest risk. In US on Friday, Dow -3.0%, S&P 500 -3.4%, Nasdaq -3.9% and Russell 2000 -3.3%. Asian markets are catching up (negative) this morning. However, more interestingly, US futures are sharply lower led by growth stocks as yields continuing higher.

FI: A Reuters sources story saying that a 75bp rate hike was to be discussed at the September meeting sent European rates in a bearish flattening move. 10y Bunds sold off by 7bp, while the 2y point rose 10bp. Powell’s much awaited Jackson Hole speech was essentially a blow to anyone thinking a Fed-pivot was imminent. During the weekend, several ECB speakers were on the wires, where notably Schnabel’s presentation is worth highlighting as she essentially argued that the origin of inflation is largely irrelevant and that a recession may be needed with higher unemployment to follow to get inflation lower.

FX: EUR/USD bounced around Friday amid hawkish signals from Fed and ECB, but ended the week below parity. Scandies dropped on the back of the following set-back to risk sentiment.

Credit: The modest tightening we saw during the course of last week reversed Friday with tangible spread widening driven by hawkish central bank signals coupled with recession worries. The liquidity in the cash market has deteriorated and the bouts of activity amongst investors remains focussed on new issues. During Friday, iTraxx main widened 5.6bp to 113bp while Xover widened 29.4bp to 559.9bp.
Nordic macro

Q2 GDP release Monday with the Q2 GDP indicator suggesting +1.4 % q/q. SCB also releases July trade balance and retail sales, the latter probably more interesting, giving clues to whether Swedish consumers can keep up spending or not. The Riksbank’s Martin Flodén will particpate in a panel on the topic “High inflation and other challenges for monetary policy”. His speech last week was interpreted as somewhat hawkish saying that the Krona is “too weak” and that further rate hikes are needed for inflation to fall.

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