Market movers today
Markets will digest yesterday’s ECB meeting and look out for ‘ECB sources’ stories today.
Otherwise, focus will be on the EU energy minister meeting (press conference scheduled for 14:30 CET), where price caps, windfall profit taxes and emergency credit lines will be discussed, as possible measures to tackle Europe’s mounting energy crisis.
We expect that Norwegian core inflation fell by 0.3% m/m in August, meaning that the annual rate continues to climb to 4.8%. This would again be well above Norges Bank’s forecast in the June monetary policy report (4.2%), but the gap would be much smaller than in July. Inflation is clearly trending higher, but as some of the acceleration in July probably were one-offs, the uncertainty is high. Of course, the outcome will have significant impact on the rate decision on September 22.
The 60 second overview
ECB. Yesterday, ECB hiked policy rates by 75bp. The sizeable interest hike was made to dampen demand and address inflation expectations. President Lagarde stressed that we are not to assume that 75bp is the new norm, but they will remain data dependent and make the decision on the hike size on a meeting-by-meeting basis, but also that further hikes were to be expected at the coming meetings. ECB’s focus is clearly on hiking rates now and discussions on APP reinvestments have been left for later, without specific guidance. Sources stories say that such discussions are expected to take place in October. In terms of technical details, the ECB decided that the tiering system is no longer needed and that government deposits are no longer capped at 0%. In our base case, we expect the ECB to hike policy rates by another 50bp in October and 25bp in December but risks are currently skewed towards more tightening. See more in Flash ECB review: 75bp, but 75bp is not the new norm.
Danmarks Nationalbank. The Danish central bank mirrored the ECB’s decision and also hiked policy rates by 75bp in yesterday’s session thereby ending 10 years of negative interest rate policy. It marked the second rate hike this year and the key policy rate now stands at 0.65%.We look for DN to mirror future ECB rate hikes 1:1 and hence in our base case we pencil in a DN key policy rate of 1.40% by year-end, see more in Flash Comment Denmark, 8 September. Importantly, EUR/DKK trades close to the 7.4360 floor set by DN last year. Should DN resume selling of DKK in FX intervention, it could opt to make a unilateral interest rate cut, e.g. by 10bp; increase interest by less than ECB. It is not our base case, but something to watch.
Bank of Japan. Yesterday the Japanese ministry of finance, Bank of Japan and the FSA met to discuss the JPY slide. The news of the meeting took USD/JPY somewhat lower but when markets were assured of no intention to intervene, the cross traded back above 144. This morning USD/JPY has traded back sharply lower on USD weakness and verbal intervention from Japan. We continue to expect politicians have a strong preference to refrain from intervening to support JPY and that ultimately leaves USD/JPY in the hands of the global pressure for higher yields.
UK. Queen Elizabeth II has passed away peacefully at the age of 96 according to a statement from Buckingham Palace. The queen had been the longest reigning UK monarch. King Charles III will succeed her as the new king of the UK.
Equities: Global equities were higher yesterday, lifted by the relatively rare combination of banks, health care and materials outperforming while communication service and consumer staples underperforming. It was a bit of roller-coaster day on both sides of the Atlantic with indices flipping between gains and losses before ending close to day high. VIX ticked lower and helping the gain in equities as the ECB decision was more or less as expected. In US Dow +0.6%, S&P500 +0.7%, Nasdaq +0.6% and Russell 2000 +0.8%. Asian markets mostly higher driven by a strong lift in Hong Kong stocks. European and US futures higher as well.
FI: While the 75bp rate hike took media headlines, markets reacted strongly to the announcement of the suspension of the government deposits cap of 0%. European curves bear flattened with 2y Germany up by 22bp on the day, while the 10y point was ‘just’ 14bp higher. The well telegraphed ECB hike of 75bp did not move markets as such, and now markets are pricing in 107bp by year end. Reinvestments were not discussed at this meeting. Slightly surprising the decision to hike 75bp was unanimous.
FX: Given that ECB’s decision was largely as anticipated, there was only a small reaction in EUR/USD – thus, spot remains fixed just below parity. We also continue to target 0.95 in 12m and note that it is quite common these days to see substantial rate hikes having little or even negative effect on the domestic currency. Danmarks Nationalbank followed the ECB and also hiked interest rates. Speculation in the market as to BoJ intervening in the JPY weakness has faded.
Credit: All focus on the ECB and credit markets saw a slight tightening following the 0.75% rate hike. We saw relatively good performance from recent new issues in Scandinavia with the new Statkraft bond tightening some 10bp while the new Orsted bond was around 8bp tighter. Overall on market level iTraxx Main was 3bp tighter at 111bp while Xover was 13bp tighter at 545bp.