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Too Early for a Fed Pivot

Market movers today

Today markets will zoom in on the FOMC meeting. It is too early to turn soft for the Fed, and we look for a 75bp hike and hawkish communication as further tightening in financial conditions is still needed.

We also get October ADP Private Sector Employment out of the US, which might give some indications on where we are heading with the jobs report on Friday.

In Germany, we get October unemployment figures, which has moved somewhat higher recently, largely affected by Ukrainians entering the work force. Consensus is looking for another increase.

In Denmark, October figures will likely show that Danmarks Nationalbank has intervened to floor EUR/DKK ahead of the move to hike by less than the ECB last week.

The 60 second overview

US: A bunch of strong data from the US yesterday confirms our view that it is too early for Fed to turn soft today, see US Research – Fed preview: too early for a pivot, 28 October. The ISM manufacturing for October came out strong and better than expected with the headline index keeping in expansionary territory at 50.2 (cons. 50.0). The better than expected performance was driven by higher new orders and production. Prices paid index declined sharply to 46.8 (from 52.4), but labour market conditions appear to still be quite tight. ISM Employment index recovered to 50 (once again contrasting PMIs), September Job Openings rose and August openings were revised higher. Involuntary layoffs also declined. Overall, yesterday’s data does not support the view that US is near a recession.

Denmark election: Denmark’s Social Democratic leader Mette Fredriksen is unexpectedly set to win a second four-year term in office in the country’s snap election. Her left-leaning red bloc has won 87 seats compared to opposition bloc’s 72 seats. The newly emerged center party, the Moderates, led by former prime minister Lars Løkke Rasmussen is about to secure 16 seats. The final result will be available only after Greenland votes are counted. Traditionally, Greenland votes are left-leaning and the red bloc has often won at least 3/4 seats, which this time would secure a majority for Frederiksen in a 179-seated parliament.

Brazil: The outgoing President Jair Bolsonaro finally broke the silence yesterday as he woved to respect constitution after losing the second round in the country’s presidential election to Luiz Inácio Lula da Silva. While Bolsonaro stopped short of admitting a defeat or even mentioning his opponent, his two-minute speech was followed by his Chief of Staff saying he had been authorised to formally begin the transition. Bolsonaro’s appearance and his appeal to his supporters, some of whom have taken to the streets to protest, that they should remain peaceful, will reduce the risk of social unrest, a scenario feared by many. Driven by Brazil’s improved terms of trade, stronger than expected economic growth, pre-emptive monetary policy tightening, and now, reduced political risk, BRL is one of the best performing currencies this year.

Equities: Equity markets in a rollercoaster session yesterday driven by bond yields with the positive correlation between bonds and equities continuing. If anyone questioned the narrative of good news being bad news and vice versa then they got a new strong example of that yesterday. Equities both in Europe and US were higher ahead of the JOLT report but too strong job demand increased the Fed fear, made yields soaring and US equities went from green to read. Long duration growth stocks were beaten down the most together with the most cyclical consumer related stocks. Defensive value outperforming while VIX stayed close to 26. In US, Dow -0.2%, S&P 500 -0.4%, Nasdaq -0.9% and Russell 2000 +0.3%. Asian markets are mixed this morning with China outperforming on back of renewed hope for change in the zero covid policy. European and US futures are solidly in green.

FI: Yesterday’s European rates session was a tale of two stories. Initially, EGBs were supported with the spillover from the previous US session driving yields almost 10bp lower as most European countries were closed out for All Saints day. In the afternoon, the US rates jumped on the strong JOLTS report, pulling EGB yields higher. As a result, 10y German yields ended virtually unchanged on the day, a pattern that was broadly representative for the EGBs yesterday as well as the ECB market pricing expectations. The BoE’s selling of bonds didn’t seem to impact markets materially.

FX: EUR lost out against the rest of G10 currencies yesterday. EUR/USD traded below 0.99 and USD/JPY above 148. EUR/SEK dropped below 10.90 and EUR/NOK fell close to 10.20.

Credit: Credit spreads as measured by iTraxx Main tightened by 3bp to 111bp yesterday, while Xover was tighter by 14bp to 541bp.

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