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Focus Turns from Hawkish Fed to BoE and Norges Bank

Market movers today

Today we expect a 25bp rate hike from Norges Bank. Markets and analysts are evenly split between 25 and 50bp, see more below.

Later we expect 75bp from Bank of England, which is also fully priced in by the markets. We see it as a close call between 50bp and 75bp, though.

In the US, we will look out for ISM non-manufacturing, which will give us more intelligence on the service sector strength. Consensus sees a decline to 55.5 from 56.7.

The 60 second overview

Fed: The US Federal Reserve hiked rates by 75bp yesterday as widely expected. Powell delivered a hawkish message, emphasizing that financial conditions need to be tightened further, which weighed on equity and bond markets and supported broad USD. In contrast to the recent speculation around a possible Fed pivot, Powell stated clearly that ‘it is very premature to be thinking about pausing’ even if downside risks to growth are rising. Powell did not give clear signals on the most likely hiking pace for the December meeting, but highlighted that terminal rate and financial conditions are more important than the exact pace of hikes. We think Fed has to continue tightening aggressively in the near-term and adjust our Fed call to include a 50bp hike in February in addition to our earlier forecast of one more 75bp hike in December. Read our full take from: Research US – Fed review: Another hawkish 75bp hike – We now expect 50bp also in February, 2 November.

Bank of England: We expect a rate hike of 75bp from Bank of England at today’s meeting bringing it to 3.00%. Market pricing is close to 75bp but in our view it is a close call between 50bp and 75bp. However, we expect the Bank to return to its more dovish stance as recession risks are becoming more pronounced and the growth outlook is becoming increasingly weaker. Likewise, the BoE tends to ear on the side of caution, why we expect a return to smaller increment hikes from here and expect the hiking cycle to end in February next year, leaving the bank rate at 3.75%. See our Bank of England Update – BoE preview: a dovish 75bp hike in store, 31 October.

Russia: Russia’s foreign ministry said yesterday that the country fully reaffirms its commitment to prevent a nuclear war under a joint statement by key Western powers, Russia and China in January. Putin repeated that Russia could use nuclear weapons if ‘the very existence of their state’ came under threat from a conventional attack or if Russia was hit by a nuclear strike first. Yet, he said there was ‘no military or political sense’ in Russia using a nuclear weapon against Ukraine. According to US officials, tensions seem to have calmed somewhat following a series of consultations between US and Russia defence officials. Meanwhile, Ukraine continues to advance in the southern city of Kherson.

Brazil: In a clear attempt to de-escalate social unrest, on his Wednesday evening remarks on social media, the outgoing President Bolsonaro appealed to his supporters to clear the roads as their actions were harming both the economy and the right to free movement. Since Sunday’s election, truck drivers and other bolsonaristas have built hundreds of barricades on highways hampering logistics and risking shortages of critical goods such as medicines.

Equities: Equities down yesterday finishing close to day-low as investors decided to read Powell less dovish or further away from pivoting than previously anticipated. Yields once again setting the tone for equities and no signs yet of the bond vs. equities correlation turning negative again. No surprise to the tech, growth cyclical universe underperforming and the defensive values doing better. In US, Dow -1.6%, S&P 500 -2.5%, Nasdaq -3.4% and Russell 2000 -3.4%. Asian accross markets are lower this morning and European futures the same. US futures are higher.

FI: Yesterday was mostly just waiting for the FOMC meeting in the evening. Fed hiked the policy rates by 75bp as expected, and markets responded with a dovish reaction sending 10y UST 6-7bp lower on expectations of a slower pace to come. During the press conference, Powell was hawkish and emphasized the hawkish bits several times, incl. that they are not ready to talk about even a pause of hikes but also that the peak rates are higher, as ongoing increases are made until rates are ‘sufficiently restrictive’. The cycle peak rate jumped 10bp to 5.10% briefly before settling around 5.03%. 10y UST ended 4bp higher at 4.08%. Similar to the ECB as discussed here COTW: Too early to trade the ECB pivot. Market psychology will lead to additional temporary rallies, 28 October, a Fed pivot is not imminent.

FX: USD gained vs rest of G10 currencies yesterday after US interest rates rose on the back of the FOMC meeting. EUR/USD fell close to 0.98 after the FOMC meeting and USD/JPY rebounded back towards 148.

Credit: Credit spreads as measured by CDS indices were little changed yesterday, with iTraxx Main at 111bp (unchanged) and Xover wider by 1bp to 542bp. Several issuers made use of the pre-Fed window to bring deals to the market, which saw both FIG and corporate senior euro deals printed.

Nordic macro

Norway: We expect Norges Bank to hike the policy rate by 25bp to 2.50 %, as indicated in September. High inflation and a strong labour market are arguments for a larger hike, but keep in mind that the policy rate has risen 150bp in three months and is now 50bp above the neutral rate. Additionally, there are now clear signs of growth slowing, and capacity utilisation has fallen. We expect NB to signal another 25bp hike for December.

Sweden: October services PMI is expected to drop in line with the recent downward trend from a decent 55.1 September print. This is a consequence of the deteriorating global business cycle and a recession hitting the manufacturing industries.

Riksbank Governor Ingves speaks about the future of money at 14.30 CET, probably not a market mover.

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