Thu, Dec 08, 2022 @ 05:44 GMT
HomeContributorsFundamental AnalysisYields Lower Despite Hawkish ECB Comments

Yields Lower Despite Hawkish ECB Comments

Market movers today

No major data releases are scheduled for today, but Swedish October PPI and German consumer confidence are due for release.

It is a quiet day on the central bank front as well, Riksbank’s Floden will be on the wires today.

The 60 second overview

Yields lower, equities up, USD flat: Despite hawkish ECB comments (see below) European bond yields moved lower yesterday and US bond markets (closed yesterday) picked up the baton in Asian trading with the US 10-year yield dropping to 3.65%, the lowest in nearly two months. Equities found support in the narrative and moved higher again yesterday. Asian stocks are slightly lower on China’s Covid spread that looks increasingly chaotic. The USD is broadly flat from yesterday.

Hawkish ECB comments: ECB’s Executive Board member Isabel Schnabel delivered hawkish comments yesterday saying that “incoming data so far suggest that the room for slowing down the pace of rate adjustments remains limited”. She added that the ECB will probably have to raise rates into restrictive territory. She is generally a hawk and the comments indicate she is likely to vote for another 75bp hike at the 15 December meeting rather than 50bp. Next week’s inflation print for November will also be key for the decision. ECB minutes yesterday also struck a hawkish tone indicating that the ECB would continue to hike also in case of a shallow recession. Markets price 150bp of hikes by summer next year.

China’s Covid challenges continue: China’s most widespread Covid outbreak to date continues with a new record in reported cases today. More than half of China’s provinces now face rising cases and restrictions. China’s restrictions are less harsh than previously in line with the 20-point plan recently announced but it is unclear if they can get the outbreaks under control without resorting to tougher restrictions and whether they would do that if necessary. The development could turn more chaotic in the coming weeks if it turns out that the spread cannot be contained without stronger lockdown measures, which could hit large parts of China. Disruptions to supply chains could return as witnessed with the Foxconn challenges causing problems for iPhone production. We doubt China will allow major Covid waves over the winter before a vaccination campaign has been rolled out. Hence, China could be facing a chaotic winter with widespread restrictions. But the jury is still out on the path for the coming months and China’s response.

FI: The spill-over from the FOMC minutes on Wednesday night and continued concern about the European growth outlook sent European rates lower from the morning, amid US being out for Thanksgiving. Bunds ended 6bp lower on the day at 1.85%, after some of the rally was retraced on hawkish comments from ECB’s Schnabel. 2s5s continued to flatten.

FX: It was very limited with spot moves in FX markets yesterday although USD on a broad basis traded on the back-foot. EUR/USD remains close to the 1.04 level. JPY has been the primary winner amid lower global yields and oil prices with USD/JPY now trading just north of 138 – the lowest level since late August/early September. In the Scandies, both SEK and NOK have gained modestly in recent sessions.

Credit: The positive sentiment, that has prevailed most of the week in the credit markets, continued yesterday. The Investment Grade index, iTraxx Main tightened 2.2bp to 87.6bp while the High Yield index iTraxx Xover tightened 10.3bp to 441.5bp. We see similar strong tightening in the cash indices.

Nordic macro

Statistics Sweden (SCB) is publishing its financial market statistics report (CET 8:00) which includes, among many other numbers, the household mortgage growth rate that has taken a serious turn lower as of late. We assume this trend to continue. Also, the (already high) share of variable mortgage loan contracts is expected to continue to increase, at the same time as average mortgage interest rates are rising, consistent with a lagging adaption to the increased repo rate from the Riksbank.

Today’s PPI numbers – (also at 8) – are likely to fall on a monthly basis, as electricity prices made a significant downward contribution in line with what we have seen for the October CPIF print.

Danske Bank
Danske Bank
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