Fri, Feb 03, 2023 @ 16:23 GMT
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US Labour Market Takes Centre Stage

Market movers today

It’s time for US Nonfarm Payrolls, which is one of the key data points for the Fed going into their next FOMC meeting on 14 December. We expect US job growth to decline from 261k to a still decent 220k (consensus 200k). Also keep a close eye on wage growth, which is a key input to the Fed’s assessment of the outlook for core inflation.

The Fed’s Evans will speak tonight and may offer the first comments from a Fed member on the labour market report.

In the Scandies we get the monthly NAV labour market report in Norway which is likely to show an ease in the tightness of the labour market. We pencil in a rise in the seasonally adjusted unemployment rate to 1.7% – which is naturally still very low. This will prove to be one of the key final releases for Norges Bank heading into the 15 December monetary policy meeting. Also next week’s Regional Network Survey and inflation release will be key.

The 60 second overview

Markets: Overall it has been fairly quiet overnight with very limited market moves across asset classes. The focal point in markets remains the outlook for US monetary policy. Nominal and real yields in US have moved considerably lower this week following not least Powell’s speech Wednesday evening but also weaker-than-expected US data.

Yesterday’s ISM manufacturing report – a gauge of the US manufacturing outlook – fell more than expected with the main index falling to 49.0 from 50.2 last month and hence contractionary territory (below the 50 threshold). Also the details on both employment and price pressures were weaker-than-expected. This together with lower-than-expected PCE core inflation in October, also released yesterday, strengthened market expectations that the Fed will slow down its pace of rate hikes.

US rates markets are now pricing in a peak in US policy rates below 4.9% suggesting that the Fed will deliver only an additional 100bp more of tightening in this cycle. We still think that risks to this pricing is skewed to the topside and highlight that the recent substantial easing of global financial conditions only risks creating a second inflation wave as we head into 2023.

Equities: Nordics in catch-up with the US rally. High multiples in the lead as yields dropped sharply (Orsted 8%, EQT 5%, NIBE 5%). Interestingly, US equities did not rally on lower yields but S&P -0.1% with the preference for quality continuing. Despite the directionless markets, VIX dropped -3% to just below 20, so risk on is still visible.

FI: Global bond yields continue to decline on the back of the comments from Fed chairman Powell regarding slower pace of rate hikes as well as lower than expected rise in the PCE deflator as well as weaker than expected ISM manufacturing data. Hence, 10Y Treasuries rallied some 14bp and the curve flattened from the long end.

FX: Broad USD continues to weaken, with EUR/USD trading over 1.05 for the first time since late June. This also supports Scandies, with both NOK and SEK making new multi-month highs vs the USD. GBP was among yesterday’s big winners as inflation expectations came in lower.

Credit: The dovish comments from the FED created a very bullish session for the credit market. This brought iTraxx main 5bp tighter to 86bp while Xover tightened 16bp to 443bp.

Danske Bank
Danske Bank
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