Tue, Feb 07, 2023 @ 04:38 GMT
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Fed to Hike by 50bp Despite the Low CPI

Market movers today

After the CPI downside surprise yesterday, markets revert focus to the FOMC rate decision today. Despite signs of peak inflation, economic data continues to paint a strong picture of services activity and the US labour market, with high wage inflation and stagnant labour supply. Nevertheless, in line with guidance from various FOMC members, we (and markets) expect Fed to slow the hiking pace to 50bp today. But with the recent easing in financial conditions further rate hikes might be needed in 2023, read more in Fed Preview – Tightening pressure persists into 2023, 8 December.

In Sweden, November inflation figures are on the agenda and we expect both headline and underlying inflation to print higher compared to October.

Ahead of the Bank of England meeting tomorrow, we think UK inflation will slow to 10.9% in November, but core inflation could accelerate to 6.6% as wage growth remains high.

Overnight, China will release a batch of data, including industrial production, retail sales and home sales. They will likely be weak as signalled by both manufacturing and service PMI, however, Chinese growth should recover next year, as the zero-Covid policy is phased out.

The 60 second overview

US CPI: US inflation eased more than expected in November, as headline CPI rose by only 0.1% m/m (from 0.4%) and core CPI by 0.2% m/m. Price pressures eased on a fairly broad basis, although lower gasoline prices affected both the energy and transportation service components. Stickier parts of the CPI showed a more mixed picture; core goods prices continued to decline (-0.5%) amid normalizing used car prices while core services (ex. shelter) inflation was limited by a delayed negative base effect in health insurance prices. Neither effect reflects easing in the broader wage-sensitive part of inflation, which Fed has been the most worried about recently, and indeed core services inflation excl. shelter and healthcare accelerated slightly to 0.52% on m/m basis. Atlanta Fed’s sticky CPI also accelerated to 6.6% y/y, signalling that while Fed is now moving in the right direction, it still needs to be able to cool labour market further and limit wage inflation to a level better consistent with its inflation target.

Market reaction and the Fed: The CPI release sparked a pronounced risk-on move in the markets, although equities reversed some of the gains later in the session. 50bp is still fully priced in for Fed’s rate decision tonight, but markets pulled back on the terminal rate pricing to around 4.85%. Hence the focus will be on both the updated ‘dot plot’ and Powell’s views on the monetary policy stance in 2023. We think Fed will still likely look to avoid sparking a too dovish market reaction in the evening, as the combination of lower yields, stronger equities and weaker broad USD seen yesterday reflect easing financial conditions. Commodity prices also moved higher, underlining the inflationary impact of the market reaction.

Equities: The initial cheer in equities at the CPI release wore off somewhat into the session. Dow Jones rose a mild 0.3% vs Nasdaq up 1%. Yield sensitive sectors naturally the winners, such as tech and real estate. Yet, in the Nordics, yield sensitive names like EQT or Hexagon outperformed together with value cyclicals like Boliden and Volvo. So, not very selective buying in the Nordics yesterday but rather full risk on.

FI: The lower than expected US inflation data lead to a solid bullish steepening of the US yield curve. The inflation data is supportive for the view that the Federal Reserve can slow down on the tightening of monetary policy. Hence, all focus will be on the FOMC meeting tonight and the ECB meeting on Thursday.

FX: Lower than expected US CPI immediately boosted risk sensitive assets and orchestrated a USD setback. The risk rally reverted somewhat later in the session and over the night, but EUR/USD remains well over 1.06 this morning. Today, all eyes turns from CPI to the Fed later tonight, where market expectations are for a 50bp hike. Before we get there, however, we start the day off with Swedish November CPI where we expect a re-acceleration of headline CPI on the back off a surge in domestic energy prices.

Credit: Yesterday, credit markets benefitted from a lower-than-expected US CPI print, which drove broad based spread tightening in CDS indices. iTraxx Main was 4.8bp tighter to 84.6bp while iTraxx Crossover was 24.9bp tighter at 439.1bp. Moreover, the primary markets saw only modest new deal activity across the Eurobond market.

Nordic macro

Sweden: We expect November inflation in Sweden to print 10.0% on CPIF ex energy on the back of significantly higher energy prices. Our forecast is higher than median consensus (9.6%) and way higher than the Riksbank’s 8.8%. On the core measure, ex energy, our forecast is 8.3%, close to consensus 8.2% and slightly higher than the Riksbank’s 8.1%. Given the outcomes in neighbouring Nordic countries, food for example, there might be a small downside risk to CPIF ex energy.

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