ECB Holds the Course

Market movers today

Data calendar for Friday is almost empty. We have only UK retail sales due in the morning and US existing home sales out in the afternoon.

ECB’s Lagarde will again be on air from Davos but as she was also speaking yesterday, we do not expect much news.

Also two Fed speakers, Harker and Waller, will be on the wires today ahead of the quiet period that starts on Saturday.

The 60 second overview

ECB: Minutes from the December ECB meeting showed that ‘a large number’ of officials initially preferred at 75bp hike, but with the Governing Council eventually compromising on a smaller 50bp increase accompanied by hawkish rate guidance and start of QT. Hawkish comments from President Lagarde at the World Economic Forum in Davos suggested that ECB was determined to ‘stay the course’ and signalled further significant rate rises lie ahead to get inflation under control. She also highlighted that the economic outlook for euro area has improved and that this economic year should be better than feared. The hawkish comments sent the implied ECB peak rate pricing back to 3.4% and EUR/USD back above 1.08.

Norges Bank decision to leave policy rates unchanged at yesterday’s meeting was the first G10 central bank (except Japan) to do so. The signal of 25bp March hike was maintained though. Our base case has been for the December hike to mark the final hike of the cycle. Meanwhile, with hard data keeping up better than expected, the recent easing of global financial conditions alongside the positive global demand shocks from China reopening and higher European real disposable incomes, conditions look increasingly set for a final 25bp hike in March.

US: The US Treasury began tapping two government-run retirement funds to avoid a default after the debt ceiling was hit, steps that should allow payments to continue until early June. Treasury Secretary Yellen urged Congress to boost the borrowing limit, though Republicans and Democrats show no signs of ending their stand-off.

Japan: Inflation reached 4% for the first time in more than four decades, with core inflation at 3% also hitting the highest level since 1991. Amid further signs of building price pressures, the figures add to market speculation of a policy change by Bank of Japan. We share that view and think a hike in the policy rate to 0% and another increase in the yield curve control target likely awaits in Q2 23.

FI: ECB members pushed back against the recent repricing of lower yields yesterday. EUR rates grinded gradually higher in yield terms during the day. Bunds ended 4bp higher on the day amid minor intra-euro area spread changes. The front-end underperformed the longer part of the curve, as ECB rate hike expectations repriced significantly, unwinding most of the rally on Tuesday/Wednesday. Compared to Monday, ECB policy peak rate as priced by markets is just 3bp lower now at around 3.4%.

FX: Overall, little changed in G10 FX overnight. EUR/USD hovers just north of 1.08 after both Fed (e.g. Collins) and ECB (e.g. Lagarde) suggest they will deliver according to forward guidance, that is, Fed toward 5.00-5.25% and ECB ‘stay the course’ and go 50bp at the next meeting. JPY slightly weaker vs peers where USD/JPY clawed back above 129. EUR/SEK moved to the higher end of the 11.10-11.20 range yesterday and EUR/NOK held just below the 10.75-area resistance.

Credit: Negative sentiment in equity markets drove credit spreads wider. ITraxx Xover was 17bp wider at 428bp, while Main was 4bp wider at 82bp. That said, the primary credit market was still open for business. In Scandi space, European Energy printed a EUR100m hybrid bond with a 10.75% coupon and made a EUR75m tap issue of its EUR 2026 senior unsecured bond at 99.50.

Danske Bank
Danske Bank
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