Thu, Mar 23, 2023 @ 16:34 GMT
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Hawkish Fed Talk after CPI Report

Market movers today

In the US, retail sales figures are the highlight today and it will be interesting to see whether consumer spending continued to cool at the start of 2023, despite the strong labour market. Empire manufacturing for February is also released.

After wage growth again surprised on the upside yesterday, the UK inflation report for January will reveal whether core inflation pressures are still on the rise, adding to the risk of more hikes from Bank of England.

The delayed Q4 2022 GDP figures are released in Norway.

The 60 second overview

US inflation push yields higher: US January CPI came out broadly in line with our expectations, as headline CPI grew 0.5% m/m and core CPI 0.4%. That said, the details continued to illustrate persistent underlying price pressures, and markets reacted by pricing in a larger probability of Fed continuing its hiking cycle beyond May and now pricing a peak rate around 5.25% in July. Core Services ex. Shelter inflation remained steady at 0.6% m/m, but the figure was pulled down by negative contribution from healthcare inflation, largely linked to negative base effects in health insurance prices. Excluding healthcare and shelter, core services inflation picked up to 0.65% m/m (from 0.35%), while core goods CPI also rose by 0.07% after three months of consecutive decline.

For now, we stick to our forecast of two more 25bp Fed hikes, and first rate cuts only in early 2024. Besides realized inflation and labour market data, we will keep a close eye out for how inflation expectations develop. Both market and consumer survey based expectations have ticked slightly higher recently, which supports the case for maintaining nominal rates higher for longer.

Fed officials signal risk of higher rate peak: In comments after the CPI print, Dallas Fed President said that “We must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions.” Also talking after the CPI release, Richmond Fed President Thomas Barkin stated that “if inflation persists at levels well above our target, maybe we’ll have to do more [than anticipated]”. Another Fed member Patrick Harker from Philadelphia Fed said that “It’s going to be above 5% in the Fed funds rate. How much above 5? It’s going to depend a lot on what we’re seeing.”

US says three mystery objects likely private: US National Security Spokesman John Kirby said Tuesday, that the three unknown objects the US shot down in recent days were likely private and not linked to China. As we wrote yesterday, US Secretary of State Anthony Blinken and China’s top foreign policy diplomat Wang Yi are weighing a meeting at the side lines of the Munich Security Conference starting Friday.

NATO has for the first time opened for Finland and Sweden joining separately. “So the main question is not whether Finland and Sweden are ratified together,” Secretary-general Jens Stoltenberg told reporters on Tuesday. “The main question is that they are both ratified as full members as soon as possible. And I’m confident that both will be full members, and are working hard to get both ratified as soon as possible.” Turkey is currently holding up Sweden’s membership accusing Stockholm of holding Kurdish activists and over allowing the burning of the Koran in front of the Turkish embassy in Sweden.

Equities: Equities little changed yesterday after yoyo moving during the day. However, underneath the surface an interesting outperformance of growth stocks took place. This happened although the US CPI report came out hotter than expected and yields moved higher across the curve with further inversion. For us, this can only be explained by the classic FOMO reaction as investors have been missing out on the rally in growth stocks since October. However, we see this change in correlations as temporary and argue for growth stocks to suffer if we see further lift to yields. Some of this also visible in futures this morning. In US yesterday, Dow -0.5%, S&P 500 -0.03%, Nasdaq +0.6% and Russell 2000 -0.1%. Asian markets broadly lower this morning led by South Korea dropping 1.7%. Futures in Europe slightly negative while US down a bit lead by Nasdaq.

FI: Bond yields and interest rates rose on the back of the stronger than expected US inflation data released yesterday. 10Y US Treasury yields rose almost 10bp on the back of the US inflation numbers before falling 3-4bp by the end of the trading session. There was a spill-over effect to European bond yields and these also rose.

FX: Initial gyrations in G10 FX after US CPI, but soon the USD came out as a marginal winner with EUR/USD moving toward low 1.07 and USD/JPY testing the upper end of the 130-133 range. EUR/SEK made attempts toward year lows around 11.06 in the early part of the European session but then gradually edged higher during the day alongside EUR/NOK.

Credit: Credit markets tightened markedly during the day, but after the release of the US CPI figures, sentiment changed and both iTraxx Xover and Main closed more or less unchanged in 77bp and 401bp, respectively.

Nordic macro

Norwegian GDP is released today. Growth was much stronger than expected towards the end of last year. Although we expect it to slow in December, with mainland GDP falling 0.2% m/m, this would still give solid growth of 0.7% q/q for Q4. That said, it will be worth looking out for any revisions of previous data, as these can sometimes change the picture quite considerably.

Danske Bank
Danske Bank
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