Market movers today
Focus this week will turn to euro area Flash HICP inflation for February on Thursday. US ISM manufacturing and Chinese PMI for February will provide more information on the turn higher of the global PMI cycle. We look for a lift in both.
Today, we’ll get euro area sentiment indicators from the EU Commission as well US durable goods orders and pending home sales.
In the Nordics we get retail sales in both Norway and Sweden today.
The 60 second overview
US inflation: While the strong leading indicators eased recession fears last week, inflation risks remain elevated. According to some of Fed’s favourite gauges, US inflation took off again last month, upending optimism that the peak has been reached. The headline PCE deflator rose 0.6% m/m, with the annual rate picking up to 5.4% from a revised 5.3%. More worrying, the core gauge accelerated to 4.7% from a revised 4.6%. The sources of the pick-up – income and spending growth – remained healthy last month. Equities dropped, treasury yields jumped and the dollar strengthened after the PCE report. The two-year yield rose to 4.8%, the highest since 2007, and Fed swaps are fully pricing in rate hikes in March, May and June. Bets on the peak rate rose to about 5.4% by July.
War in Ukraine: Russia’s war on Ukraine reached the one-year mark. China called for a cease-fire between Russia and Ukraine in a position paper on ending the war that offered some reprieve to Moscow, but was quickly dismissed by Kyiv’s allies. In our view, talks about peace are highly premature as neither of the sides of the conflict has shown any willingness to compromise on their original military objectives (read more in Research Russia-Ukraine: One year since Russia’s invasion – Europe faces three changes as it settles into new reality, 17 February).
Germany: The German economy shrank 0.4% q/q in Q4 22, double the decline of the previous estimate. Falls in capital investment and private consumption were primarily to blame. The German two-year yield climbed above 3% for the first time since 2008. Meanwhile, Bundesbank President Nagel warned that ECB may need to deliver significant rate hikes in the second quarter as well.
Equities: Equities down on Friday as another set of inflation data fuelled the overheating fear. On the surface it could have looked like a classic defensive rotation but looking closer at the S&P500 performance, materials and banks were the two best performing sectors. As the stronger than expected inflation data comes with improving macro outlook, we see only a slightly defensive rotation. Please also note this comes after three months of massive cyclical outperformance. In US last Friday, Dow -1.0%, S&P 500 -1.1%, Nasdaq -1.7% and Russell 2000 -0.9%. Asian markets are lower this morning while European and US futures are slightly higher.
FI: European rates continue its volatile trading sessions as markets assess the monetary policy tightening needed. On Friday, Bunds sold off by 7bp, in what can largely be considered normal 1d change, amid US core PCE inflation coming in slightly higher than anticipated. Intra euro area spreads saw minor changes to Germany. The policy peak in ECB is now priced for a 3.81% deposit rate peak, which is setting new highs as markets have added 22bp in the past two weeks. On Friday, the 2y Schatz rose above 3% for the first time since 2008. Focus this week is on the euro area inflation data and the ECB minutes. ECB will commence its end to full APP reinvestments as of 1 March.
FX: Last week, rising US Treasury yields – especially in the front-end of the curve – set the tone generally in markets on the back of a re-acceleration in inflation data. The tightening of financial conditions favoured the USD, which broadly appreciated and sent EUR/USD below 1.05. GBP also had a strong week with EUR/GBP testing the 0.88 mark (however, edged higher since). On the other hand, rising yields had a negative impact on JPY and CHF, and deteriorating risk sentiment led to AUD depreciation against the USD.
Credit: iTraxx Main traded slightly tighter on Friday and closed 4bp tighter than the week before at 77bp, while Xover widened 14bp during the week to close at 420bp. Friday saw a bit of issuance in the low-beta segment with UK drug maker AstraZeneca placing a EUR dual tranche. Overall, however, last week was not too busy with EUR corporate issuance totalling EUR9.4bn and financial issuance (excluding covereds) at EUR3.0bn.
Norwegian retail sales fell 3.6% in December, largely as a result of Black Week bringing some Christmas trading forward to November. Card data from BankAxept suggests that spending was relatively healthy in January, so we expect retail sales to climb at least 2.0% m/m (s.a.), but the underlying trend would still be down.
In Sweden, the week starts off with some interesting household-related data with household lending and retail sales, both for January. Swedish household mortgage lending came to a virtual standstill in December looking at seasonally adjusted monthly changes. Although there has been some recovery in property prices in January we doubt that that has pushed lending higher again as turnover remains very low. The plunge in retail sales may have decelerated in January as suggested by Swedbank card transactions data. That said, the same data suggests volume drop accelerated again in February. Hence, there is no obvious reason to assume the worst is passed yet.