Tue, Mar 28, 2023 @ 15:45 GMT

Easing Fears

Market movers today

From the US, we get producer prices and retail sales for February. Like the CPI, the PPI is expected to show declining headline inflation but still too high core inflation at the producer level. Consensus is for a small decline in retail sales after the big 1.7% m/m increase in January, but keep in mind that the data is prone to large revisions.

Swedish y/y inflation for February should decline a little from the high January levels, but we still call for 8.6% for CPIF excluding energy which would be 0.6 percentage points above the Riksbank’s forecast and hence supporting the widely held expectation of a 50bp hike in April. That said, even a low outcome is unlikely to change that expectation.

The 60 second overview

In particular rates markets reversed a portion of Monday’s rally yesterday as markets see the US banking crisis as more contained than the initial assessment. The front end led the sell-off across the curve. The 2y Schatz rose 20bp yesterday, reversing around half of Monday’s rally, while 10y German Bunds rose 15bp to 2.42%. ECB peak policy rate expectations now stand at 3.67%, which compares to a low of 3.10% on Monday. The Fed’s equivalent rose to almost 5% yesterday.

The US February CPI continued to illustrate persistent underlying inflation pressures. Core CPI came out above expectations at 0.45% m/m (forecast 0.4%) driven by core services, and while the shelter component explained part of the uptick, broader core services ex. housing and healthcare inflation accelerated to 0.8% m/m (from 0.65%). Similarly, Atlanta Fed’s sticky CPI picked up to 6.8% on annualized m/m basis (5-month high), which remains clearly too fast for the Fed. Energy and core goods CPI came out below expectations, but as the labour market remains tight, services remain the key focus for monetary policy. The Fed faces a challenging decision next week balancing price and financial stability risks, but with risk markets stabilizing for now, short-term inflation expectations recovering and underlying price pressures still elevated, we stick to our call for two more 25bp Fed hikes in March and May.

We argue that we expect ECB to largely look through the recent events from a decision point of view arguing it is primarily a US isolated case, but we see a dovish 50bp rate hike due to communication and the uncertain outlook being chosen. Contrary to our anticipation last week, we do not think Lagarde will give firm guidance for a May hike but emphasise data dependence and a meeting by meeting approach. This leaves markets in the driver’s seat for financial conditions. We do not see ECB announcing new liquidity lines now, but they will sound ready.

Equities: Global equities ended 1% higher yesterday despite the Asian markets dragging the overall performance down. A staggering turnaround took place during the European cash session, and in our opinion, this had nothing to do with macro data. The turnaround is happening as investors are starting to realize the SVB failure will not lead to a systemic risk. Look at the banks in Europe yesterday, they started out as the worst performer but ended 2.4% high as the third best industry yesterday. In the US, bank performance was much more mixed or selective with First Republic Bank up 27%. Another sign of the improving risk sentiment, cyclicals outperformed defensive, min vol underperformed and VIX came off the highs from Monday. All indices were higher in US with Dow +1.1%, S&P 500 +1.7%, Nasdaq +2.1%, Russell 2000 +1.9%. Most Asian markets are playing catch-up this morning though with Nikkei going against the trend. Futures in Europe and US haven been fluctuating between gains and losses this morning.

FI: The German ASW spreads tightened 5bp in both the Bobl and Bund, while tightening 9bp in the Schatz ASW yesterday. German ASW are still elevated compared to last week – and further tightening is expected although the pace in light of increased volatility is uncertainty.

FX: Yesterday we saw some reversal of Monday’s moves, with front-end treasuries underperforming and markets once again re-pricing Fed back to expecting 25bp next week following the inflation data. In FX, however, USD and JPY underperformed while SEK was among the winners, with EUR/SEK sharply lower in line with improving risk sentiment.

Credit: Credit markets saw a rebound on Tuesday following the negative sentiment from the SVB fallout at the start of the week. Itraxx main tightened 5bp to close at 89.6bp, while Itraxx Xover tightened 19.6bp to close at 457bp. Primary markets were once again somewhat muted, with issuers weighing the right moment to step back into the market given the current high uncertainty on the future path of rates and spreads.

Nordic macro

In Sweden, the February inflation outcome is today’s clue. We expect both CPIF and CPIF ex energy to decline marginally compared to January, to 9.0 % yoy and 8.6 % yoy, respectively. This is 0.4 percentage points below and 0.6 percentage points above the Riksbank’s respective forecasts. The Riksbank is currently focused on the latter. In the parliamentary hearing yesterday, Erik Thedéen again stressed that they are worried about the still rising trend in core inflation, the risk that there has been a problematic shift in price setting behaviour. He did not sound dovish at all even in light of recent financial market turmoil. Needless to say today’s and the next and final sets of inflation data will be key for the April decision. A bit surprisingly, there were no questions or discussion about the SEK at the hearing. We still look for 50bp in April and a final 25bp in June while we also expect that by then core inflation will have moderated for a couple of months.

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