Market movers today
The main event today will be the Riksbank Policy Rate decision at 9.30 CET, where we expect a 50bp hike in line with the market pricing. We also expect Riksbank to signal an additional hike in June, see more in the Nordic section below.
On the data front, Swedish and Norwegian March unemployment rates will be released this morning alongside German consumer confidence. This afternoon, US durable goods orders are due for release.
Markets pay close attention to any final ECB comments ahead of the silent period starting tomorrow; de Guindos is scheduled to be on the wires today.
The 60 second overview
Macro: Risk-off dominated global markets with equities lower across the board and core yields lower amid intra-euro area spreads widening. Mixed corporate earnings and concerns over First Republic Bank were the main sources of the risk-off. The sour risk sentiment continued overnight in the Asian session.
Banking turmoil: The earnings report from First Republic Bank showed a deposit outflow of 41% to just above USD 100bn in Q1 and also looks into divest part of its business, which reminded markets of the significant banking turmoil in March.
US Politics: Incumbent President Biden formally announced his campaign to be democratic nominee in the 2024 presidential election.
EU debt: in an FT op-ed yesterday, German Finance Minister Lindner repeated his case that sound public finances need clear fiscal rules. He is opposed to the Commission proposal of country-specific debt plans and instead calls for common fiscal rules that include numerical debt reduction targets, as well as additional measures that ensure compliance and better enforcement. Overall, clearly hawkish overtones from Germany, that makes EU fiscal rules reform seem increasingly like an uphill struggle, as we also discussed in Euro macro notes – Germany is falling back into old habits, 14 April.
Equities pulled back on Tuesday with losses accelerating into the US session. S&P500 closed down -1.8% and Russell 2000 as much as -2.5%. The latter was dragged down by First Republic Bank that plunged 40% after showing a -35% contraction in deposits. Markets shifted to recession fear mode with all sectors lower and a classic defensives-over-cyclicals preference. Let’s call it risk off, with VIX rising all the way up to 19, yields falling in tandem with equities (the good old correlation) and industrial metals and oil down 2-3%. Solid tech earnings have bid up the Nasdaq futures this morning, so a shift in sentiment is in the cards.
FI: The sour risk sentiment sent 10y German yields 10bp lower despite the significant supply to markets yesterday from EU and Germany as well as hawkish commentary from Schnabel, who clearly favours a 50bp rate hike next week in our reading. Uncertainty is high for the upcoming ECB meeting whether ECB will deliver a 25bp or 50bp rate hike. Markets price 3.82%, which is 6bp less than on Monday.
FX: USD rebounded yesterday and notably EUR/USD was on a roller-coaster ride. First rising above 1.1060 before falling to around 1.0970 and despite a narrowing of the spread between short-term USD and EUR interest rates. Sour risk sentiment, i.e. a drop in US equities and oil price, looked to be the main culprit.
Credit: Overall the secondary credit markets remained calm while primary markets remained active. The iTraxx Main was unchanged while the iTraxx Xover widened 6bp from yesterday.
We expect the Riksbank to deliver a rate hike of 50bp bringing the policy rate to 3.50% and to signal an additional rate hike in June, somewhere between 25bp and 50bp. This view is well aligned with current market pricing, which indicates 50+30+15bp=95bp for three upcoming meetings. We still expect a final 50bp in June and a peak rate at 4.0%. After near-term hikes, the Riksbank’s rate path projections from the last two meetings have shown a completely flat profile until the end of the forecast period (which will now include Q2 26). If the Riksbank opts to do this again we would find it natural for the market to continue to ignore it. Notably, the market is pricing in the first full 25bp cut by Q1 2024 and close to another 25bp cut in Q2 2024. A signal of eventual rate cuts towards the end of the rate path would make more sense in our view, as the policy rate otherwise would be too restrictive for too long. While March inflation was lower than expectations, the gap to the Riksbank’s forecast remains too wide (1.4pp for core). In addition, macro developments have also been stronger than expected at the start of the year. Even the housing market is showing resilience, although we deem this to be temporary. With regards to the active QT, it is still early days so we would not expect any changes at this point. As for the SEK, there is little room for the Riksbank to underwhelm market expectations. The KIX-weighted SEK is back close to February levels, which then prompted the U-turn with regard to krona communication. Board members have then made it clear that their increased focus on the SEK should not be interpreted as them having an exchange rate target. That said, too much FX complacency runs the risk of spurring further SEK weakness. Given current market pricing a 50bp hike should be SEK neutral. Forward guidance and overall communication will be more important.