Market movers today
Today is PMI day. Euro area PMIs will be scrutinised for clues on whether the service sector continues to be the key driver for growth and inflation. In the US, it will be interesting to see if PMIs continue to paint a significantly rosier picture of both the manufacturing sector and service compared to e.g. ISM data.
The Central Bank of Hungary concludes a meeting where we expect them to keep the base rate unchanged at 13.0%.
Overnight, we expect the Reserve Bank of New Zealand to hike the cash rate by 25bp to 5.50%. Markets are divided with around 37bp priced in.
The 60 second overview
Debt ceiling: Biden and McCarthy failed to find an agreement in the debt ceiling talks overnight, but reassured the negotiations would continue. Republican negotiator Patrick McHenry called the tone in the meeting ‘the most positive yet’. Parties have not yet found common ground on the budget outlook, as democrats have offered to limit next year’s spending to this year’s levels, but republicans have demanded freezing spending to 2022 levels for 10 years. Furthermore, other unresolved issues seem to include democrats’ push to reduce deficit with tax hikes and republicans’ proposed subsidies to oil & gas industry. With the X-date looming in early June, the parties most likely still have around two weeks left for the talks. While we do expect a deal to be eventually reached, we also think the discussions are once again likely to go down to the wire.
PMIs: Preliminary PMI data from Japan and Australia was mixed ahead of the euro area and US releases later today. In Japan, activity picked up both in manufacturing and services, with the latter index reaching an all-time high at 56.3 (from 55.4). Output price indices eased modestly on both sectors, although especially service sector inflation pressures still appear clearly elevated in a historical context. In Australia, growth weakened in the services sector, while the manufacturing index remained stable in contractionary territory.
Geopolitical radar: Yesterday Russia reported that a Ukrainian group had attacked a Russian town of Belgorod, close to the border with northeast Ukraine. Kyiv authorities denied that Ukrainian army was involved in the situation, and Ukrainian media reported that Russian opposition groups were responsible for the attack.
Equities: Wait and see-mode in equities yesterday. Sectors and styles were tightly bunched, with both S&P and Stoxx closing unchanged. As said, there were little direction but if any, a slight preference for defensives, FANMAG and quality. One thing to keep an eye on is small caps, which begun to outperform in the US last week. This outperformance extended into Monday’s session, with Russell 2000 up 1.2%. Of course, the rebound in the regional banking index holds a part of the answer, but this macro environment is typically when small caps would start to outperform again from a stylistic perspective. US futures are a tad higher this morning.
FI: An early morning rally in EGBs was replaced by a gradual move higher in yields across the board throughout the rest of the day in a curve flattening move, on the back of hawkish Fed comments where Bullard sees additionally two hikes this year while Kashkari said the June meeting is a close call (for pause or another hike). Spreads were generally mixed while markets also recorded a strong performance by Greece after the national elections on Sunday seemingly gives PM Mitsotakis another term. The 10y Greek bond dropped 17bp vs 10y Bunds.
FX: Most G10 currency pairs were rangy on Monday. This included EUR/SEK for most part of the European session, but US opening sparked a mini rally in the cross which now eyes the April high at 11.43. Meanwhile, EUR/NOK is challenging 11.80 and the highs from early May.
Sweden: In Sweden, today’s focus is on a speech (12:30 CET) by Erik Thedéen on “The mutual dependence between monetary, financial market and fiscal policy”. There are actually several Riksbank speakers who will discuss the economy this week: Per Jansson (hawk) and Flodén (dove) on Wednesday, Thedéen (hawk) again on Thursday and Breman (dove) on Friday, all of which might be important money-market and SEK drivers.
Norway: Norges Bank’s Q2 expectations survey will be important given the current situation. Expectations for this year are likely to be at least as high as they were last time around, but we are excited to see where expectations for next year land, for both wages and prices. Signs that expectations will peak this year and fall next year are important for the risk of price-wage spirals.