All Eyes on Riksbank

Market movers today

Today we expect a 25bp hike from the Riksbank. We expect the Riksbank to conclude their hiking cycle with another 25bp hike in September putting the terminal policy rate at 4.0% like the ECB, see more in the Nordic section below.

Following a big decline in Italian inflation from 8.0 to 6.7% yesterday, more euro area countries, including Germany, will publish June inflation data.

We also have both Powell and Lagarde on the wires again today.

Overnight, China publishes official PMI data, where we look for a small lift to the manufacturing PMI and further moderation in the service PMI from still high levels.

The 60 second overview

Sintra: The policy panel with Lagarde, Powell, Bailey and Ueda brought few new signals on the monetary policy outlook. Powell struck a somewhat more hawkish tone than in his most recent speeches, highlighting that US monetary policy might not be restrictive enough and that moving back to consecutive hikes is not off the table. Furthermore, he underscored the asymmetric outlook, where the cost of bringing inflation down quickly will be lower than allowing inflation to prolong, even if it requires a modest recession.

Lagarde mostly reiterated her earlier messages, saying that the ECB is likely to hike again in July, but not commenting on the outlook for meetings beyond summer. On the macro data front, Italian June inflation data showed a clear decline in headline inflation from 8.0% to 6.7% y/y, with some easing in the core and services measures as well. Italy is the first major euro area economy to report monthly inflation data, followed by Germany and Spain today, and finally the euro area HICP tomorrow.

US bank stress tests: The Fed’s annual stress tests showed that large US banks remain ‘well positioned to continue lending’ even in a scenario of a severe economic downturn. While large US lenders remain well capitalized for adverse events, the Fed’s Barr cautioned that markets should remain humble about how risks can arise, referring to the turmoil seen last spring. For now, US banks’ liquidity buffers remain above pre-pandemic levels, not least reflecting the gradual increase in the use of the Bank Term Funding Program introduced in March. The rebuild of US Treasury’s cash balance has also not drained bank reserves as feared, even though the process is already more than halfway done. We discussed the latest USD liquidity developments in more detail yesterday in FX Strategy – USD liquidity unaffected by rebuild of cash balance, 28 June.

Equities: Global equities were a tad higher yesterday with big regional and sector differences. Japan almost 2% higher, US flat and Latin America down 1%. Same for sectors with cyclical part outperforming the defensives. We are only halfway through 2023 and sector returns go from -5% to plus 35% which no one (of course) expected going into the year. 2023 is not a big outlier; it happens every year, but strategists and investors are typically underestimating the low sector correlation and high realized return differences. However, this just tells us that one can make a lot of alpha even with limited sector bets.

In US yesterday, Dow -0.2%, S&P 500 -0.04%, Nasdaq +0.3% and Russell 2000 +0.5%. Asian markets with big differences again this morning, Japanese markets are higher while Hang Seng is down 1.5%. Many will end up concluding that Q2 2023 was the quarter of AI related outperformance but please take a look at Japan versus Hang Seng. Remarkable outperformance that no one is talking about and this is not an AI story.

FI: European yields fell through most of yesterday’s session. German yields ended the day down by about 4-5bp across the curve, while BTP yields were close to unchanged. Market expectations for the peak ECB rate fell by approximately 5bp to 3.95% throughout the day. There was no single factor behind the declining pattern in yields, although both Italian CPI/PPI and Eurozone money supply data came in soft. Inflation forward swaps saw minor declines throughout the day.

FX: NOK and USD led the way yesterday, where GBP, AUD and NZD lost ground to the rest of G10. Majors largely ignored comments from key central bank heads speaking at Sintra as they did not offer any substantial news. Notably, SEK fell ahead of today’s Riksbank meeting.

Credit: While primary market activity remained lively yesterday, the investor response for several of the new deals was rather disappointing. This was the case e.g. for Italian renewable energy company Alperia which priced its 5y green senior line with initial guidance at MS+250bp, while Commerzbank also seemed to struggle with its new 10.25NC5.25 EUR500m Tier 2. The spread on the latter was set at MS+370bp following IPTs of 370/375bp and the final book size was undisclosed. CDS indices were broadly unchanged with iTraxx Main closing at 77bp (-1bp) while Xover was 1bp tighter at 416bp.

Nordic macro

Sweden: Today’s main event is undoubtedly the Riksbank policy decision at 09.30 CET. Our call entails a 25bp hike, increased QT volumes (+50%, from SEK3.5bn to SEK5.25bn) and a repo rate path indicating an additional 10-15bp worth of hikes for the September meeting. Market pricing going into the meeting implies a (roughly) 40% probability of a 50bp hike which cannot be completely ruled out, especially in light of the continued weakening of the SEK. However, as recent inflation developments have been in line with Riksbank projections, we see 25bp as the most likely outcome today, which is also consensus. Increased QT volumes is also consensus amongst banks, and we deem an increase of 50% as reasonable. As for the rate path we believe that the Riksbank opts to keep the door open for further hikes, and thus signal a non-zero probability of further hikes in coming meetings, just as they did back in February.

In the Riksbank’s shadow, we also get data on retail sales and NIER’s Economic Tendecy Survey. Both these variables have shown signs of near-term stabilization as Swedish consumers are concerned, and as such the new prints will be important input for whether this continues or not, with potentially strong implications for broader Swedish economic developments as well.

Danske Bank
Danske Bank
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