Market movers today
Today’s main event is the Norges Bank meeting. In June, Norges Bank signalled that the policy rate would probably be raised further at the coming week’s meeting. High inflation figures for June unexpectedly opened up the possibility of the bank having to deliver another half-point hike in August, but falling core inflation in July combined with current market signals now clearly point to a quarter-point hike.
The 60 second overview
FOMC minutes: The minutes from the July FOMC meeting revealed very few new policy signals. Most Fed officials saw “significant” upside risks to inflation and believe that more tightening might be required, although with a more balanced risk outlook, which was emphasised several times. Two members backed a hold at the meeting. The FOMC minutes are obviously backward looking compared to the recent slew of data, but inflation concerns are still lingering despite the two latest benign US CPI prints. The Fed also scraps its recession call, which points to the US growth resilience as well in the face of extraordinary tightening. Market reaction was generally muted on the back of the minutes. Today is a quiet day with focus on jobless claims and Philadelphia Fed Manufacturing index.
US GDP: Atlanta Fed’s GDPnow forecast for Q3 was lifted to 5.8%, up from 5.0% earlier this week.
Euro area: The strong euro area labour market was confirmed to continue in Q2 as well. While the employment growth lost some pace, it still grew by 0.2% qoq in the euro area, which is essentially the lowest since the pandemic. Indeed’s hiring lab database suggested that wage growth declined further in July, albeit stayed printed at an elevated 4.2% yoy.
Equities: European and Nordic equities recovered into the session, while US closed another -1% lower and ended near session lows. It was not a risk-off session at home turf, with consumer discretionary banks and industrials all performing well. However, US saw more of a defensive and value preference. Big tech and yield sensitive sectors such as real estate sold off, as yields rose after the Fed minutes. VIX ticked another point higher to 17. Risk sentiment seems to improve this morning with Asian markets mixed and US futures a notch higher.
FI: Global bond yields moved generally sideways yesterday will no significant news to alter the pricing. The FOMC minutes released last night did not lead to a market reaction. That means that 2y UST yields are still trading just below the 5% level. Inflation swaps declined marginally yesterday coming off the recent highs of 2.65% in 5y5y inflation swap. At the same time, markets added to its rate cut expectations from the ECB yesterday to now around -65bp priced through 2024.
FX: Scandies were once again under pressure yesterday from negative risk sentiment. Both EUR/NOK and EUR/SEK rose to the highest level since early June. GBP and USD were top performers as EUR/GBP slipped to the lowest in over a month and EUR/USD hovered around the 1.09 level.
Credit: The negative tone in the credit market continued yesterday, which we largely attribute to the ongoing barrage of negative stories out of China and their potential to spill over to the rest of the global economy. This drove iTraxx Main out by 1.1bp to 74bp while Xover widened 4.4bp to 415.4bp. We note though, that the moves in cash space are less pronounced indicating that liquidity remains weak in the secondary market.
Nordic macro
Norway: Norges Bank signalled in June that the policy rate would probably be raised further in August. High inflation figures for June unexpectedly opened up the possibility of the central bank having to deliver another half-point hike in August, but core inflation fell again in July from 7.0% to 6.4%, which is only marginally above the 6.3% assumed in the June monetary policy report. Together with a slightly stronger NOK, higher FRA-OIS spreads and somewhat lower rate expectations abroad, this clearly points to a quarter-point hike as signalled at the June meeting. We expect Norges Bank to keep the tightening bias, stating that ‘rates most likely will be raised again in September’. However, they will stress that this will be data dependent.
Sweden: Anna Breman will be the first Riksbank board member to comment on the economy and monetary policy after the summer break when she speaks at 14:00 today. She will get the chance to reflect on, hitherto, higher inflation than anticipated and a much weaker than expected preliminary GDP print for the second quarter. In June she expressed a lot of concern that service inflation gets stuck up here. Regarding monetary policy she stressed that if, which is in fact the case, the market prices in ‘premature’ rate cuts, the Riksbank may have to respond by keeping rates higher for longer. Arguably, the rationale for that would be to mitigate unwarranted easing of financial conditions. Breman is currently a hawk.
