Central Bank Bonanza

Market movers today

A packed central bank day kicks off with Riksbank which we expect to hike rates by 25bp to 4% in line with consensus view. We expect this to be the final hike in the cycle but risks remain skewed on the upside, and we believe Riksbank will leave door open for November. See more below.

The SNB will announce their rate decision at the same time as the Riksbank, and despite inflation being in their target range of 0-2%, we and the consensus expect them to hike the policy rate by 25bp to 2%, marking the peak.

We expect Norges Bank to hike rates by 25bp to 4.25 % and signal that rates most likely have peaked. However, Norges Bank will keep the door open for further hikes if needed, which will also be illustrated by the rate path in the MPR. The same rate path will probably postpone the timing of the first cut to well into H2.

For Bank of England, markets are split after yesterday’s inflation data, and are now only pricing in less than 50% probability of a hike today (was 80% before CPI). Yesterday’s August inflation print was a big surprise, as headline inflation declined from 6.8% to 6.7%. Analysts had expected an increase to 7.0%. Core inflation fell even more sharply from 6.9% to 6.2% (exp. 6.8%). While we do not believe a single weak data release is enough to defer the BoE from hiking by 25bp, we think yesterday’s release definitely favours a dovish commentary, signalling a peak.

Also, in the afternoon, Central Bank of Turkey is expected to hike rates by 500bp to 30%.

Overnight, Bank of Japan will announce their monetary policy decision. We do not expect any changes this time, but do think another tweak in their YCC is likely later this year.

On data front, we get the euro area September consumer confidence figures. Consumer confidence has increased greatly since last fall where the energy crisis and inflation shock depressed consumers. In August, consumer confidence took a small dive and it will be interesting to see if this was a one-off or if consumers’ moods are fading again due to the weakened growth and employment outlook.

The 60 second overview

Market sentiment: Markets are risk off, digesting the Fed’s hawkish hold yesterday, and preparing for today’s central bank bonanza. The US 2-year yield has reached its highest level since 2006, EUR/USD is approaching 1.06 level and Brent oil price has retraced back below USD 93 level.

Fed: Last night, the Fed maintained rates unchanged as widely anticipated, but the clearly stronger-than-expected economic forecasts marked a hawkish surprise for the markets. The Fed revised up 2023 GDP forecast to 2.1% (from 1.0%), 2024 to 1.5% (from 1.1%) and left 2025-2026 forecasts at 1.8%. Despite the stronger than expected growth, inflation is still seen cooling largely in line with earlier forecasts. Powell made it clear that the more upbeat outlook warrants maintaining rates higher for longer, which was also visible in the updated rate projections. 12 out of 19 participants called for one more hike in 2023, while 2024 and 2025 median ‘dots’ were revised up by 50bp to 5.1% and 3.9% respectively. While we share the Fed’s view of cooling inflation, we expect a clearly more pronounced slowdown for growth on the back of already restrictive stance of monetary policy and continuing tightening in financial conditions. As such, we make no changes to our Fed call, and still think that the Fed’s next move will be a cut in Q1 2024. Read our full Fed review: Upbeat on growth, 20 September.

China: In a further sign of stimulus by Chinese officials the fifth largest city in China, Guangzhou, has eased home-buying rules for non-citizens who will now be eligible to purchase a home if they have paid personal income taxes there for at least two years (was previously five years).

FI: The Federal Reserve kept rates unchanged as expected, but signalled that there could be one more hike later in the year. Furthermore, the FOMC committee also raised their “dot plots” such that they are not expecting as many cuts as previously. Hence, the FOMC committee sees the fed funds rate at 5.1% by the end of 2024 to previously 4.6%.

FX: Central banks and relative rates keep setting the tone in FX markets. Last week the dovish hike from the ECB sent EUR/USD one figure lower and after the Fed’s hawkish hold the cross dropped another full figure to currently around 1.063. Meanwhile, USD/JPY soared and is back well above 148, GBP/USD weakened and USD/Scandies both rallied more than ten figures on the back of Fed. Scandies which in general had a strong day ahead of Fed, erased some of the gains afterwards. Now, SEK, NOK, CHF and GBP wait to take direction from today’s European Central Bank’s decisions.

Credit: The credit markets traded with a positive tone yesterday with good 2-way flow in cash and tightening of the indices. While headline indices were distorted by the roll to series 40 yesterday, we see like for like spreads tightening of 1bp in iTraxx main and 4bp in Xover.
Nordic macro

For the Riksbank meeting, we expect a 25bp hike up to 4.00% which is in line with consensus and market pricing. As for the forward guidance, we would expect that the rate path is revised slightly higher, signalling some 10-15bp for another hike in November. We do not expect the Riksbank to make adjustment to the QT programme, where they currently sell government bonds at a monthly pace of SEK5bn. The most interesting part of today’s announcement will be if the Riksbank provides any details on the potential hedging of 25% of the FX exposure in the currency reserve. While the Riksbank stressed in June that such a decision should not be seen as a currency intervention, we assess that it could nevertheless lend support to the SEK in the coming months. See more in our preview in Reading the Markets Sweden – 15 September.

We expect Norges Bank to hike rates by 25bp to 4.25% and signal that rates have most likely peaked. However, Norges Bank will keep the door open for further hikes if needed, which will also be illustrated by the rate path in the MPR. The same rate path will probably postpone the timing of the first cut to well into H2.

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