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Norges Bank Defies the Tide

In focus today

Today we get PMIs out of the big Western economies.

In the euro area, we expect continued modest contraction in the service sector while the downward trend in manufacturing becomes gradually less steep. We will also keep an eye on the price indices, which moved higher in November. Particularly the IFO survey showed German service businesses’ price expectations increased markedly in November.

The 60 second overview

Norges Bank: Norges Bank was the major outlier in a string of monetary policy holds from the ECB, SNB and BoE yesterday. Norges Bank decided to hike its policy rate by 25bp to 4.50% and signal a 20% probability of another hike in March. Heading into the decision, most analysts – ourselves included – had called for unchanged policy rates while markets had priced a small hike probability (+4bp). Following the decision, we postponed our first rate cut from March to June, but lifted the number of expected rate cuts next year from 4 to 5.

ECB/BOE: Apart from Norges Bank, central bank decisions were in line with expectations. ECB kept the deposit rate at 4% and lowered its projections for growth and inflation next year. Lagarde struck a dovish tone with no clear intention to push back on the aggressive market pricing for next year. ECB will start reducing the PEPP portfolio in H2/24 and terminate reinvestments by the end of 2024. We stick to our call of the first cut being delivered at the June meeting, though risks are tilted towards an earlier start. The BoE also left the rate unchanged at 5.25%, though the communication was hawkish in an attempt to counter the easing of financial conditions seen recently. As for the ECB, we expect the first cut from BOE in June.

US: US retail sales surprised to the upside in November, rising by 0.3% m/m after the decline of 0.2% m/m in October. US consumers remain on a solid footing, not least due to the strong labour market. In that respect, initial claims data from last week came in better than expected at 202.000, the lowest level since mid-October.

Japan: Overnight, composite PMI data from Japan rose from 49.6 to 50.4 in December after declining for most of H2. The move was driven by improving activity among services providers, while manufacturing ticked further down below the 50 mark separating expansion from contraction. Focus now turns towards the BoJ meeting on Tuesday.

Equities: What a day in equities! European and Nordic stocks rallied in catch-up to the US session. However, US continued higher too with small cap Russell2000 adding another 3%. This takes small cap Russell 2000 a staggering +7% higher for the week vs Nasdaq +3%. It is clear that the rally is benefitting not only large cap tech. Small caps, REIT, regional banks, lower quality balance sheet and consumer cyclicals were the place to be this week. Value beating growth. Same story in the Nordics with real estate rallying double digit together with rate sensitive stocks like EQT and Nibe. This summed up to S&P 500 0.3%, Nordics 1.3% and Stoxx 600 0.9%. US futures are higher, again, this morning.

FI: Yesterday morning, European yields caught up with the significant decline in US yields following the FOMC meeting on Wednesday. The ECB statement and Lagarde’s press conference pushed short-end rates a bit higher, though most of the rally had already faded prior to the ECB decision. Markets still expect ECB to cut rates by around 150bp next year. 10Y Bund yields ended the day down by 6bp, while 10Y UST yields extended the rally from Wednesday night by dropping an additional 11bp. The 10Y BTP/Bund spread tightened following the release of the PEPP schedule, as the planned reduction of EUR7.5bn/month in H2/2024 was less hawkish than feared.

FX: EUR/USD moved sharply higher following yesterday’s ECB monetary policy announcement, trading close to the 1.10 mark. The Bank of England (BoE) yesterday decided to keep the Bank Rate unchanged at 5.25% and coupled with a hawkish tilt in communication, this initially sent EUR/GBP lower. However, the move was fully retraced following the ECB announcement, in line with our expectation. Yesterday Norges Bank surprised markets by hiking policy rates by 25bp including the sight deposit rate to 4.50% providing support for NOK. The SNB kept the policy rate unchanged at 1.75% yesterday and delivered a dovish message, which ultimately sent EUR/CHF notably higher. SEK faced headwinds from lower than expected inflation.

Credit: Credit spreads tightened massively, with iTraxx Xover closing 24bp tighter, taking the index to 329bp, while Main compressed 4.6bp and closed in 59.5bp.

Nordic macro

Market is expecting a slight increase in LFS November unemployment to 8.0 % SA. Take this data with a pinch of salt. We rely more on PES registries.

Danske Bank
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