Today, we have published the fifth and last document in our series on inflation and what it means for financial markets. In this document , we look at the FX implications of the inflation and fixed income out look out lined in the first four pieces, Part 5: FX and inflation – US inflation outperformance + comfy Fed = weaker USD.
This morning we also published ECB Preview – Striking a compromise, 2 March, ahead of next week’s meeting. In short , we expect the ECB to strike a compromise between the doves and the hawks by removing the QE flexibility bias but have no discussion on rate hikes. We expect Mario Draghi to strike a relatively dovish tone at the press conference. For expected market react ions, see the full document .
Market movers today
In the UK, PM Theresa May is speaking about her vision on Brexit today. Leaks suggest that May will stick to her demands for a tailor-made UK deal and that contents of the speech were changed in the last minute amid her Cabinet remaining heavily divided.
On Sunday in the Eurozone, we have a Super Sunday with the Italian election and the SPD’s decision on whether to join the German government or not. F
In the Scandies, focus is on Danish FX reserve data, Norwegian NAV labour market report and investment survey in Sweden. For more details, see ‘Scandi Markets’ on page 2.
Selected market news
Global market sentiment remains heavily influenced by developments in the US amid rising speculations that the Fed could soon signal a higher tightening pace whilst the risk of a global trade war has risen on the out look of more protectionist US policies. The US fixed income rally has continued and most Asian equity indices have followed US counterparts into red territory.
Yesterday evening, US President Donald Trump announced that his administration contemplate imposing substantial tariffs on imports of steel and aluminium. We emphasize that while higher tariffs create a worse growth-inflation trade-off, both steel and aluminium only make up a very small part of US imports, cf. this chart. However, the move is likely to trigger retaliation from the EU, Canada and China meaning that the risk of a global trade war that potentially could derail the global recovery has risen considerably on the announcement .
The strong ISM manufacturing report yesterday added fuel to market speculations of Fed potentially revising higher its dot plot to four 2018 rate hikes at the forthcoming meeting in March. The accompanied ISM sector statements indicated rising import price pressures, rising capital equipment expenditures following the tax reform as well as labour shortages in some industries. Meanwhile short ly after the ISM release, Fed chair Powell toned down his hawkish remarks from Tuesday, partly reversing the more aggressive Fed pricing and halting the slide in EUR/USD. Overall our view remains, that the Fed is unlikely to hike rates aggressively this year. We might get a fourth rate hike this year but a fifth seems unlikely and at this stage our base case remains three.
