Market movers today
The main events today are the euro area preliminary first quarter GDP and the FOMC meeting. At the May FOMC meeting, we expect the Fed to maintain the target range at 1.50-1.75%. We believe the Fed is unlikely to change i ts pol icy signal significantly. The expected June hike is almost already fully priced in.
After GDP growth beat expectations and showed growth of 0.7% q/q in the last three quarters of 2017 in the euro area, we expect a slowdown in Q1 18 to 0.4% q/q after some moderation, in particular in the latter part of the quarter. However, we are still in expansionary territory, expecting sol id GDP growth throughout 2018.
PMIs from Norway and Sweden are also due out. Swedish PMI manufacturing was quite close to the 2014-16 level at around 55 in March and could very well fall slightly below this. The same slowdown tendency is visible in services PMI but it is still a bit higher at close to 60. In Norway and Sweden, it is time for PMIs.
Selected market news
Many of the European markets were yesterday closed for Labour Day. However, the UK market was open and a new set of weak UK data was published, as the UK PMI dropped to the lowest level since November 2016. The weak PMI came after weaker CPI, retail sales and GDP data had been released in April and following soft comments from Bank of England Governor Mark Carney. The market is now pricing in just a 17% probability of a BoE rate hike next week. Just a few weeks ago a hike was priced in by more than an 80% probability. In the US market the ISM indicator edged lower to 57.3 in April from 59.3 in May. The ISM indicator peaked at 60.8 in February and the reading might be an indication that US economic activity – as we have seen in the eurozone and the UK – has weakened over the past couple of months.
In the FX market , attention was on the continued advance of the US dollar. EUR/USD dropped below 1.20 and USD/JPY rose towards 1.10. Implied FX volatility is going up and it seems that the market is now preparing it self for a larger move in EUR/USD compared to the range trading that so far has been the case in 2018. In the bond market , 10Y US Treasury yields are st ill trading just below the psychological important 3% level. If we see a ‘hawkish’ Fed tonight we might see a break with this level. In the US equity market , at tention was on the Apple earnings that came after the market closed. Apple beat Wall Street expectations and the stock surged as much as 5% in after-hour trading.
In Italy, the political situation has worsened over the past couple of days. On Monday, the Five Star leader Luigi Di Maio said that the party was seeking new elections later this year , as the party talks between both the cent re-right alliance and the Democratic Party had failed. It will be up to President Sergio Mattarella to call a new election. However, yesterday, the media reported that the president had said that a new elect ion in the autumn would be a ‘disgrace’, and that it risks not solving the problem of non-governability in Italy. Hence, the Italian elect ion impasse has not been solved, and the Italian bond market is expected to under perform today.
