Chinese trade balance data released on Saturday

Market Movers

• It is a quiet start to week in terms of data releases and the market probably will continue to digest Friday’s very strong US labour market report.

• In the euro area, focus will be on the October Sentix investor confidence and German trade balance data for September. We believe the Sentix investor confidence indicator has bottomed for now and expect a moderate increase as the financial stress has eased due to signs of stability in China and Mario Draghi surprising the markets by opening the door for a deposit rate cut. In terms of German trade balance data focus will be on exports and the impact of the weakness in emerging markets.

• During the week several FOMC members including Evans, Dudley and S. Fischer will speak. This will attract some attention and it will be interesting to hear their views on the economic outlook in the light of the strong US labour market data.

• In Scandinavia, focus this week will be on inflation with Norwegian October inflation prints due tomorrow, while Swedish Prospera inflation expectations and October inflation prints are due Wednesday and Thursday, respectively.

Selected Market News

US treasury yields moved markedly higher across the curve on Friday after the surprisingly strong US labour market report. Non-farm payrolls increased by 271,000 in October, well above both our expectation and consensus while the unemployment rate declined from 5.1% to 5.0% and will very soon fall below the low end of the Fed’s projected NAIRU range (4.9%).

We have changed our Fed call and now expect it to deliver a 25bp rate hike at the December meeting. The market now prices close to a 85% probability of a hike in December depending on the level of Fed funds after the first hike and, in all senses, close to as much as the market can price it ahead of the December meeting. We look for four further hikes in 2016, in line with the median projection within the FOMC, i.e. in total five hikes before end-2016. The market has priced slightly below three hikes in total before end-2016 and thus the market is probably still capable of pricing in further rate hikes in 2016, putting further upside pressure on the short end of the US yield curve. Importantly, our new call on the Fed does not change our ECB view. We still look for an extension and expansion of the QE programme and deposit rate cut deeper into negative at the ECB December meeting. Hence, the market impact for European government bond yields should primarily be felt at the long end of the European curve, as the ECB is still capable of keeping shorter yields on a tight leash.

Chinese trade balance data released on Saturday revealed a record high trade surplus of USD61.46bn in October. However, data also showed that both exports and imports contracted on an annual basis in October. While the export sector continues to suffer from the emerging market slowdown and a strong CNY, the weak domestic demand implied by the 18.8% y/y decline in imports may keep pressure on for more domestic easing, although recent economic data indicate that the Chinese economy is likely to bottom out in Q4.

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