The rate hike was relatively well-received in the market

Market Movers

• We expect Norges Bank (NB) to leave rates at 0.75% but it has admittedly become a very close call – in our view close to even odds – amid the renewed collapse in the oil price, which could trigger another 25bp ‘insurance cut’ as it did in December 2014 and September 2015. We expect NB to indicate a very dovish stance by lowering the rate path, signalling a close to 100% probability of a rate cut in March. Markets are pricing in a roughly 50% probability of a 25bp December rate cut, a full 25bp rate cut for the March meeting and an accumulated 40-45bp worth of cuts on a 9-12M horizon (the period where the most easing is priced in).
  

• In terms of data releases, we expect the German IFO expectations to improve slightly and point to steady growth in line with the signals from yesterday’s Euro flash PMI.

• We expect UK retail sales (ex fuels) to increase 0.3% m/m in November, which is more or less in line with the consensus estimate of 0.4% m/m.

• In Sweden, unemployment figures will be released at 9:30 CET.

• Finally, note that the Bank of Japan (BoJ) early Friday morning announces its monetary policy decision. We expect BoJ to keep its target for the annual rise in monetary base unchanged at JPY80trl. Anything but an unchanged target would be a surprise to the market.

Selected Market News

Last night was all about the long-awaited FOMC meeting and as widely expected by both analysts and financial market participants, the FOMC increased the Federal Funds rate target by 25bp. It was the first US interest rate increase in more than nine years. The median ‘dots’ now signal four hikes in both 2016 and 2017, i.e. a total of eight hikes until year-end 2017 (down from nine). On the surface, the unchanged median ‘dot’ in 2016 might be interpreted as a hawkish signal but it hides that most individual ‘dots’ next year have in fact been lowered. For more details see FOMC Review that we will publish this morning.

The rate hike was relatively well-received in the market and risk sentiment was boosted in a relief rally as the Fed managed to take away at lot of uncertainty by hiking rates. We think it is fair to say that FOMC and not least Yellen during her press conference found a sound balance between neither being too dovish nor too hawkish and US equity markets rallied with the SP500 index closing 1.45% higher. Asian equity markets also trade higher this morning. In the FX market, the USD gained versus the G10 currencies – most notably against the EUR that has dropped to 1.0850 this morning – while many EM currencies gained from the relief rally. The 2Y10Y US yield curve flattened slightly with a 2bp increase in yields on 2Y US government, while yields on 10Y treasuries dropped 4bp. Despite the unchanged 2016 dots we stick to our view that Fed will hike three times in 2016 and four times in 2017. The market is pricing in only two full hikes in 2016 and an additional two are priced for 2017. This is too soft in our view and we expect US yields to continue to trend higher.

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