Christin Tuxen
Danske Bank A/S
Market Movers
Key event today will be the FOMC meeting. We expect the Fed to keep the federal funds rate target unchanged at 0.25-0.50% but focus will be on the accompanying statement, see Fed unlikely to risk tightening too much, too quickly, 25 January. We stress that we expect the Fed to make an attempt to be dovish by communicating implicitly that it will skip March as a possible hiking month and remain on hold in the current environment. Indeed, the Fed will not risk tightening too much but it will be a challenge to not disappoint with markets pricing only one full hike this year.
Reserve Bank of New Zealand policy meeting this evening: we – and consensus – expect the cash rate to be kept unchanged at 2.50%.
ECB’s Mersch and Lautenschlager will be speaking today but are unlikely to talk down expectations that the ECB is prepared to cut again in March.
Swedish confidence survey results out, see Scandi Markets.
Selected Market News
The gyrations in risk appetite continue. Crude oil is back above the USD30/bl mark but down from yesterday’s highs this morning and equity markets are mixed in Asia with Chinese indices down while Japan is posting decent gains. Industrial profits out of China overnight showed a 4.7% y/y drop in December, souring sentiment regarding the Chinese outlook once again. Australian CPI figures were released this morning, generally surprising marginally on the upside, thus sending AUD/USD a tad higher. While the US Markit services PMI posted a slightly larger than expected drop on Tuesday afternoon, data showing consumer confidence held up reasonably well in January despite the recent market jitters, which helped prop up sentiment overall, and the US session ended the day with 1-2% gains; Treasury yields 2-3bp lower .
We stress that if the Fed fails to soothe the markets in its statement today – which may be difficult considering the already dovish market pricing – there is a risk of higher money-market rates and some USD strength to go with it in the near term.
Separately, in Sweden, the risk of Riksbank intervention remains on the agenda following the recent move lower in EUR/SEK, albeit with the cross trading just off 9.30 we are still somewhat off the levels (possibly around 9.10-9.00) where the central bank would likely be activated. While intervention is a veritable minefield for a central bank to enter, it may nevertheless come to the fore given the Riksbank’s sole focus on the inflation target and given that most agree the SEK is fundamentally undervalued (on PPP measures). We continue to see EUR/SEK around 9.30 in 1-3M supported by a February rate cut in Sweden but see a gradual move lower in the cross further out on Swedish growth outperformance.
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