No new policy signals expected at ECB meeting

Market movers today

Today's main event is the ECB meeting. Market attention turns to the implications and new communication on the back of the new strategic framework. We do not, however, expect new policy signals coming from the change in language. See also ECB Preview: Aligning forward guidance to strategic outcome, 15 July.

This morning, consumer confidence in Denmark, industrial confidence in Norway and manufacturing confidence in France are due out.

In the afternoon, US initial jobless claims data are due out. 

The 60 second overview

US Inflation: Inflation is becoming a politically sensitive subject in the US as republicans are pushing to make the recent surge in US consumer prices a political liability for the Biden administration. This comes ahead of the final negotiations on President Biden's infrastructure bill as well as the remainder of his USD 4tn spending package including more spending on social security and climate change mitigation.

Nord Stream 2: Germany and the US have finalized a deal paving the way for completion of the Nord Stream 2 gas pipeline extending through the Baltic Sea (the pipeline is already close to completion). Different US governments have during the past decade opposed the idea of Russia delivering gas directly to the largest economy in the EU. Under the new agreement Germany is obliged to take action itself and push for sanctions in the EU targeted Russian energy exports, if Russia makes use of gas exports as a sort of blackmail towards Ukraine. Despite a deal in place, foreign ministers of Poland and Ukraine said that the deal cannot effectively limit the threats posed by completing the pipeline. Also republican senators have criticized the deal.

Jerome Powell: The four-year term of Fed chair Jerome Powell expires February next year, but according to White House sources Powell enjoys wide support among the Biden administration's top economic advisors, although the question of a re-nomination has not yet been discussed with the President. Besides Powell's term also the board term of Richard Clarida expires in January and Randal Quarles' position as vice chair of supervision expires in October. However, Quarles' term with the Board of Governors does not expire until 2032.

Equities: Both American and European indices ended yesterday in green and the S&P500 has over the past three days more or less erased the past week's decline. Despite the spreading of the delta variant hospitalisations remain stable and the current reporting season has seen 85% of the S&P500 companies reporting so far beating analysts' expectations. This morning the Hang Seng index closed 1.8% higher and futures are pointing towards a marginally positive opening in the US and Europe as well.

FI: The 10y US treasury yield rebounded yesterday rising 7bp to 1.29% coming from the lowest yield levels since February. The rebound was driven by a steepening move with the 2y maturity little changed at 0.21% still pricing a slightly more than 50% probability of a 25bp hike within the next 12m. Interestingly treasury yields have traded with a low correlation to implied USD volatility during the past two months - 10y US treasury yields have declined 30bp, but 1y10y vol has remained steady.   

FX: Yesterday's rebound in risk aided the hardest hit currencies from Monday and Tuesday higher. Not least NOK had a strong comeback with EUR/NOK now back towards the 10.50 support level. CAD, NZD and GBP were the other outperformers. USD traded somewhat on the back foot, which lifted EUR/USD back towards 1.18 as we enter ECB-day.

Credit: The credit market took lead from the better tone from the equity markets yesterday with tightening across the board. Itraxx main tightened 2bp to +48bp while xover tightened 8bp to +238bp. Activity in the cash market demonstrated similar tightening trends.