Danske Research Team
Danske Bank A/S
Market Movers
It is all about the ECB today. We expect Draghi to deliver a new ‘menu’ of aggressive monetary easing consisting of: a 20bp deposit rate cut accompanied by a two-tier deposit rate system, stronger forward guidance plus an QE extension to December 2016 and an expansion of the monthly purchases to EUR75bn, for details. Fixed income markets are aggressively priced ahead of the meeting with at least some 15bp rate cut pencilled in for today. Importantly, we expect the December package to be the end of the easing cycle as we look for a strong euro-area recovery in 2016. The rate announcement will be at 13:45 CET and Draghi’s press conference will start at 14:30 CET.
In the US, the ISM non-manufacturing index is expected to decrease a little to 58 from the October figure of 59.1. This is still a very high level indicating that the domestic part of the economy is in good shape. If the services sector holds up reasonably well, this should pave the way for the Fed despite the dire manufacturing ISM earlier this week. Note also that Fed’s Yellen and Fischer will be speaking today.
Swedish and Norwegian central-bankers set to speak, see Scandi Markets.
Selected Market News
Fed’s Yellen last night confirmed her readiness to hike this month. Crucially, the Fed chair clearly signalled that she prefers to get started on policy normalisation now and then possibly move relatively slowly on rates thereafter. Yellen made a range of key observations: (i) the US labour market continues to tighten and that this will continue, (ii) the underlying inflation pressure is higher than PCE core inflation suggests as it is held back by temporary factors such as a strong USD and lower commodity prices, (iii) the FOMC is not that worried about development abroad and welcomes more easing from China and (iv) the so-called 'neutral rate' will be key in the hiking cycle but as there is great uncertainty regarding the former, the cycle will be highly data dependent, i.e. Yellen keeps the door open for both a more hawkish and a dovish cycle. Our view is still four hikes next year but the December ‘dots’ could be taken down to deliver a ‘dovish hike’ to ensure the US money-market curves does not steepen too swiftly.
The market continues to price around 75% probability of a first Fed hike this month but, following Yellen’s comments, US equities came under pressure, oil sold off to hit new year lows, the USD (DXY) index rose above 100 and US Treasury yields ended up a few bps with gains concentrated in the short end. Oil prices later recovered somewhat on speculation that Saudi Arabia might be willing to cut production at the OPEC meeting on Friday provided other OPEC members cut too. This would be a significant surprise and a marked change in Saudi (and OPEC) production policy which has recently aimed at maintaining market share to price out notably US shale producers. Bank of Canada, as expected, kept rates unchanged at 0.50% yesterday, stressing that a weaker CAD is still needed in order for the economy to go through the ‘complex adjustment’ that not least the low oil price has brought about. BoC is now awaiting the expansionary effects of past easing, a ongoing US recovery and another uptick in USD/CAD as Fed hikes.
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