Dovish ECB fuels spread compression

Market movers today

Today we will listen in when Bundesbank governor Jens Weidmann speaks at the Franco-German Economic and Financial Council.

In Sweden, we get both business and consumer confidence and a new borrowing forecast from the Debt Office, see more below.

In the US we get PCE inflation figures which should not be a big market mover as they will likely just mirror the big increase we got in the CPI figures. It will be interesting to see whether service consumption has increased relative to goods, though as we also get consumption data.

The 60 second overview

ECB: We have had a string of dovish speeches from various ECB officials the past few days, and today we will hear from one of the ECB hawks - Weidman from the Bundesbank. If his comments follow a similar path as the ones we have seen so far, then the spread compression between Germany and the rest of the EGB market should continue despite the solid performance seen since last week. We would also expect the Bund ASW-spread to widen from the current level.

COVID-19: The picture keeps improving in the EU with cases falling in most countries and with most countries now easing restrictions. In the Nordics, Denmark, Norway, and Finland cases are moving sideways while Sweden is still improving. In the US, the situation continues to improve with hospitalisations at the lowest level since the pandemic. The US is on track to re-open fully soon despite slower vaccination pace. We think recent data supports our view that COVID-19 has peaked in the Northern Hemisphere. The weather is now warmer, and elderly/risk groups have been vaccinated, which put a limit on how high hospitalisations will go. Restrictions will be eased gradually over the summer (but there are differences across countries). See more in COVID-19 Update, 26 May 2021.

Equities: Equities slightly higher, growth outperforming value by a small margin, and cyclicals outperforming defensives by a small margin. This has been the picture for the first three days of the week and these limited positive moves are resulting in lower volatility and lower implied volatility. Looking at the VIX over the last five trading days is has moved from north of 20 down to 17.4. The big winner yesterday was US small caps after a long period of underperformance. In the US, the main indices closed at: Dow +0.03%, S&P500 +0.12%, Nasdaq +0.6%, Russell 2000 +2.0%

This morning most Asian markets are lower while futures in Europe and US are close to unchanged.

FI: Rates continue to decline on the back of more dovish comments from the ECB. However, today one of the hawks is speaking - Weidman from the Bundesbank. If he follows the path set out by other ECB officials, then we should see a further decline in yields and more spread compression.

FX: NZD rose more than 1% vis-à-vis EUR yesterday as RBNZ turned hawkish. EUR/USD retreated back below 1.22, and EUR/NOK and EUR/SEK held relatively steady.

Credit: CDS indices continued to outperform cash bonds. iTraxx Xover tightened 2½bp (to 251½bp) and Main tightened marginally (in 51bp). HY tightened around ½bp and IG closed unchanged.

Nordic macro and markets

Two things on the Swedish agenda. First, business and consumer confidence. The previous report was very strong and indeed the first time since June 2019 that all business sectors reported stronger business conditions than normal. Until now, services producers have been lagging behind manufacturing quite significantly but apparently now see clear improvements, except of course for those that are directly affected by restrictions. Also, businesses are generally optimistic about the future.

Second, a new borrowing forecast by the Debt Office. In the February forecast, the Debt Office expected a 2021 budget deficit of 63bn turning to a 30bn surplus in 2022. Since then monthly budget figures for February-April have come in 33.5bn better than expected. In the meantime, the government has announced additional fiscal measures but if anything we lean towards a somewhat lower deficit forecast this time around.