Equity rally stalls on Fed comments

Market movers today

Both Norway and Denmark release CPI for December this morning while we will get various activity data out of Sweden later in the day, see Nordics section below.

In the US we get the NFIB small business optimism index. It is hovering at a low level and expected to stay weak. It also contains interesting sub-indices on price plans and outlook for compensation.

Fed Chairman Jerome Powell will speak at a Riksbank conference on central bank independence. It is not clear if he will comment on the current US economy as well.

The 60 second overview

Fed comments and markets. Yesterday Atlanta Fed's Bostic explained how he favours hiking policy rates to 5.00-5.25% and then keep policy on hold for "a long time". While this in isolation suggests 50bp is still in play for the February meeting Bostic did mention that a US inflation disappointment on Thursday (lower than expected print) could result in a 25bp hike instead. Also his counterpart from Fed Bank of San Francisco Daly explained how she still pencils in policy rates to move "somewhere above 5.0%" and that it's still too early to "declare victory" over persistent inflation.

Both comments come following markets returning to pricing in a peak in US policy rates below 5.0% which came on the back of Friday's non-farm payrolls and ISM services reports that both indicated that the nominal engine of the US economy is set to ease.

Markets have reacted to the comments by sending rates slightly higher, the equity rally has stalled while the recent sell-off in the USD has calmed. The oil price has also come slightly lower while gold is little changed.

Japan inflation. Overnight Tokyo inflation matched expectations on both the headline and core measure at 4.0% Y/Y and 2.7%, respectively. Tokyo inflation is used as a proxy for the national inflation prints that have become increasingly important - not just for Japan but also for global markets with Bank of Japan set on course for ending its yield curve control later this year.

Credit: Despite continued high activity in the primary market, sentiment remains upbeat in credit and investor appetite for new deals continues to look solid. Secondary spreads are also performing and yesterday, iTraxx Xover tightened 8.4bp and Main 1.8bp, reaching their lowest levels since April last year.

FI: European rates were quite volatile yesterday although core and semi-core rates ended only 2bp higher across the curves. Peripheral spreads performed relative to core. The morning session was dominated by partial reversal of Friday's rally.

FX: Scandies got off to a good start to the week, where USD and JPY struggled in the other end of the G10 currency sphere. CNY continues to gain momentum vis-à-vis USD, but took a breather vis-à-vis EUR yesterday.

Nordics

Today is primarily about Norwegian and Danish CPI.

Norway. Norwegian core inflation for once surprised to the downside in November, with prices for food, hotels/restaurants and furniture/interiors not rising as much as expected. Although the figures were probably affected by discounting during Black Week, they confirmed that the underlying trend, as reflected in the monthly change in seasonally adjusted terms, is still down. A slight correction after Black Week means that we expect the annual rate to stay at 5.7% in December.

Denmark. November delivered a decent downside surprise on the back of lower energy prices, which presents the risk of an upside surprise in the December figures. On the other hand, December has seen the market prices of electricity, gas, petrol and diesel fall, which overall means we expect a decline in the consumer price index of 0.3% relative to November. However, in terms of the annual inflation rate comparing to December last year, it implies an increase from 8.9% in November to 9.0% in December. Developments remain very uncertain, for example for food prices, which we have incorporated into our forecast with a small decline.

That said we also get data out of Sweden:

We get a bunch of November data with production figures, household consumption and GDP-indicator all due. Household consumption is likely to be affected by the bounce up in retail sales, probably an effect of the Black Friday sales. GDP and PVI (production) are usually quite correlated. Although recent GDP prints have been resilient, both NIER and PMI's point to a slowdown with weak order inflow and this should start to show up in the production figures.

The National Debt Office also releases the December budget outcome and its forecast is a borrowing requirement of SEK 138bn. Note, however, that in the previous two months the borrowing requirement has been SEK 13bn lower than expected, largely due to higher tax revenues. Last but not least, today the Riksbank holds an international symposium with speakers such as Bailey (BoE), Kuroda (BoJ), Schnabel (ECB), Powell (Fed) and Knot (ECB). The new Riksbank governor Thedeen will give some intro remarks which will also be his first words as the head of the Riksbank.