Fed minutes confirm tapering is a question on timing

Market movers today

US PPI inflation will add more input to the inflation picture. PPI prints have been high lately pointing to pipeline pressure on consumer inflation.

US initial jobless claims is also due for release today.

In Scandi, it is time for CPI inflation in Sweden (see below).

The 60 second overview

Fed minutes: Staff presented an "illustrative path" for tapering with the tapering pace of USD15bn per month (USD10bn in Treasuries and USD5bn in mortgage-backed securities (MBS) per month). "Several participants" wanted a faster reduction, however. Policymakers also discussed whether to start actual tapering either in mid-November or mid-December. This means that the tapering pace is at least USD15bn/month but it could also be USD20bn (higher than that now seems unlikely). This means tapering is concluded in July at the latest. We expect an announcement in November and that actual tapering will start in mid-November.

Besides that it is very clear that FOMC members disagree on how to interpret the labour market development, especially why the labour force is not recovering as much as expected. This is also why there are disagreements on when to hike rates and by how much, as some think there are permanent damages while others disagree. On inflation expectations, FOMC members emphasised that longer-term inflation expectations remain well-anchored but some are concerned about the rise in 1-3 year inflation expectations.

Brexit: In yet another attempt to sort out the remaining details of the Brexit saga, the EU offered to remove checks on goods from the UK to Northern Ireland. EU's Brexit negotiator Sefcovic said that this was the final attempt to solve the dispute. In the proposal, EU suggest to remove 80% of the paper work on animal and plant-based products.

The US CPI core rose 0.2% m/m (in line with consensus, but slightly lower than we anticipated) but headline surprised to the upside (0.4% m/m vs 0.3% consensus). Headline inflation is now 5.4% y/y (up from 5.3%) wile core inflation remains unchanged at 4%. Nothing here suggests the stagflation story is going away anytime soon.

Equities: Risk sentiment improved on Wednesday, with most markets higher. The inflation/stagflation trade paused as long duration growth mostly retook leadership. FANMAG outperformed, but also materials on metal prices bouncing. S&P500 snapped its three-day declines and rose 0.3% (still lower for the week), Dow unchanged, Nasdaq 0.7% and Russell 2000 0.3%. This positive sentiment is lingering this morning with Asian markets all higher and US futures in green.

FI: Massive bullish flattening from the long end dominated market yesterday. Both the 30y German cash bond and swap rate was 8-9bp lower. We expect this to be driven by a number of stops and unwinding of carry positions, and not as much repricing of central bank expectations given that the front end was broadly unchanged on the day. Despite the repricing in the long end, inflation swaps ended broadly unchanged on the day. The US CPI figures did not impact markets significantly, nor did the FOMC minutes which said that Fed could start tapering in mid-November or mid-December. We believe that this uncertain and volatile environment will continue in the near future.

FX: Even though US CPI inflation surprised and short-term US interest rates rose further, USD lost against the rest of G10 yesterday. Scandies gained the most with EUR/NOK falling as low as 9.84 and EUR/SEK dropping down to 10.08.

Credit: Credit markets saw signs of stabilization yesterday where iTraxx Xover tightened 2.2bp and Main was unchanged. HY bonds tightened close to 2bp while IG closed 0.5bp wider.

Nordic macro

In Sweden, we expect September inflation to move another leg higher on the back of soaring electricity prices; a 7% monthly increase is what the data suggests. Energy prices may make another push higher in October, this time driven by vehicle fuel prices. Besides energy, we expect relatively seasonally normal increases in clothing and hotels/restaurants and equally seasonally normal declines in recreation and transportation. The latter two have, however, developed very differently than normally so far this year and, hence, the uncertainty is high. We have also made a slight upward adjustment to food prices for the remainder of the year on the back of higher international food prices. In total, we expect September CPIF and CPIF excl. Energy to print 3. 0% y/y and 1.8% y/y, respectively. The first forecast is spot on the Riksbank's forecast and the latter is 0.1 p.p. higher.

In the afternoon, there are two Riksbank speeches, Cecilia Skingsley 13:15 on digital currencies and Henry Ohlsson 15:30 on global impact on Swedish monetary policy. In advance, we are more interested to hear what Per Jansson has to say about 'current monetary policy in his speech tomorrow.