Higher yields amid surprise hike from Bank of Canada

Market movers today

It will be another quiet data day in terms of economic data. US weekly jobless claims are due.

In Sweden, the SNDO publishes May figures for the Swedish budget balance, see more below.

The 60 second overview

Germany: Hard data for the German manufacturing sector was less bleak than recent PMIs as industrial production increased 0.3% mom in April. It was a smaller increase than expected, but at the same time March was revised higher. Soft data continues to suggest weak months ahead, though.

OECD: The OECD delivered yet another fairly rosy outlook for the global economy. A slowdown on the horizon without many repercussions for the labour market, but also with a continued too high inflation pressure. We agree that a gradual slowdown largely seems like the most likely scenario, even if risks to the growth outlook are largely skewed to the downside. However, the 23/24 growth outlook of 0.9/1.5% for the euro area and 1.6/1.0% for the US still seems too optimistic to us.

Bank of Canada hiked its overnight rate to a 22-year high of 4.75% yesterday, reflecting our view that monetary policy was not sufficiently restrictive. This was the first hike since January and markets price in another hike next month. US treasury yields traded higher on the back of the decision with 10-years 9 bps higher, which also spilled over to Europe.

Equities: Equities were mixed on Wednesday. Stoxx 600 -0.2%, S&P 500 -0.4% but small cap Russell 2000 surged 1.8%. Alike the past week, sector performance has grown to new sectors. Energy, real estate and industrials were some of the outperformers yesterday. We see the increased breadth as a good signal for the strength of this bull market. Another strong signal is the VIX which remained at ultra-low levels of 14 (!) yesterday. It is very seldom that volatility drops this low in a short-lasting equity rally.

FI: We have now seen two central banks raising rates unexpectedly - Royal Bank of Australia (RBA) and Bank of Canada (BoC). They both tightened monetary policy with a rate hike of 25bp citing higher inflation (RBA) and overheating economy (BoC). Next week we have both the Federal Reserve as well as ECB, where the Federal Reserve is expected to pause, while ECB is expected to hike with 25bp.

FX: CAD rallied after Bank of Canada surprised markets and hiked policy rates. EUR/USD continues to hover around the 1.07 level - mind the upcoming tightening of USD liquidity conditions for a potential trigger for a move lower. Scandies continue to trade on a weak footing with EUR/SEK flirting with the 11.70 level.

Credit: Credit markets were relatively quiet yesterday though with a slight widening tendency. iTraxx Xover closed 3.5bp wider and Main 0.8bp.

Nordic macro

The SNDO publishes May figures for the Swedish budget balance. Their own forecast from two weeks ago indicates a surplus of SEK23.2bn. The 2023 full-year forecast was revised higher to a deficit of SEK15bn (up from SEK42bn) as tax revenues have surprised positively thus far into the year.