Market movers today
Three voting FOMC members are scheduled to speak today starting with John Williams at 15:15 CET at a Wall Street Journal event, followed by Kashkari and Waller in the evening. Also Bostic of the Atlanta Fed, who is not currently a voting member, will speak 16:00 CET.
For Sweden, we will get data on household consumption, production and industrial orders in December. However, we already know that GDP declined 0.6% q/q in Q4 and that retail sales dropped 1.8% m/m in December, so there will not be much new information ahead of the Riksbank announcement Thursday.
The Polish central bank is expected to leave rates unchanged at today's meeting.
The 60 second overview
Market sentiment: Yesterday was a mixed day in the global stock market despite US indices closing higher. In general, January rally in risky asset classes seems to have lost some steam in February. We think such caution may be warranted since there is still a risk that the improved growth outlook backfires if underlying inflation pressures become protracted and central banks are forced to more aggressive tightening. Without sufficient demand adjustment and tightening of financial conditions there is a risk that businesses' pricing power remains strong and that wage pressures do not cool off.
Fed: Fed Chairman Powell's speech yesterday gave little new information. We think markets were likely expecting a clear hawkish shift by Powell as a response to last Friday's burning hot US labour market data, but these expectations did not materialise. That being said, Powell was not dovish and emphasized that if we continue to get strong labour market and inflation prints, the Fed may need to do more. In separate comments, Fed's Kashkari said the Fed should likely have to raise rates to 5.4% given the strong labour market. In our view, investors' focus should now be on data releases instead of individual speeches since Fed has clearly communicated their data dependent approach. The next potential market mover is US CPI next Tuesday.
German economy: German industrial production showed some weakness at the end of 2022, declining 3.1% m/m in December. Weakness was not driven by the car sector, which continued to recover amid easing supply bottlenecks, but there was a big decline in intermediate goods production (incl. chemicals, which are particularly exposed to higher energy costs). Overall, it seems industry had a small negative contribution (-0.7% q/q) to GDP growth in Q4. Although business surveys have turned the corner, weakening order books still set the scene for a continued weak industry performance in Q1, before Chinese demand probably starts to provide some tailwind for exports.
FI: Long-dated US Treasury yields climbed higher on the back of hawkish comments from Fed Chairman Powell, that monetary policy needs to be tightened further in order to rein in inflation given the very strong labour market. However, this morning we are seeing a modest decline in Treasury yields in Asian trading.
The Schatz ASW-spread tightened significantly on the back of the announcement from the ECB that government deposits would be remunerated at €str-20bp as of May 1. There is no deadline for the new set-up. This removes the expectations that the ECB would remunerate 0% on government deposits in the short-term horizon.
FX: EUR/USD continued to slide yesterday and dropped below 1.07. Further rise in US interest rates weighed on the pair. EUR/NOK rose to a new cycle high, while EUR/SEK reversed slightly lower.
Credit: Yesterday, credit markets continued on a slight negative note ahead of Jerome Powell's expected hawkish speak. Both CDS indices were marginally wider with iTraxx Main (+0.2bp) at 75.4bp, while iTraxx Crossover (+2.5bp) closed at 397.6bp.
December consumption indicator and production value index (PVI) are released this morning (08.00 CET). Plunging retail sales (-8.0 % yoy) most likely signal a risk for a new low in the consumption indicator. As is well known, most fundamental factors were quite negative for consumers in December. PVI is likely to take a leg down as suggested by falling new orders as well as PMI and manufacturing confidence data.
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