New Fed call

In focus today

This morning we will get the National Accounts for Q4 2023 in Denmark. We expect the numbers to show a sharp rebound in GDP growth to 1.0% q/q in Q4 after the 0.7% decline in Q3. Both the decline and the rebound are driven by industrial production which again is primarily driven by pharmaceuticals. Outside of pharma, the economy appears to be stagnating as we see elsewhere in Europe.

In Sweden the monthly Prospera survey results is also out this morning. The latest print from January showed a decline in inflation expectations for all tenors (1-, 2- and 5y) whereas the 2y mean was below the 2% target at 1.86%. Later in the day we have speeches from the Riksbank's executive board members Flodén (CET 09:45), Breman (CET 12:00) and Thedéen (CET 17:55).

Later today, we receive the ECB's Q4 2023 negotiated wages indicator. We expect that wage growth decelerated from 4.7% y/y in Q3 2023 as indicated by more timely wage trackers. The ECBs wage tracker suggest a large decline in negotiated wages from 5% y/y in Q3 to 3.7% in Q4. However, the wage tracker including one-offs only marginally recedes from Q3 to Q4 so one should be cautious with conclusions on the aggregate wage pressure from negotiated wages before we receive the compensation per employee wage indicator that covers all wage expenditures.

Economic and market news

What happened overnight

The PBOC cut the 5-year Loan Prime Rate (LPR) by 25bp to 3.95%, signalling support to the property market as the 5-year LPR mainly affects mortgage rates. The Bank kept the 1-year LPR unchanged, however, after also keeping the 1-year medium-term lending facility rate unchanged on Sunday. We think the Central Bank is reluctant to conduct broad rate cuts until the FED has eased policy to avoid a widening spread, opting instead for more targeted cuts like we have seen with the 5-year LPR.

In the just published edition of Reading the Markets USD, we tweak our expected path for US monetary policy a bit. After the recent upside surprises in macro data, and not least last week's CPI, we revise our Fed call and now look for the first 25bp rate cut in May (from March). Our longer-term view of solid structural growth and continuing disinflation still holds, and we think the Fed will opt for gradual quarterly reductions afterwards. In total, we see three cuts in 2024 in May, July and November (previously 4). 

What happened yesterday

Yesterday we saw signs that consumer spending might be picking up in China, after the number of holiday trips for the Chinese New Year set a 5-year record. Reports also show increased travelling abroad. It is, though, yet too early to draw conclusions and we will have to wait for actual spending data released in mid-March.

Tensions in the Red Sea were boosted as a Houthi attack on a British vessel on Sunday reportedly forced the crew to abandon ship. Many major shipping companies, such as Maersk, are no longer sailing through the Suez Canal, and the latest attack underscores that this is not likely to change soon. The market impact was muted.

Finally, in an interview with CNBC at the Munich Security Conference, Democratic Senator Connolly said that sanctions on Chinese companies judged to help Russia's war efforts could come "very soon". This follows similar discussions in the EU, whose 13th sanctions package aimed at Russia, which could be ready later this month, might also include sanctions on Chinese companies.

Equities: Global equities marginally higher yesterday in a classic low vol session as US was closed for Presidents' Day. That being said, defensives clearly outperformed cyclicals and once again it was health care leading the advances. Looking at Stoxx600 the last 3 months, health care has outperformed utilities in the defensive space despite yields are down in the same period. This is a classic late cycle phenomenon to see health care outperforming other defensive sectors in the late part of the business cycle. Just for the record, health is the best performing sector of all in the S&P500 the last three months despite all the talks about magnificent seven. In Europe yesterday, STOXX 600 +0.2%, FTSE 100 +0.3%, DAX -0.2% and CAC -0.1%.

Asian markets are lower across the board this morning led by South Korea down 1.4%. Futures in both Europe and US point to a lower opening.

FI: It was a very calm day in FI markets yesterday with only marginal changes throughout the day. Long-end EGB yields ended marginally higher in general, while the short end of the curve was basically unchanged. US markets were closed for President's Day. Overnight, 10Y UST yields have risen a bit, now trading at 4.30%. We expect the level to range trade around 4.20% for the remainder of the year.

FX: SEK came out on top on a quiet-US-holiday-prone start to the week. Commodity currencies also performed well, while CHF lost some ground. EUR/USD held steady just below 1.08 and USD/JPY briefly slipped below 150.