Strong US data stokes 'rate fears' and curbs risk appetite

Market movers today

Today, Germany releases factory orders for October where consensus expects a stabilisation after two consecutive months of steep contraction.

The regional network survey is out from Norway. The September edition pointed to a fairly significant slowdown ahead with firms expecting profitability to deteriorate over the coming year. There has been a number of indications since that things are set to get even worse, and hence, we expect a further deterioration in the growth outlook in the Q4 survey.

Overnight, we will get trade data from China.

The 60 second overview

US ISM service: The market was taken by surprise when the US ISM service indicator unexpectedly rose in November to 56.5 from 54.4 in October. Markets had expected a drop to 53.5. Hence, despite the weaker ISM for manufacturing and the higher rates the US service sector continues to grow probably fuelled by the steady growth in US employment. In respect of details we notice that the price-paid index remained elevated at 70 despite lower oil prices in November. It suggests that inflation is entrenched and slow to dissipate. The stronger than expected ISM service report came after the strong labour market report on Friday and add pressure on Fed ahead of the important December FOMC meeting next week. That said, markets are firm in pricing 'just' 50bp hike given the 'promise' from Fed chair Powell to hike in smaller steps. But markets added to rate hike expectations in 2023.

Sour market sentiment and yields surge: The strong ISM service and the strong labour market report on Friday added to 'rate fears' in financial markets and the monetary policy sensitive 3y US treasury yield jumped 14bp during the session. 10Y yields rose 8.5bp and the curve 2s10s and 5s10s flattened further. The recent move higher in US yields fits well with our view in Yield Outlook, 29 November, where we argued for higher yields and rates on a 3M horizon after the recent drop. The 'rate fears' also weighed on especially US equity markets and global commodity markets with Brent oil down USD 5 per barrel to USD 83 per barrel. The USD also performed and EUR/USD is once again below 1.05 this morning.

Australia: The Reserve Bank of Australia hiked its cash rate by 25bp overnight. While the move was broadly expected by consensus, markets had priced in a small probability of RBA pausing already now, and AUD FX gained following the decision. RBA continues to hawkishly expect further rate hikes next year, but it did not specify the exact pace or timing. Market prices in cumulative 50 more basis points by next summer and around 40% probability of a pause in the next February meeting. Looking ahead, we think the reopening in China and the uptick in Australia's commodity export prices could provide AUD some relative support against other cyclical currencies, even if we expect AUD/USD to decline modestly amid tightening financial conditions and broad USD strength. We remain long AUD and USD vs. SEK as part of our FX Top Trades 2023, 2 December.

Equities were sharply lower on Monday. Risk-off with all sectors lower, and value cyclicals (energy, consumer discretionary, financials) underperforming. VIX rose again to 21 from 19, just like the end of all other bear market rallies in 2022. S&P -1.8%, Nasdaq -1.9%, small caps underperforming -2.8% and Dow -1.4%.

FI: European spreads tightened to German Bunds in a relatively uneventful session. The little volatility should also be seen in the light of the big central bank week awaiting markets next week. Markets are positioning for a 50bp rate hike.

FX: USD, EUR and CHF rose vis-à-vis NOK, JPY, AUD and NZD yesterday. USD found support in strong US service data, which led to a drop in EUR/USD from close to 1.06 and down below 1.05.

Credit: Credit markets followed equities into risk-off mode on Monday. Itrax main widened 1.6bp to close at 89.2bp, while Itrax X-over widened 8.1bp to close at 451.6bp. Primary market activity was also relatively muted.

Nordic macro

Sweden: The financial stability council meets at 09.00 CET to discuss the current situation with members of the government, Riksbank, FSA and the Debt Office present. At 09.30 CET Riksbank's Floden talks about financial stability and the stare of the Nordic real estate market at a Moody's conference.