Stronger sterling as vaccinations move ahead

Market movers today

US non-farm payrolls are expected to increase around 100k. The labour market is still suffering from weakness in the service sector, where most of the jobs are and have been lost as well. The labour market will be challenged until the economy can open up fully later this year and service jobs come back.

German factory orders could very well see the first decline in seven months as the manufacturing cycle is losing momentum globally. It would also be in line with the drop in the Ifo business confidence in the past months.

In Scandi we get manufacturing production in Norway and industrial orders in Sweden.

The 60 second overview

UK recovery & Sterling: EUR/GBP declined significantly after yesterday's Bank of England meeting, where the bank indicated that it is not about to cut rates into negative territory, although the door is not completely shut. While investors have priced out most of their rate cut expectations, we maintain a bullish view on GBP, as we expect the UK economy to outperform the euro area, supported by a more successful vaccine rollout. That said, EUR/GBP has moved below some important technical levels in recent sessions and the bearish momentum does seem a little stretched at the moment. As a result, it is not unlikely that EUR/GBP will take a breather near-term.

COVID-19: The number of COVID-19 cases continues to decline in the US and Europe but France is struggling with a new increase in cases. It illustrates how fast the virus can flare up again when restrictions are eased. Importantly, though, vaccine studies continue to show a close to 100% efficacy against severe cases of all variants including the British and South African.

More vaccines: Johnson & Johnson has applied for emergency use of their vaccine in the US. The vaccine, for which only one shot is needed, would potentially be the third one, following approved vaccines by Moderna and Pfizer-BioNTech.

Equities: Equities were mostly higher on Thursday, and US leading the gains to fresh records. Despite the lack of directional drivers, S&P 500 closed up 1.1%, Dow 1.1%, Nasdaq 1.2% and Russell 2000 2%. The Value rotation lingered, with Financials, Tech and Industrials the leaders. Health care and Communication services underperformed, but Materials the only sector in red. Asian markets are upbeat as well, with Japan leading on strong retail data. US futures indicate another opening in green.

FI: BTPs-Bund spreads tightened yet again (by 4bp yesterday) to trade just below the 100bp which has not been seen since 2016. The appetite for peripheral bonds remains high after Draghi stepping in to try to form a caretaker government in Italy (Renzi declared his support for Draghi yesterday) as well as duration / yield hunt by investors. 10y German Bunds sold off by 1bp yesterday to -0.456% and as such approach the top end of our -60bp to -40bp range.

FX: GBP rose the most yesterday, where BoE indicated it is not about to introduce negative rates. EUR/GBP fell to 0.875 - the lowest level since May last year. USD/JPY is on the rise again moving above 105 on the back of higher oil price and US yields.

Credit: Yet another strong day in credit markets, where iTraxx Xover was marked 4bp tighter (to 244bp) and Main ½bp tighter (to 48bp). Cash bonds moved somewhat less, with HY tightening 1-2bp and IG around ½bp tighter.

Nordic macro and markets

In Sweden, we get production data and household consumption for December. While these numbers should have been incorporated into the Q4 GDP estimate released earlier this week, it will shed some light on the composition. The GDP estimate came in somewhat lower than we expected (+0.5% qoq vs +1% qoq expected) and we suspect that weak household consumption during December was the main reason.

Also, we get the central government's monthly budget balance. The Debt Office forecasts a SEK10.6bn borrowing requirement in January. During the previous three-month period, however, the borrowing requirement has been SEK11.8bn lower than expected each month. Presumably, there is a downside risk to SNDO's forecast for January. The next borrowing report from the Debt Office is due 24 Feb.