The Fed keeps a close eye on the labour market

Market movers today

Today's data calendar is thin. After yesterday's bunch of data releases and Fed minutes, markets will probably listen closely to Fed's Bostic in the afternoon.

While waiting for Friday's US payrolls, we get a few US tier-2 employment indicators with the release of ADP employment, initial jobless claims and Challenger job cuts.

The 60 second overview

Nordic Outlook: This morning we published our Nordic Outlook - Time to get inflation down with new economic forecasts for the Nordic countries. We have downgraded the growth outlook for 2023, as higher inflation means both reduced spending power and higher interest rates than in our October outlook. We expect inflation to come down more quickly in the Nordics than in the wider euro area, and growth to return to more normal levels during 2024. Nordic housing markets, especially in Sweden, are under pressure from the sharp rise in interest rates, and we expect prices to decline further. The Swedish Riksbank is expected to hike rates further as the weak SEK causes inflation concerns, while we expect Norges Bank to be done hiking for now.

FOMC minutes: The minutes of the December FOMC meeting provided little new information for the markets yesterday. The Fed continues to focus on labour markets and price developments in the most wage-sensitive sectors to gauge the underlying inflation pressures. On a more hawkish note, some members suggested that 'unwarranted easing in financial conditions' driven by premature speculation of future rate cuts could push Fed towards taking a more hawkish stance.

Good news is bad news: Yesterday, we highlighted how the recent uptick in some US leading indicators points towards a turnaround in macro momentum amid easing financial conditions, which is tricky for Fed as they are still far away from reaching their price stability objective. Read more in Research US - Good news is bad news for the Fed, 4 January

Hawkish Fed member: Speaking of hawkish stance, President of Minneapolis Fed Neel Kashkari (voter, hawk) yesterday said, that he favoured raising rates to 5.4%, much higher than where the market currently prices the peak just below 5%. He added that "any sign of slow progress that keeps inflation elevated for longer will warrant, in my view, taking the policy rate potentially much higher".

Mixed US data: Yesterday's US macro data was a mixed bag, with ISM manufacturing continuing its decline, but JOLTs Job Openings surprising to the upside. Notably, also the ISM employment index and JOLTs voluntary quits rose, further supporting the view of a resilient labour market. Current level of job openings is consistent with employment costs rising some 4-5% annually, clearly too fast to be consistent with Fed's inflation target.

Oil prices lower: Oil prices plunged yesterday below USD80 per barrel - unexpectedly and at odds with the faster reopening of Chinese economy that should support global oil demand. We think it is too early to disregard a positive effect on oil prices from China ending hard lockdown measures, but it may not come before after it has passed the current big wave of infections.

Equities: US and European stocks were higher yesterday, partly supported by the China reopening, which continues to fuel a strong rally in Chinese stocks, where offshore stocks this morning reached the highest level since July. They are still 30% below pre-pandemic levels, though, leaving potential for more upside as the economy recovers, see China Outlook: Earlier reopening to driver faster rebound, 3 January.

Credit: The flow of new deals continued yesterday also in the EUR corporate segment with French utility Engie bringing a landmark EUR2.75bn triple-tranche deal to the market. Within the FIG segment, issuance of senior debt slowed a bit with EUR4bn printed, yet there were some signs of lower investor demand following the heavy issuance on Tuesday. Nonetheless, the two AT1 capital trades executed saw solid demand. Also, CDS indices performed with iTraxx Main tighter by 5bp to 85bp, while Xover tightened 22bp to 440bp.

FI: Global yields continue to decline and take out the rate increase seen before New Year. This is driven by the lower than expected French headline inflation data. However, the core-inflation remains sticky and thus we could a rebound in the headline inflation later on.

FX: The NOK continues to underperform amid downward pressure on oil. EUR/NOK trades just above 10.70 this morning and is vulnerable for further upside. Meanwhile, EUR/SEK briefly tested 11.20, possibly due to NOK contagion, but is back in the range, currently at 11.15. In majors, there were big moves in JPY crosses yesterday. USD/JPY and EUR/JPY alike gained two figures. EUR/USD relative stable around 1.06.

Nordics

There are no market movers in Nordics today.