Market movers today
In the US, the minutes from the December FOMC meeting are due out, where we will look for differences in the FOMC members' views on the economy and markets, especially after indications last week that the Fed may go about its monetary tightening more gradually. Members of the board Evans and Rosengren are due to speak today.
Overnight, Chinese inflation numbers are due out. Producer price inflation for December may attract some attention, as it is set to fall further from 2.7% y/y to around 1.5% y/y. We expect it to fall into deflationary territory during Q1 due to the big drop in commodity prices. CPI inflation is expected to decline to 2.1% y/y in December from 2.2% in November, still far below the 3% target.
In Denmark, today brings figures for foreign trade and the balance of payments in November.
In Sweden, the main focus is the Riksbank minutes, which is accompanied by the borrowing requirement for December.
In Norway, monthly GDP data is due to be published this morning.
Selected market news
On Tuesday evening, British Prime Minister Theresa May lost another parliamentary vote ahead of the important vote on her Brexit deal on Tuesday next week. The amendment in question was with regards to a possible limitation on the British tax code in the case of a no-deal Brexit not being specifically approved by the House of Commons - a scenario May has repeatedly said to be preferable to a 'bad deal'. While the amendment in itself has limited impact in practice, it signals that there is currently no majority for a no-deal Brexit among British politicians. However, markets did not seem to put too much emphasis on this vote and the pound weakened only modestly during the day.
Oil (futures up 2% on the day to USD50.5/bbl) continues its gradual climb and is now up 10% YTD. We forecast oil at USD 65/bbl short term as OPEC+ cuts come into effect. Oil has been an important driver of US interest rates and break-evens recently. 5Y treasury yields are up another 7bp since yesterday, making the short end of the US yield curve ever less inverted as it continues to flatten. The market-implied probability of a Fed hike in March increased from 0% to 8%. 10Y US break-evens are up 13bp over the past three days following the climb in oil, significantly outperforming nominal yields.
Equities are up about 1% in most markets with Asian indices leading the way and the VIX Index is now back in more familiar territory, although still high. S&P500 is up 5% over the past three days, thus close to being unchanged on the month. With only little news out, it seems markets continue to rally on the back of the positive signs given yesterday from the US-China trade talks and unconfirmed news reports breaking from White House officials that Trump is determined to get a deal passed.
Scandi markets
Norway. Monthly GDP data for November is due to be published this morning. As the monthly figures have proven too volatile, most analysts tend to focus on the three-month growth in the three-month moving average. After the strong October data, we estimate mainland GDP moved sideways in November, lifting the three-month/month growth rate from 0.2% to 0.3%. Keep in mind that due to the weak August and September figures, this will point to solid growth in Q4.
Sweden. Main focus in the Riksbank minutes is likely to be comments about if/how to reinvest coupons and/or redemption of the 1047 (i.e. ‘early reinvestment’), which is the next bond to mature after 1052 in March. This will have consequences for the Riksbank’s total share of the bond stock as well as the level of excess liquidity in the money (Stibor) market. The Swedish Debt Office is due to release the December borrowing requirement, which the Debt Office expects to be SEK79bn. The past two months have shown a smallerthan- expected surplus of SEK16bn and a further widening gap could have funding implications for this year and next.
Fixed income markets The significant issuance continued in the European government bond market with Ireland and Portugal announcing that they are coming to the market as well in the 10Y segment. See more on the new 10Y Ireland in Strategy - New 10Y Irish government bond, we expect it to be priced at ms+30-31bp, 8 January 2018.
Furthermore, Italy is said to be planning a new 15Y benchmark as well as tapping in the 30Y benchmark BTPS 03/2048 for up to EUR1.25bn on Friday, where the Italian Debt Office will also sell EUR5.25bn in the 3Y and 7Y benchmarks, respectively. Today, Germany is launching a new 10Y benchmark. It will sell EUR4bn in DBR 0.25% 02/2029. Given the tight ASW spread in Bunds, this would indicate modest demand. However, given the significant political uncertainty as well as expectations of an inflationary hike being pushed further out on the curve, we expect solid demand.
Also today, we have the first Danish government bond auctions of 2019 with 2Y and 10Y benchmarks at auction. We expect total sales of DKK2.5bn of DGB 0.25% 11/20 and DGB 0.5% 11/27. See FI Strategy: We recommend a cautious approach to Wednesday's DGB auction, 8 January 2018.
FX markets
As risk appetite continues to recover, supported by trade talks, the immediate support for FX safe havens has faded slightly. However, we think risk assets will be challenged for some time still, which means that cyclical currencies could come under renewed pressure near term – and we note that the latest uptick in EUR/USD was once again rejected before reaching 1.15. Today, focus will be on the FOMC minutes ahead of a series of Fed speakers over the coming days: there is a risk that markets could be a bit disappointed as to how responsive the Fed will indeed be to risk sell-offs given the latest repricing; this could keep a hand under USD near term.
For SEK, the key today will be the Riksbank minutes, where we are particularly interested in how the arguments went in favour of the December hike and also how the board interprets the weaker global macro as well as financial sentiment recently, as well as the potential effect on the intentions of the board to hike once more in the autumn. We are getting closer to a near-term bottom in EUR/SEK, in our view, and yesterday took profit on our short position in EUR/SEK in anticipation of the minutes. See FX Trading Portfolio: Take profit on short EUR/SEK .
