Market movers today
After PM Theresa May's defeat yesterday on the new Brexit deal, the House of Commons is voting tonight on whether it can support leaving the EU without a deal. We maintain our view that the House of Commons will vote to reject a no deal Brexit and instead tomorrow vote in favour of an extension, see also Brexit Monitor: Brexit goes to overtime 11 March. Also look out for responses from EU leaders and politicians.
In the euro area , focus is on the January industrial production figures, which will shed some light on how the economy started the year. In December, production declined by 4.2% y/y - the biggest decline since the financial crisis. Already released country data paints a somewhat mixed picture for January, with industrial activity picking up in Spain, France and even Italy, while Germany continues to struggle with headwinds from the car sector. We will also listen to the ECB's Couere for clues on whether the ECB wants to correct last week's market interpretation of its stance.
In the US , capital goods data for January is released. New capital goods orders have been falling since September last year, indicating a slowdown in investments at the beginning of 2019. Overall, we expect investments to continue growing in 2019 but probably not at the same pace as 2017 and 2018.
In Sweden , Prospera is releasing its big Q1 inflation expectations survey, see page 2.
Selected market news
As we had expected, PM Theresa May suffered another defeat on her Brexit deal. Still, the defeat was smaller than the first time around (149 versus 230 last time) and 40 Conservative MPs switched, including the former Brexit secretary David Davis .
While we expect the House of Commons to support an extension, the EU27 needs to grant it unanimously. While EU leaders and EU Council President Donald Tusk have said they want good explanations for an extension, we think a short extension to mid-May (before the European elections) is quite likely. EU leaders are clearly annoyed by Brexit, as they have other issues to deal with, but it is probably more problematic for the UK to kick the can further down the road. However, given the size of May's defeat, the EU leaders will discuss whether they prefer to offer a long extension.
As most expect an extension and think at some point there will be a third attempt to get May's deal through, it was not a big cost for MPs to vote against her deal again . During the day, however, we think it was clear that the Brexiteers are under increasing pressure to deliver Brexit, as the alternative is a softer Brexit (or a reversal), not a cleaner/harder one. Besides David Davis supporting the deal, prominent Brexiteers such as Jacob Rees-Mogg also seem to be softer. This is also why our base case remains that the deal will pass eventually, but of course uncertainty is high.
Scandi markets
In Sweden, Prospera’s big (quarterly) inflation expectations survey is due for release and will be scrutinised, especially in light of Flodéns’ recent comment in which he stated that he sees some tendency of falling inflation expectations in the monthly surveys.
Fixed income markets
US yields and volatility dropped after May lost the Brexit vote, as US core CPI came in lower than expected, and as the 10Y Treasury auction saw strong demand.
Italy will sell up to EUR4bn in a new 3Y BTP (1% Jul-2022). The 3Y-5Y segment is, in our view, the sweet sport on the Italian curve if we look at roll-down and the impact from the new TLTRO, and we expect strong investor demand. Italy outperformed other periphery markets yesterday despite a Reuters story that the new TLTRO would be offered at MRO +25bp to curb demand, which would make the BTP carry-case less attractive. Italy will also sell in the 7Y and 20Y segments. Portugal will tap the new 10Y bond and the 7Y bond. Yesterday, Portugal saw some concessions ahead of the auction today. Germany will tap EUR1bn in DBR Aug-48.
In Scandinavia, Sweden will tap the 10Y benchmark bond for SEK1.5bn. The Swedish market will be awash with cash this week as SGB Mar-19 expired yesterday. However, the Riksbank owns SEK46b.6n out of SEK98.5bn. Hence, all in all, SEK 51.9bn is coming to the market. Norway will tap NOK3bn in the new 10Y NGB.
FX markets
EUR/USD edged higher yesterday and is now not too far from pre-ECB levels. We still see ECB as a game changer and notably stress that this, in our view, makes EUR/USD more reactive to negative news. And from a cyclical point of view, we expect the cross will face headwinds near term, including from a possible Fed repricing. If the Commons rejects a no deal Brexit today, it could lift EUR/USD slightly in the very near term.
Markets have probably priced in support for a Brexit extension at this point, so the votes today and tomorrow may not have a big impact on EUR/GBP. If the Commons supports an extension, we could see a small move lower in EUR/GBP. Looking beyond this week, we see a risk investors will be disappointed in the coming weeks/months, which could lead to a higher EUR/GBP, perhaps to the higher end of the 0.85-0.87 range.
In the Scandies, the Regional Network Survey yesterday confirmed that Norwegian growth is set to stay above trend potential in 2019 despite weaker global impulses, see Norway Regional Network Survey: Strong growth outlook confirmed; Norges Bank to hike rates next week, 12 March. The details were also strong, highlighting the need for tighter monetary policy as (1) the output gap has closed, (2) growth remains above trend and (3) inflation has surprised to the upside from a level already above the 2% inflation target. For more on the NOK see FX Strategy – Sell 2M EUR/NOK risk reversal, 12 March.
On the back of yet another disappointing inflation number, we saw EUR/SEK climbing marginally higher. The two inflation prints we have seen thus far in 2019 have both undershot the Riksbank’s forecasts by 0.4pp, and although the board has continuously stressed that single prints below the target are of no concern, the trend seems discouraging to say the least. For today, we have Prospera’s big survey to look forward to (see Scandi section above).
