Market movers today
Key focus in Scandi will be on the Riksbank meeting . We do not expect the Riksbank to make any changes to the repo rate or the repo rate path but would not be surprised to see a softer tone. This is priced in by markets already, however, as SEK has weakened significantly recently (more on page 2).
On the global scene, we will have a number of important releases. In Europe, the UK January CPI and euro area industrial production are due. Especially the industrial production will be interesting as to what extent the end of 2018 was particularly weak.
US CPI for January is due out this afternoon. We estimate CPI core rose +0.2% m/m in January, implying a core inflation rate at 2.1% y/y down from 2.2% in December.
Overnight, first Japan GDP figures for Q4 are due out as well as the Chinese trade balance .
Selected market news
Stock markets continued to rally overnight in Asia. The gains are driven by rising optimism that the US and China will strike a trade deal fairly soon and that it will drive a recovery in the global economy.
US President Donald Trump indicated he c ould let the ceasefire deadline of 1 March slide a little if a real trade deal with China was close. He also stated that he expects to meet with Chinese President Xi Jinping to close the deal at some point, see Reuters .
Trump also played down the risk of another government shutdown. He indicated in a tweet that he would instead get money from other sources for border protection saying he 'will get almost USD23BILLION for border security' without stating which sources it would be, see Bloomberg .
Yesterday, we saw a number of ECB speakers on the wires . Most important was Philip Lane (incoming ECB board member set to replace Chief Economist Peter Praet). Lane stressed that the euro area economy was 'pretty strong' and suggested that the setback was temporary.
Furthermore, Bundesbank President Jens Weidmann suggested that there were good reasons to believe inflation would return to target and that current data was a 'soft patch'. Klaas Knot said that 'wait and see' was probably the best approach now. Importantly, it was mentioned that we should not focus on individual data points. These messages suggest an unchanged ECB narrative despite the ECB being set to lower its GDP staff projections at the March meeting. However, uncertainty prevails as the full set of incoming information since the last meeting has not been released yet.
Scandi markets
We do not expect Riksbank to make any change to the repo rate or the repo rate path. Nor do we expect any comment on the QE programme. This is more likely to be addressed at the next meeting in April. Hence, the policy message is set to remain unchanged, suggesting a next hike in H2. As we do not share the Riksbank’s view on inflation – we expect core inflation to be lower in H2 – we do not expect to see that rate hike. Indeed, we do not rule out the Riksbank delivering some ‘soft’ forward guidance in the form of recognising an increasing downside risk to the economic outlook and hence to the inflation outlook. Given the Fed’s recent cautious approach and worrying weakness in German industrial data, we would be surprised if it did not comment on this. Supposedly, ‘soft’ talk would be negative for the SEK and may bolster recent weakness.
Fixed income markets
US yields rise as the risk of government shutdown in the US is likely to be avoided and rising expectations of a possible trade deal between US and China. In Europe, the peripheral markets (especially Italy) continue to lead the market with a strong performance versus the core EU markets. The Italian T-bill auction yesterday was oversubscribed with four cents of overbidding. Hence, the Italian government bond auction tomorrow is likely to be met with solid demand even though spreads have tightened.
The new issuance season continued yesterday with the Netherlands selling a new 10Y bond. Again, there was a very strong bid-to-cover of 4.6 and the Dutch State Treasury sold EUR6bn, thus fulfilling almost 30% of the funding requirement for 2019. Today, we will have Germany (30Y) and Portugal (10Y and 15Y) in the market with tap auctions. In Scandinavia, Norway will do a small tap of NOK2bn in the 2Y benchmark. See more on the Norwegian auction in Fixed Income Research: Norges Bank to sell NOK2bn in NGB NST 474, 3.75%, '21, 12 February.
Yesterday, we published a short note on the Danish callable mortgage bond market, as the price of the 1.5% 2047 callable mortgage bond is now very close to par. This could lead to significant prepayments from the Danish Housing Authorities, which has a significant amount of loans in this series. The Danish Housing Authorities has funded subsidised social housing loans with this bond and is converting its current loans into government-guaranteed loans funded by government-guaranteed mortgage bonds, which are bought by the government. This is funded by using the significant excess reserves on the government’s account. Hence, this works as a form of QE, as investors need to reinvest in other Danish mortgages or other assets. The total amount in the 1.5% 2047 is some DKK 15-16bn. See Strategy: What if? 1.5% 2047 is prepaid at 100, 12 February.
FX markets
The Riksbank meeting is also the centre of G10 FX today. Although we do not expect any significant changes in policy outlook (see Scandi markets section above), there might still be some implications for the SEK. The market and especially foreign investors seem to be anticipating somewhat ‘soft’ comments from the board regarding recent macro developments, both domestic and globally. By doing so, they will probably send EUR/SEK higher still. However, we believe that this is already reflected in the market pricing of the cross and given the stretched levels a not-overly-dovish statement should on the other hand be SEK-positive on the margin. Communication is key, as always.
In the majors, EUR/USD notably rebounded above 1.13 yesterday following soft comments from Jerome Powell and the global risk rally. Also, the other traditional havens in CHF and JPY lost out. Going forward, we still see EUR/USD as a range play and emphasise that we need to see a substantial turnaround in euro area data before EUR/USD can move sustainably higher.
