Market movers today
The main economic release today is the US core inflation number. We estimate the CPI core index rose +0.2% m/m in December, implying an unchanged core inflation rate at 2.2% y/y.
In the UK, the monthly GDP estimate for November is due to be released. Given the weak PMIs, do not expect a strong number and estimate another 0.1% m/m (0.3% 3M/3M) increase.
In Sweden, average house prices for December are due out.
In Denmark, industrial production data for November is due to be released.
Selected market news
Headlines overnight were dominated by several interesting central bank headlines. Fed Chair Jerome Powell spoke yesterday. He emphasised that the Fed is now in a place where it has room to be patient and flexible in terms of further adjustments in monetary policy. On the balance sheet, his message was that it will be substantially smaller than now, but bigger than before the crisis. Fed Vice Chair Richard Clarida followed up on Powell's message, stressing that the Fed should be forward looking as it would not be prudent to wait until a slowdown before acting. On the balance sheet discussion, he said it will be consistent with the Fed's goals for monetary policy.
Francois Villeroy expressed caution from the side of the ECB in terms of the next step following the halt of the bond purchase programme in December. He stressed that the ECB wants to be predictable but not recommitted and was keeping its options open amid risks to the outlook for the eurozone economy. While ECB and Fed officials are sounding patient, the Bank of Canada's Stephen Poloz yesterday conveyed that the base case for the BoC is still that the expected slowdown in economic growth following the slump in oil prices would be only temporary, which means that further interest hikes could still be on the cards.
There was also news on the trade front. Chinese Vice Premier Liu He is scheduled to meet US Trade Representative Lighthizer and Treasury Secretary Steven Mnuchin on 30-31 January to continue talks on a trade deal.
Scandi markets
In Sweden, average house prices for December are due out and in Denmark, industrial production data for November is due to be released.
Fixed income markets
Yesterday, we saw France perform versus Germany in the 10Y segment and 30Y segments. The 10Y spread between had widened to 45bp and the 30Y spread to 80bp, but both spreads gradually tightened on the back of yesterday’s auction, where the French Debt Agency sold EUR8.2bn in the 10Y, 15Y and 30Y segments. The 30Y segment attracted the most interest given the steep French curve relative to the German curve.
Today, the Italian Debt Office will sell EUR6.5bn in the 2Y, 6Y and 30Y segments. Given the strong demand we have seen at the syndicated deals this week, the auctions should be met with decent demand. We have recommended to be long both Spain and Italy in the 5Y segment and both trades have performed poorly initially since the New Year, but are slowly coming back. Given that this week’s significant supply has been met with such strong demand, we expect to see more performance next week.
This evening, Spain is up for review by Fitch. We do not expect a change to the rating, but do see a chance of a positive outlook.
FX markets
USD saw a broad-based recovery yesterday as the Fed continued to steer the direction for the majors. Powell’s comment that the balance sheet will be ‘substantially smaller’ led to a re-assessment of just how flexible the Fed will be after all given the latest repricing in a softer direction. Significant moves higher were seen notably in USD/CHF, which recovered from a brief dip below 0.9720; EUR/USD also fell back below 1.15. In yesterday’s FX Strategy - EUR/USD rocket - Fed 'on hold' is only 1 of 3 stages to orbit, we stressed that the recent move higher in EUR/USD is justified by a ‘Fed on hold’ and ranges have moved higher with 1.15 now more likely to be the midpoint going forward. We still target 1.25 in 12M.
For GBP, focus remains on next week’s Brexit in the UK House of Commons, where it is expected that PM Theresa May will lose; markets will instead likely focus on the size of the defeat. In Brexit Monitor - May is losing control over the Brexit process but no credible alternative has emerged yet, 11 January, we emphasise that the key risk to our bullish GBP view is that Brexit clarifications drag out and that GBP appreciation consequently will be much more moderate and materialise later than current forecasts imply. We target EUR/GBP at 0.83 during H1 in our main scenario. Near term, the cross is boxed in the 0.88-0.9060 range but upside risks dominate as the 29 March deadline approaches. We have raised our 1M EUR/GBP forecast from 0.88 to 0.90.
EUR/NOK continued lower yesterday following the inflation print and the oil price rebound though the pace of the decline has eased a bit. Very near term, the data calendar and technicals are likely to slow down the move further. We do not expect EUR/NOK to correct much higher, but we could be in for some range trading, unless the oil price rally accelerates towards USD70/bbl or we see renewed NOK/SEK buying interest.
Strategically, we still expect EUR/NOK in Q1 to eventually move below 9.70, which would open for a swift move to the low 9.60s and then lower.
