Market movers today
We have a more interesting day ahead of us after the quiet one yesterday. In Norway , we expect Norges Bank to stay on hold (10:00 CET). All in all, we think there is little reason for it to depart from its planned gradual normalisation of monetary policy and still expect it to signal the next hike will come in March.
Later at 13:45 CET, we have the policy announcement from the ECB and at 14:30 CET, ECB President Mario Draghi's press conference. We expect the debated growth risk assessment to take centre stage. At the previous meeting, the ECB coined the growth risk assessment as broadly balanced but moving to the downside. Since then we have seen a string of disappointing data. We expect questions from the audience on liquidity operations but no formal announcement until the March meeting (see ECB Preview - We assign 60% chance of ECB hike in December 2019 , 18 February).
In terms of data releases, preliminary PMIs for euro area and US are due out. In euro area, we expect the manufacturing PMI to have fallen further to 50.7 in January. Beyond headwinds from the German car industry and political risks in France, we think there are downside risks due to ongoing weakness in China, as well as weak external demand and fragile risk sentiments in financial markets.
Selected market news
Yesterday, markets traded sideways overall without any significant news. The overnight session in Asia continued its wait-and-see mode ahead of the central bank meetings today. However, the US equity markets ended on a stronger footing, as the earnings season has started. Both IBM (NYSE:IBM) and Procter and Gamble reported strong earnings.
Concerns about the growth implications of the US government shutdown have started to circulate. Yesterday, White House economic advisor Kevin Hassett cautioned that zero growth is possible should the shutdown continue through March, followed by 'humongous' growth once the shutdown ends. Later, media reports suggested that the Democrats may grant President Trump his USD5bn-plus budget request to increase border security. However, those funds are said not to be used to build a wall but 'only' to increase border security.
On the political front, the grasp for power continues in Venezuela. President Trump (among others) quickly recognised opposition leader Juan Guaidó as President after he declared himself the leader. Venezuelan bond yields declined on the outlook for a regime shift.
The annual meeting in Davos is well underway. We note that Germany's Angela Merkel, Japan's Shinzo Abe and China's Wang Qishan all defended globalisation while also calling for an end to the trade wars.
Scandi markets
We expect Norges Bank to stay on hold today but to keep the strong tightening bias, signalling a rate hike in March. Global turmoil persists and global interest rate expectations are slightly lower than in December. On the other hand, the domestic economy has performed slightly better than expected and core inflation has again surprised on the upside.
There is little reason for Norges Bank to depart from its planned gradual normalisation of monetary policy, as the output gap has closed, growth seems to be staying above trend and core inflation is moving upwards from the target.
We estimate the LFS unemployment rate dropped moderately to 3.9% in November.
Fixed income markets
There were modest moves in yields yesterday. Spain outperformed EU peers as the investor data from the strong 10Y auction showed a widening of the investor base relative to the syndicated deals in previous years. Asian investors have begun buying Spain given the upgrade and positive outlook for the debt-to-GDP. Danish government bond yields continue to track Germany even though there was modest demand at the inaugural 10Y DGB auction yesterday.
Today, France will come to the market with an auction in the 3Y to 6Y segment, where it will sell EUR8-9bn in four different maturities including a new 3Y bond. In addition, it will sell EUR1-1.5bn in 5Y, 9Y and 30Y linkers. We expect there will be plenty of demand given the yield pick-up that France still offers to EU peers.
In Scandinavia, the main event is the Norges Bank meeting. We expect it to confirm a hike in March and this should add pressure on the spread between Norway and EU peers. See more in Reading the Markets Norway, 21 January 2019.
FX markets
GBP outperformed in the G10 space yesterday supported by a technical break above 1.30 in GBP/USD. While uncertainty related to Brexit remains high, the risk of a ‘no deal’ Brexit appears to be fading, which has improved appetite for GBP. We reckon that the past week’s rally in GBP is fair given that the ‘post Brexit’ outcome distribution for EUR/GBP looks increasingly skewed towards the downside. Momentum is strong and with risks skewed towards the downside for EUR at the ECB meeting today, EUR/GBP could still test lower towards 0.86 in the coming days.
Today, focus in FX markets turns to Norges Bank and the ECB. On the former, if we are right in our call (see above), this should not lead to a significant immediate repricing of a March hike (currently priced at only c.14-15bp). However, it should confirm that relative rates will increasingly become a NOK-supportive factor as we approach the meeting as long as the global risk environment holds up. For today’s session, we should expect NOK appreciation to be more limited. On the ECB front, we do not expect Draghi to move EUR much, but, if anything, we believe risks are tilted to the downside given our expectations of downward risks to the growth assessment.