Market movers today
Today’s main event is ECB meeting where the Governing Council is widely expected keep rates on hold. This would be the first time of no change in policy rate since June last year. Since September, inflation and growth data have been broadly in line with expectations and taking into account the clear guidance from ECB, this clearly supports the case for pausing.
We expect Lagarde to acknowledge a discussion on advancing the PEPP reinvestments during the Q&A part of the press conference, thereby signalling a tightening bias, albeit with some optionality still in its communication. Markets are pricing ECB policy rates largely unchanged for the coming six months, before a very slow and gradual rate cutting cycle commences from Q2 next year. Read more in ECB Preview: Keeping a tightening bias with optionality, 17 October.
We also get Q3 GDP data from the US. We expect GDP to have grown by 3.3% q/q AR, driven by still upbeat private consumption and structures investment.
Before we tune in for the ECB, trade balance statistics from Sweden provides the final data to assess how real net exports has evolved.
The 60 second overview
US Politics: Mike Johnson was elected as the new Speaker of the House last night, more than three weeks after Kevin McCarthy was ousted from the position. Johnson, who is a relatively junior member of the republican house leadership, was endorsed broadly by both conservative and moderate party members ahead of the vote, and eventually gained unanimous support from all 220 republicans in attendance.
Johnson is a conservative, and has so far signaled support for aid to Israel, border security and advancing funding legislation to avoid a government shutdown. The latter will be the on the top of the agenda for the House, with the previous Continuing Resolution funding bill running out on 17 November. Another key uncertainty relates to Johnson’s position on Ukraine, and whether he will bring Biden’s USD106bn supplemental funding package (covering aid for both Israel and Ukraine) to the House floor for a vote.
UAW strike. Overnight, a tentative agreement was reached between the United Auto Workers (UAW) and Ford Motor in an effort to put a halt to the strikes that have been ongoing for the past six weeks. The tentative agreement includes an hourly wage hike of 25% over the span of the contract period, which exceeds four years.
Fed preview: Yesterday we published our Fed preview: Near-term bloom, long-term gloom?, 25 October. In brief, we expect the Fed to remain on hold at the next week’s meeting, in line with consensus and market expectations, and look for no further hikes at a later stage.
While the recent US macro data releases have inarguably been stronger than we anticipated, tightening financial conditions ease the pressure to continue hiking the policy rate. The rise in long-end yields is driven by the term premium, and as such seems uncorrelated with the latest Fed guidance. The fact that the Fed is no longer fully in control of financial conditions could tilt Powell to take a more cautious stance in his remarks.
Riksbank. The Riksbank hawk Per Jansson yesterday said that “we are approaching key interest rate peak” and added that in hindsight, he could have supported a higher interest rate increase at their last decision. However, he also said that next month’s inflation figure will have a big impact on their decision for the November meeting.
Equities: Equities were lower and yields were higher yesterday. However, there is more to the story since both an earnings effect and a more recession-like rotation took place yesterday. Q3 results (Alphabet earnings) sent the communication service sector lower and the media industry will be in focus again today (Meta reported after US close yesterday).
More interestingly in our opinion is that utilities and consumer staples outperformed yesterday despite the heavy lift to yields. Hence, nervousness is increasing in equity space and investors are seeking shelter in the defensives despite the solid underlying macro trends. In US yesterday, Dow -0.3%, S&P 500 -1.4%, Nasdaq -2.4% and Russell 2000 -1.7%. Risk-off is spreading to Asia this morning with both South Korea and Japan being down around 2%. Futures in both Europe and US are substantially lower this morning as well.
FI: With little new market information, yesterday was mostly a waiting game ahead of today’s ECB meeting. However, curves bear steepened from the long end yet again driven by the long end in the US with 30y UST up 12bp on the day. European 30y yields ended around 7bp higher on the day. This led the 10y US-German yield spread to widen further to now stand at 205bp which is more than 100bp higher than just 5 months ago. In aggregate, yesterday’s yields developments were a partial reversal of the strong flattening on Monday.
FX: In a quiet session yesterday, the USD broadly strengthened in the G10 space, and EUR/USD declined below 1.06. USD/JPY climbed above 150. USD/CAD trades around 1.38 after the Bank of Canada kept the policy rate unchanged for the third meeting in a row, as widely expected. EUR/GBP is relatively flat, just above 0.87. The sell-off in scandies somewhat stabilised, with EUR/NOK slightly above 11.80 and EUR/SEK just below 11.80.
Credit: With long term rates resuming their upward trajectory, the credit markets recorded another risk-off session yesterday. Itraxx main widened by 2bp to 87.4bp and Xover widened 7.3bp to 462.3bp. The primary markets remain largely closed amid the Q3 reporting season, but already next week we could see a re-flurry of deals from corporates seeking to get first in line in the Q4 funding window.
Nordic macro
Sweden. Trade Balance and household lending growth is released today at 08:00 CET. Seasonally adjusted real goods trade balance has improved over the past two months, and we expect this continued in September. Overall, net real exports should add to Q3 GDP growth. The October Economic Tendency Survey is presented at 09:00 CET and will be scrutinized on three specific points: 1) Any signs of bottoming in manufacturing and services confidence, 2) The balance between hiring expectations and labour hoarding and 3) Selling price plans in retail trade and services.
The first two will give hints about the probability of a recession and the latter how disinflation at the consumer level is proceeding, it needs to come down further as for example the Riksbank’s Per Jansson, yesterday said that it is “absolutely central that the companies’ pricing behaviour returns to its former pattern as quickly as possible […] the less interest rate increases will be required”.
The price plans will also be interesting since September’s inflation print indicated a reverse trend as goods prices increased again while service prices are starting to drop while earlier this year we saw an opposite development. The Debt Office releases its new forecast at 10:00 CET.
The underlying budget outcome has been some SEK30bn better than expected. We anticipate the SNDO to adjust the forecast for 2023 in a similar magnitude and revise the budget balance for 2024 higher. The volume of nominal and inflation-linked bonds is expected to be unchanged for 2023 and 2024 and the bulk of the funding cut taken by less T-bills.
