ECB very likely to join hiking club later this year

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The movers on the market today

The most important release today will be the US jobs report. Based on the ADP jobs report and White House comments, nonfarm payrolls likely fell due to sick leave (omicron). As the demand for labor remains exorbitant, a weak impression should be ignored. The focus can be on the so-called “household survey”, where people without paid sick leave are still counted as employed.

In Europe, we will be watching German Factory Orders and Eurozone Retail Sales, which will likely reflect the very poor German Retail Sales we saw on Tuesday.

At 10:00 am today the ECB will publish its survey of professional inflation forecasts and the main results of the ECB’s recent contacts with non-financial corporations.

We will also remain attentive to talks between Russian President Vladimir Putin and Chinese President Xi Jinping ahead of the opening of the Winter Olympics in Beijing, as Putin pledges to deepen diplomatic and economic relations between the two countries.

In Norway, we will await the government’s decision on the new governor of Norges Bank, see Nordic section below.

The overview in 60 seconds

ECB: After yesterday’s hawkish ECB meeting, we have changed our call on the ECB and now expect the ECB to raise the deposit facility rate by 25 basis points in December and March 2023, bringing the deposit facility rate at 0%. For now, our call is for a ‘two and done’. We expect Danmarks Nationalbank (DN) to follow the ECB and raise the deposit rate to minus 0.10%. We will discuss this in more detail in ECB Review: New Call – ECB to Rise in December 2022 and March 2023, February 3.

Bank of England: Additionally, the Bank of England sent a hawkish signal to markets that further rate hikes are likely in the coming months (four out of nine policymakers voted for a 50 basis point rate hike) and that they could start actively selling government bonds to the markets later this year. The Bank of England is concerned about high energy price inflation leading to higher and persistent inflation.

Shares: Stocks ended sharply lower yesterday, dragged down by US, tech, growth and cyclical stocks. Please note that this happens again with a positive correlation to fixed income, i.e. high yields, lower stocks. The reason is the same as at the beginning of January, with an increase in the fear of stagflation and now more central banks, the BoE and the ECB, are admitting it and therefore adjusting their policies accordingly. Add to that lackluster earnings reports to make matters worse (which changed in very positive directions after the bell). VIX ticked higher but not in the classic risky way. The telecom sector (not the media (!)) actually rose in the US yesterday and so rotations are the name of the game. It’s very rare to see defensives outperform cyclicals by nearly 3% on the day that the S&P 500 fell 2.4%.

In the US yesterday Dow -1.5%, S&P 500 -2.4%, Nasdaq -3.7% and Russell 2000 -1.9%. Other markets are reopening in Asia this morning following the Lunar New Year celebration with Hong Kong, i.e. the theft of Chinese H-shares. US futures are significantly higher this morning, driven by the tech sector, but European futures are also higher.

FI: A virtually unchanged decision was quickly replaced by a very hawkish Lagarde at the press conference with upside risks to inflation highlighted. Lagarde had several options to close the door on a rate hike in 2022, but she intentionally left the door open by saying she didn’t want to make any unconditional promises. Markets clearly took this as a hawkish signal and sent the December 22nd €STR price up 17bps on the day, to 47bps. At this point, we also cannot rule out the possibility of an accelerated reduction.

Market signals from yesterday’s price action suggest a significant slowdown is ahead in Europe. European curves pivoted around the 5yr point with the underside again underperforming (2s5s10s widened 4bp to 20bp, 15bp wider than before last week’s FOMC meeting). Years 10-30 flattened from 8bp to -4bp. This is the first time since the GFC that the 10s to 30s have reversed, except for a very short time before the PEPP was announced. 10-year spreads widening BTP-Bund widens by 11bp. As we approach today’s US labor market report, we expect these trends to continue this morning. The sources’ stories published so far suggest a “significant minority” have called for a change and an end to QE in the third quarter. With an accelerated cut in the French elections soon on the agenda, we believe French bonds will underperform.

Effects : EUR/USD rose above 1.14 and moved closer to 1.15 yesterday, supported by hawkish comments from ECB’s Lagarde suggesting that the ECB could join the “hiking club” later this year. EUR/GBP rose above 0.84 as hawkish comments from the Bank of England were dominated by comments from the ECB.

Credit: The credit market had a risk-free day yesterday, leading a poor session in the US, where various notable tech companies reported disappointing fourth quarter numbers. This was seasoned with new hawkish signals from the central bank, prompting a strong sell-off in equities which spilled over into credit. Itraxx main widened 4.6bp to 62.1bp and Xover widened 18.8bp to 230.1bp. We have seen similar expansion trends in the cash sector.

Nordic Macro

In Norway, the government will announce the choice of the new central bank governor. The result is a close race between current Deputy Governor Ida W. Bache and NATO Secretary General Jens Stoltenberg. If Bache is selected, it will of course involve business as usual, while Stoltenberg’s choice could create some uncertainty. Keep in mind though; pricing is done by a committee of 5 people, so the risk is limited.

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