ECB Very Likely to Join the Hiking Club Later This Year

Market movers today

The most important release today will be the jobs report from the US. Based on the ADP jobs report and comments from the White House, non-farm payrolls probably declined due to sick days (omicron). As labour demand remains sky high, a weak print should be disregarded. Focus may be on the so-called “household survey”, where people without paid sick days are still counted as employed.

In Europe, we will look out for factory orders in Germany and euro area retail sales, which will likely reflect the very poor German retail sales we got on Tuesday.

At 10:00 today, ECB will publish its survey of professional forecasts on inflation and Main findings from the ECB’s recent contacts with non-financial companies.

We will also keep an ear out for talks between Russian president Vladimir Putin and Chinese president Xi Jinping ahead of the opening of the Beijing Winter Olympics, as Putin pledges to deepen diplomatic and economic ties between the two countries.

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

The 60 second overview

ECB: After the hawkish ECB meeting yesterday, we changed our ECB call and now expect the ECB to hike the deposit facility rate by 25bp in December and in March 2023, which will bring the deposit facility rate to 0%. For now, our call is for a ‘two-and-done’. We expect Danmarks Nationalbank (DN) to follow the ECB and hike the deposit rate to minus 0.10%. We discuss in further detail in ECB Review: New call – ECB to hike in December 2022 and March 2023, 3 February.

Bank of England: Also the Bank of England sent a hawkish signal to markets by indicating that further rate hikes are likely in coming months (four out of nine policymakers voted for a 50bp rate hike) and that they may start actively selling government bonds to markets later this year. The Bank of England is concerned about high energy price inflation causing more persistently high inflation.

Equities: Equities ended sharply lower yesterday, dragged down by US, tech, growth and cyclical stocks. Please note this again happens with positive correlation to fixed income i.e. yields high, equities lower. The reason is the same as that in early January with more stagflation fear building and now more central banks, BoE and ECB, admitting this and hence adjusting policies accordingly. Put on top of some lacklustre earnings reports to make things worse (that changed in very positive directions after the bell). VIX ticked higher but not in a classic risk-off way. The telecom sector (not media (!)) actually rose in the US yesterday and hence rotations is the name of the game. Very seldom to see defensives outperforming cyclicals by almost 3% on day where S&P 500 drops 2.4%.

In US yesterday Dow -1.5%, S&P 500 -2.4%, Nasdaq -3.7% and Russell 2000 -1.9%. More markets are reopening for trading in Asia this morning post Lunar New Year celebration with Hong Kong i.e. China H-shares flying. Futures in the US are sharply higher this morning lifted by the tech sector but also European fugures are pointing higher.

FI: A virtually unchanged decision was soon replaced by a very hawkish Lagarde during the press conference with upside risks to inflation highlighted. Lagarde had several possibilities to close the door for a rate hike in 2022, but she intentionally left the door open ensuring that she did not want to make pledges without conditionality. Markets clearly took this as a hawkish signal and sent Dec22 €STR pricing 17bp higher on the day, to stand at 47bp. At this point, we cannot rule out the possibility of accelerated taper as well.

The market signals from yesterday’s price action suggest a significant slowdown is coming in Europe. European curves pivoted around the 5y point with yet again the belly underperforming (2s5s10s widened 4bp to 20bp, which is 15bp wider than before the FOMC meeting last week). The 10s30s flattened 8bp to -4bp. This is the first time since the GFC that the 10s30s has inverted except for a very short period ahead of the PEPP announcement. Spreads widening 10y BTPs-Bund spread 11bp wider. Heading into the US labour market report today, we believe these trends will continue this morning. The sources stories released so far suggest a ‘sizeable minority’ called for a change and calling for QE end in Q3. With accelerated taper amid French elections soon on the agenda, we believe French bonds will underperform.

FX: EUR/USD rose above 1.14 and closer to 1.15 yesterday supported by hawkish comments from ECB’s Lagarde suggesting that the ECB may join the “hiking club” later this year. EUR/GBP moved 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-off day yesterday, taking the lead from a bad US session, where various notable corporate tech companies reported disappointing Q4 numbers. This was seasoned with renewed hawkish central bank signals spurring an elevated equity sell-off which filtered through to credit. Itraxx main widened 4.6bp to 62.1bp and Xover widened 18.8bp to 230.1bp. We saw similar widening trends in the cash space.

Nordic macro

In Norway, the government will announce the choice of new central bank governor. The outcome is a close race between the current vice Governor Ida W. Bache and the NATO secretary general Jens Stoltenberg. If Bache is selected, that will of course imply business as usual, whereas the choice of Stoltenberg could create some uncertainty. Keep in mind though; the rate setting is conducted by a 5 person-committee, so risk is limited.

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